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Inflation Give Little Hope For Relief; The Ongoing Debate About Offshore Drilling; China on the Verge of Overtaking U.S. As Top Manufacturer.

Aired August 17, 2008 - 15:00   ET


CHRISTINE ROMANS, CNN HOST, YOUR MONEY: Welcome to YOUR MONEY where we look at the news of the week and how it affects your bottom line. I'm Christine Romans.
ALI VELSHI, CNN HOST, YOUR MONEY: I'm Ali Velshi. Coming up on today's programs on the rise, prices climb on everything from cereal to home heating oil. Find out if there is any relief in sight.

ROMANS: Plus, to drill or not to drill? The debate only intensifies. We're going to tell you why offshore drilling is such a hot topic on and off Capitol Hill.

VELSHI: And a new report says China will overtake the U.S. as the world's top manufacturer in less than ten years. We're going to find out what that means for your jobs and your shopping habits.

ROMANS: But first, a government report out this week. The consumer price index shows consumer prices rose last month at the fastest pace in 17 years. Take a look at this, prices have skyrocketed. Gasoline is up nearly 38 percent in the past year. Fuel used for home heating is up 61 percent and food prices are up more than 8 percent. The government also reports core inflation every month. That number which came in much lower than the CPI figure it strips out energy and food. But we know that you can't live without energy and food, so these inflation numbers overall really are a cause for concern, Ali.

VELSHI: Also making headlines this week Christine, expected bumper crop of corn. According to a report from the U.S. Department of Agriculture, farmers are on pace to harvest the second largest corn crop in U.S. history. Now that is after all the devastating flooding we saw in the Midwest in June. But don't get too excited. A bigger corn harvest doesn't necessarily mean lower prices at the supermarket.

Here to explain is Tom Jackson. He's an agricultural economist at Global Insight. Tom good to talk to you. We heard about a good corn crop, quite possibly a good soy bean crop or at least better than expected because soybeans were damaged more than corn was in the flooding. Why then should that not relate to lower prices for the food we pay?

TOM JACKSON, AGRICULTURAL ECONOMIST, GLOBAL INSIGHT: I would argue really that the food price inflation that we've seen really hasn't fully incorporated the rising commodity prices. There's still just so much demand for corn out there. The corn prices are staying high and especially for livestock producers. They're still just having trouble keeping up with these high corn prices.

VELSHI: You know, we're looking at inflation year over year at 5.6 percent, the fastest pace in about 17 years. We know that gas prices are starting to moderate. We don't know how long oil will stay at these slightly lower levels. We're still talking $115 a barrel approximately. People are thinking that will give them a bit of a break. It was a combination of energy prices and rising commodity prices, though, that have contributed to the inflation that we face right now, isn't it?

JACKSON: Yes, it is. Certainly moderating or at least flattening out of energy prices will help. But, again, we still haven't fully seen the impacts of the energy prices factor through to the retail food prices, believe it or not. So it's still going to get worse before it gets better.

VELSHI: Tom, tell me how this works, because a lot of people look at corn prices and soybeans and say, don't eat much soybeans and I suppose corn gets into corn flakes and a bunch of other things. Both corn and soybeans work their way well into our food system more than we know.

JACKSON: That's especially true in the livestock sector. You can basically consider that as processing of corn and of soybean meal, a big product of soybeans. And, again, livestock production, producers just can't -- they're losing money. They've been kind of hanging on really producing more than you might expect, given the run-up in feed prices. But they're still -- they're going to -- some of them are going to give up here pretty soon on waiting for lower corn and soybean meal prices, which are going to translate into lower meat, milk production, egg production, all that.

VELSHI: Now we saw in 2007 we saw a rate of increase in the price of agriculture that was about double the long-term average. There's some speculation that increased rate will continue for some years to come. Do you still think that's the case or have you thought that's the case?

JACKSON: It's very likely. I mean, the problem is, you know, demand has just grown so much. And one thing we need to mention is the weaker dollar, I think, this has boosted agricultural exports from the U.S., a lot more than we were figuring on, especially as some of these biofuel policies were put into place. And really production, in the long term, I never bet against U.S. agriculture's ability to overproduce in the long run. But, you know, those gains still come fairly gradually, especially from the levels that we're already seeing.

VELSHI: OK. Bottom line, though, if you were looking at commodity prices, seeing them off record levels, don't get too excited about getting a discount on the things that you buy and the things that we eat?

JACKSON: Absolutely.

VELSHI: Tom Jackson from Global Insight, good to talk to you again, thank you.

JACKSON: Thank you.

ROMANS: All right. Coming up next, think the Russia/Georgia conflict is happening a world away? Not when it comes to your money. We will tell you why.

And later we will hop aboard the CNN Election Express and find out which money matters will be driving voters to the polls this November.


VELSHI: Russia's invasion of Georgia is the symbol of a powerful nation returning to the world stage. This conflict has political and economic implications all over the world. Frank Sesno joins us now with more -- Frank.

FRANK SESNO, CNN SPECIAL CORRESPONDENT: The implications, as you say, are global and they run everything from the cooperation that was taking place with the Russians on issues relating to terrorism, locking down loose nukes and Iran's nuclear program. Probably the best snapshot of just exactly what's at stake here is something that the defense secretary Bob Gates said just the other day. And I'm quoting him here. He said, "Russia's behavior over the past week has called into question the entire premise of that dialogue and has profound implications for our security relationship going forward."


SESNO (voice over): This is the nightmare that a resurgent Russia raging a hot war could rekindle the cold war, a superpower rivalry all over again. The nightmare, that when Bush saw Putin's soul, he suffered from wishful thinking or just got it wrong.

GEORGE W. BUSH, PRESIDENT OF THE UNITED STATES: I looked the man in the eye. I found him to be very straightforward and trust worthy.

SESNO: A lot's happened since then. Putin's accused of cracking down on democracy and the press, taking over the energy sector, shutting off the gas in the middle of the winter to pressure his neighbors. But Russia's invasion of Georgia changes the game and shatters any illusion that the two men who were side by side at the Olympics just a few days ago are playing by the same rules. If the Russians have decided to rebuild the empire, reassert control over the neighborhood, keep a heavy hand on all the oil and gas that could be pumped from central Asia, all bets may be off.

There were plenty of warning signs, but we were focused on al Qaeda, war in Iraq and China rising. While we worried about $100 a barrel oil, enriching regimes in Iran and Venezuela, it was in Russia where oil mixed with resentment and ambition and memories of faded glory. And now this.

(END VIDEO CLIP) SESNO: And now this. Ali, there will be plenty of finger pointing, already is. Did the west miss the Russian bear or did it somehow provoke it by bringing NATO and anti-missile defenses right to its doorstep? So a lot at stake here.

VELSHI: Frank, we're all multitaskers in the world. Is it now clear to the west that this has to be back on the agenda, that we have to pay a great deal of attention to whatever Russia's aspirations may be good or bad?

SESNO: Absolutely. Not only because of all the geopolitics involved but because of what I mentioned, real practical things. There's a lot of energy in Central Asia, a lot of energy, as you know, because you talked about it a lot. A lot of deposits, pipelines coming through. That's going to affect commerce. All that natural gas and other supplies that the Russians essentially flipped off in the middle of the winter last time around as I mentioned. So it's very practical and also very big.

VELSHI: Now, Frank, let's talk about Russia. It is a major energy consumer, but it is also a growing energy producer. What's the implication to the west that Russia controls the flow of oil from central Asia, the flow of natural gas from central Asia? Why does that matter to us?

SESNO: It matters because -- when all this oil was discovered and as over the last several years as the west and western companies have tried to build these pipelines, they've been trying to do two things, mostly revolving around one word which is diversify. Diversify supplies from the Middle East and diversify supply lines to avoid Russia and some of Russian politics. So what's at stake now is whether these very big supplies that exist in central Asia from the Caspian and elsewhere, are still going to be able to be tapped very readily and whether they'll be dependable. Whether the Russians play power politics with the oil and cut off supplies as they pursue their other ambitions.

VELSHI: Frank Sesno, our special correspondent, thank you very for joining us.

SESNO: Thank you.

ROMANS: All right. Both John McCain and Barack Obama have expressed support for Georgia with McCain going so far as to renew calls that Russia be evicted from the G-8 club of leading industrial nations.

We will look at what the presidential candidates are up to. We bring in CNN senior political analyst Bill Schneider who is literally rolling toward the Democratic Convention aboard the CNN Election Express. Bill joins us today from the Iowa State Fair, Iowa my home state. Bill, it has been eight months since Barack Obama broke out with an upset victory at the Iowa Caucus. How has the political climate changed in Iowa since then?

WILLIAM SCHNEIDER, CNN SENIOR POLITICAL ANALYST: Well, you know, not a whole lot. It's very interesting. Obama is still leading McCain here by a small margin, but it's been a consistent margin. He has a very, very dense organization in this state. They really organize the life out of Iowa to get people out to attend those caucuses back in January. That organization is still in place. McCain barely competed in the Iowa Caucuses. He came in fourth or fifth in both 2000 and 2008, did not make a big effort here in Iowa. And it shows. And this is not a state with a lot of big military installations, so his natural constituency of veterans is not as big here as in many other states.

ROMANS: Candidates you know in recent days been able to score any political points with their economic and energy plans as far as you can tell?

SCHNEIDER: The number one economic issue is still gas prices, gas prices, gas prices. McCain, I think, did score some points on that issue when he talked about oil drilling, which makes sense to people. They don't think of it as a full solution but they do support the idea of allowing oil drilling offshore. So he scored some points with that. But people are still waiting to hear what can be done about oil prices, gas prices right now. That remains topic number one and I'm not sure people see an enormous difference between the two candidates.

ROMANS: Meanwhile, the conflict between Russia and Georgia goes on, cooled a little bit toward the end of last week. But some real questions about United States' relationship with Russia and Russia with the west. This sort of plays into John McCain's strengths. He's been able to sort of try to look presidential on the campaign trail. Barack Obama is in Hawaii on vacation. How has that played out?

SCHNEIDER: Well, I think McCain has seized on the issue and grabbed a lot of attention. There's been some criticism, a lot from Democrats but some criticism that he's pretending to be president, the same criticism we heard about Barack Obama when he went overseas. Who elected him already? It's been an interesting debate, because McCain came out sounding very tough with Russia and then he pulled back a little bit when he realized that people were worried that he might reignite a cold war. He said that was not his intention to reignite a cold war.

As he pulled back, Obama pushed forward. At first, he sounded a little bit evenhanded. He criticized both Georgia and Russia. Then a little later last Friday he came out very critical of Russia. So with McCain pulling back a little and Obama pushing forward they've ended up in about the same place, both critical of Russia.

ROMANS: All right. Bill Schneider at the Iowa State Fair. Thanks so much.

VELSHI: Hey Christine, the Election Express which I love and the Iowa State Fair, that's got to be the best combination of things. You know why I would particularly enjoy the Iowa State Fair?


VELSHI: The crazy food. State fairs have the best kind of fried, dipped combination of pineapple and chocolate with fish and chips. Must have everything you could possibly want.

ROMANS: Don't forget the big butter statue. I think this year it might be Shawn Johnson, the hometown girl that won the silver in gymnastics.

VELSHI: That is right.

ROMANS: There is a lot of buzz about her at the Iowa State Fair this year.

VELSHI: They must be having fun out there that is a good gig.

Well coming up after the break, to drill or not to drill. When it comes to drilling for oil off the U.S. coasts find out why your candidate may not be on the side that you think they are.


ROMANS: All right. Poppy Harlow of joins us now with a look at some of the top stories of the week. Hi Poppy.

POPPY HARLOW, CNNMONEY.COM CORRESPONDENT: Hey there, Christine. The focus this week on retail owners, how the retail sectors are doing in this country. We saw a decline in July, economists pointing to the end of the government stimulus payments as the culprit. Wal-Mart, the world's largest retailer saw second quarter sales climb 10 percent. However, that was a whether I will less than analysts expected.

VELSHI: And the end is near, so says Alan Greenspan when talking to the "Wall Street Journal" about the housing crises. The former Federal Reserve chairman said, quote, "Home prices in the U.S. are likely to start to stabilize or touch bottom sometime in the first half of 2009." Greenspan also criticized the government's handling of Fannie Mae and Freddie Mac.

HARLOW: Start to stabilize?

VELSHI: I was going to say --

ROMANS: Hang around on the bottom for a long time.

VELSHI: And he had sort of a bit of a caveat about "or later." So they're going to come back kind of first half next year or later. I think Steve Hargreaves could probably have given us that good a guess. But I suppose if you told a reporter of "The Wall Street Journal" that, it would be a conversation whereas when Alan Greenspan says it it's some reason for a little bit of hope. What do you think of the Wal-Mart sales?

HARLOW: I think it shows that people are -- well people are -- I think we are going to continue to see this. People are going to pay for essentials but they are not going to pay for the other stuff or they can't pay for the other stuff. What do you think?

VELSHI: Yes. I never know whether it's a sign of the good economy or it is sign that the fact that Wal-Mart is getting all this business that other people aren't getting.

HARLOW: Four dollar prescription drugs and clothes under $10, of course you bring people in. They're spending more there even if they don't want to. You pull them in and they spend money.

VELSHI: We can solve that and solve the economic problems of this country if they just let us drill for more oil offshore.

ROMANS: Right below your feet.

HARLOW: So say the Republicans.

VELSHI: Steve, where is this going? It seems to be getting some traction for John McCain, that's for sure.

STEVE HARGREAVES, CNNMONEY.COM CORRESPONDENT: Right. And this week we saw Nancy Pelosi and Barack Obama indicated that they might be willing to talk about it.

ROMANS: But they hold their nose and talk about it because they don't like it.

HARGREAVES: No, they don't. But it's an issue that won't go away. People keep bringing it up and bringing it up.

ROMANS: Does it solve the problem? If we can start drilling for more oil does it solve the problem?

HARGREAVES: Most experts say, no, there's really not that much oil there. You're talking maybe a million barrels offshore.

HARLOW: We talk about solving the problem. We're talking really about solving high gas prices for Americans and for people around the world who keep in mind are paying a lot more than Americans are right now. Still, what we're hearing, Steve isn't it right, just shaving two to three cents off a gallon if we drill offshore or if we drill in Anwr?

HARGREAVES: Right. It's really projected to have a minimal impact on price but people are still pushing for it. There are some people that think there is a lot more oil down there than the government is estimating.

VELSHI: I think there's oil right underneath us at $500 a barrel. There's a lot of oil offshore but some of it is very expensive to get at. But here is the thing Barack Obama says 7 to 10 years to get that first incremental drop of oil out of the ground. John McCain, we've heard a number of speeches where he said he's spoken to oil companies and they say inside of a year they can start getting that oil. You are the guy who studies this all the time. What do you think? How long will it take us to get oil if we start drilling more offshore?

HARGREAVES: Well, you can get some right away. There are some areas in the eastern Gulf of Mexico that you could probably bring online fairly quickly. But most of the stuff, if you're talking about Anwr up in Alaska, if you're talking about the east coast or the west coast, it's going to take a long time. It's going to take several years. People say at least five.

ROMANS: Do we have the technology, the manpower, the drill bits, and the stuff to go out and get it?

HARGREAVES: That's been a problem. Oil companies will have to scramble to get that stuff. They say if you open it up, like if you open it up, it will come.

HARLOW: It's interesting because Steve's piece on our website on talks about OK keep in mind --

ROMANS: Nice plug.

VELSHI: Get it in there.

ROMANS: Couldn't even tell.

HARLOW: Until now. Really this offshore drilling is the most divisive issue in the campaign. And you say a lot of the experts you talk to said, hey, that's why the focus is on this, not so much the savings that people are going to see at the pump, right?

HARGREAVES: Right. I mean the McCain campaign said this is why you always hear so much about it, we both agree that we have to focus on renewable alternatives. I mean, I think Obama has a more aggressive plan to focus on renewables but McCain, the campaign points out that this is an area where we differ. Of course critics of this, people who want to keep offshore closed say, you know, supporters of this just keep on bringing it up because they see it as an election thing. They're basically just playing politics.

ROMANS: It gets in the way of all the big issues, doesn't it? They're trying to cover their bases. Yes, we want to go for renewables but keep drilling but we need to try this, conserve at home. Do we need a fundamental rethink of what we do? I mean, if you're still going after oil, are you ever really weaning yourself --

VELSHI: Be able to solve the problem?

HARLOW: It seems like what Obama and Pelosi are saying, OK maybe we'll agree to some offshore drilling but we want to get a lot back from the oil companies, tax them, have more put into alternatives. It seems like they are going for both. But it's interesting to see the timing of this because this is happening as more and more Americans call for offshore drilling. It works for them.

VELSHI: Good to see you both. Thanks very much. If you'd like more of Steve or Poppy,

ROMANS: All right. Coming up home prices are falling. Foreclosures are soaring. In short, the housing market is rotten. Free advice for those --

VELSHI: Free advice? ROMANS: That's right. Thinking about buying your first house, downsizing before retirement, snapping up one of those foreclosed homes, but first, this week's "Right on Your Money."


ROMANS (voice over): With the click of a mouse, you can view account information, pay bills and research investments. But be aware you may not be the only one screening your online information.

MANDY WALKER, SR. PROJECT EDITOR, "CONSUMER REPORTS:" If your computer is stolen or a hacker breaks in on the Internet, they get the whole list of all your passwords so they can get into all your accounts.

ROMANS: But here's how to protect your identity online. Don't reply to or click on any link in an e-mail that asks for your credit card or bank account information or any other private information, even if the e-mail looks like it came from your bank.

WALKER: Of course, this is usually phishing schemes done this way. So a cyber thief could be using your account number to get your passwords, to steal your identity or empty all your accounts.

ROMANS: Don't store passwords or logon information on your computer.

WALKER: It's certainly tempting because you probably have a different password for 19, 20 different accounts. Don't click yes when they ask do you want to remember the information and delete any that you've already stored that way, again so they won't get hacked into.

ROMANS: One way to prevent thieves from opening new accounts in your name put a freeze on your credit files.

WALKER: It can be a bit of a pain if you're applying for a new loan because you have to either give the creditor a pin. number or you have to unlock it somehow to give them access. But it will stop identity thieves from opening new accounts which can be key if you're suspecting you'll be a victim of identity theft.

ROMANS: And that's this week's "Right on Your Money."




ROMANS: Home prices are plummeting according to a new report from the National Association of Realtors. Most housing experts agree we're not at the bottom of this rotten real estate market yet. A record number of foreclosures driving down prices over the past 12 months and actually putting the recovery in jeopardy here. The picture pretty dismal. Banks seized more than 77,000 homes in July. More than 680,000 homes have been taken back from homeowners over the past year. About a quarter of all homes sold in the past year were sold at a loss. So does this mean now is the good time for anyone to try to buy? For that, we turn to Christopher Mayer, the director of the Paul Museum Center for Real Estate at Columbia Business School. What is in the program?

Is it time to start wading in there if you're going to live in the house, if you have the money in the bank and you are not trying to sell another house? Is there somebody out there that can take advantage of what's really a rotten market?

CHRISTOPHER MAYER, COLUMBIA BUSINESS SCHOOL: I think this is a pretty tough market for anybody. If you look at it, the problem is buyers are going to have a really tough time getting financing.

ROMANS: Even good buyers?

MAYER: Even good buyers. It's going to be really rough. You're looking at fees that are very high for anybody that doesn't have 20 percent down. If the bank sees anything in your application that they don't like, they're likely to turn you down.

VELSHI: So the banks now are considering the fact that they don't want to get stuck with that property if the homeowner is not suitable for that home. Now it's not just a matter of prices coming down to the point that homes become more affordable to people. What turns us around now? We thought at some point when prices continue to drop, people can afford homes but you're saying it's not necessarily that simple an equation?

MAYER: Normally when you think about a housing cycle you think, geez, prices come down, people who are selling are worse off, people who are buying are better off. But it's only true if the people who are buying can actually get credit. The problem is, if you're a bank, if you're Fannie Mae and Freddie Mac, reported in the papers, you're getting a lot of losses and means you haven't got much money to lend. Who are you going to lend that money to? Only the very safest people. And what are you going to charge them? As much as you can get away with.

VELSHI: And the rates are going up.

ROMANS: Let's talk about foreclosed homes. There's 77,000 more of them on the market in July, some 680,000 homes seized by the banks over the past year. Is now a good time, if you've got the money and the means to be trying to shop for a foreclosed home?

MAYER: I think it's really risky to go to a foreclosure auction and think you're going to buy. If you're going in and buying a foreclosed home, you're looking and you're buying and there's a lot of risk associated with it as is if there's any problems with the house, you're stuck with the problems. So this is really sort of the market for people who are sharks who can walk into a house, they can see that, gee, the roof is going to go in two years, the heating unit is going to disappear. VELSHI: What if you're looking to upgrade? You were looking to get into a better home. Again, you have the means and the money and the credit to do this. You might be getting a better deal because somebody is taking a loss on their house. Is it a good time if you're upgrading or you are planning to get into a bigger home?

MAYER: The problem is if you're upgrading, certainly if you are a buyer who has a good mortgage you're giving it up a good mortgage for often a more expensive mortgage. So again this trading on the mortgage front counter acts the benefits of what's going on in the house prices.

ROMANS: Let's talk about if you're thinking about retirement and downsizing. Some people might have been sitting on their home for the past 25 years they are heading into retirement and they want to cash out what they can cash out that big house and buy a smaller one. And there are a lot of condos on the market. Is it a good time to consider that?

MAYER: The sort of problem is, again, you're going to see house prices continuing to fall. Condos particularly have been really overbuilt on the market. For people who are older who are kind of thinking about trading down, actually, oddly enough, many of those people are as likely to buy a more expensive house as a less expensive house.

ROMANS: Really?

MAYER: The idea is when you're older; you don't want to reduce the value of where you live. You just want to consume different things. So instead of the five bedroom mcmansion, what you want is be on the beach.

VELSHI: Nicer place, but smaller kind of thing?

MAYER: Nicer place, but smaller.

ROMANS: First-time home buyers, people who don't have another house they're trying to unload, they don't have another mortgage, they have been sitting on their cash for the past five or six years --

VELSHI: You would think this would be perfect for them.

ROMANS: But I'm concerned they might not be able to get a mortgage.

MAYER: Right. I think the problem getting credit is a big issue. The caveat to that, if you have enough money in the bank and you are willing to pay the high mortgage rate and hang around and refinance that loan in two years when credit markets come back, there's some potential benefit. But you've really got to have very, very good credit and a lot of money for down payment.

ROMANS: What about the tax credit in the bill the president signed, the bipartisan housing rescue, there's $7,500 tax credit in there for people who are first-time home buyers. MAYER: There are two problems with that tax credit. The first is you can think of it as an interest-free loan. You have to pay the money back over the next 15 years. The second is, you need the money at closing to get a good rate, but you don't get that credit until you file your tax return. So you've really got to get somebody to float you that money until you're going to be able to get it back from the government.

ROMANS: Bottom line here is you're telling us to tread very, very carefully in the housing market if you're a buyer or a seller.

MAYER: I think at the moment this is sort of a time that people who can wait out the market a little bit may be better served to do that.

ROMANS: But those old go -- go days of trading up and having these really cool, fancy loans that no one understood but, boy, you could live in a big house, those days are over?

MAYER: Those days are not coming back.

ROMANS: All right. Thanks so much for joining us. Christopher Mayer, Paul Museum at Columbia Business School.

VELSHI: Well the competition between China and the U.S. is not just for Olympic gold. It's for manufacturing, too. Up next, two different points of view about whether it's a fair match.

And later small cars are big sellers these days, but are they safe? We are going to have a look at the safety of small cars.


VELSHI: All eyes remain on Beijing as the Summer Olympics continue but the competition between China and the U.S. is not just for gold medals. Research firm Global Insight estimates that China will overtake the United States as the world's top manufacturer in 2016. Now, already, China has emerged as an economic power house and a huge growing consumer for the world's raw materials. Bill Tucker reports.


BILL TUCKER, CNN CORRESPONDENT (voice over): Manufacturing employment grew from 100 million in 2002 to 110 million in 2005, not in the United States, but in communist China, according to the latest figures available. From 2004 to 2005 alone, the sector exploded by six million jobs according to the Conference Board of Business Advocacy and Research Group. In comparison, manufacturing in the United States is in decline.

In the past 2 1/2 years, we've lost more than 700,000 jobs. About 13 million people here are employed in manufacturing, accounting for about 20 percent of our economy.

ROBERT SCOTT, ECONOMIC POLICY INSTITUTE: That sector is in trouble. It's grown at the slowest rate since the great depression over the last seven years. And it's not growing fast enough to maintain its vitality.

TUCKER: And the sector is losing its vitality. Last year when adjusted for inflation analysts the Commerce Department figures show the manufacturing sector here grew by a mediocre 2.25 percent. Advocates for American manufacturers call that figure disappointing and disturbing.

ALAN TONELSON, U.S. BUSINESS & INDUSTRY COUNCIL: We've had Washington flooring the gas on the American economy, putting more stimulus into the economy than in any other peacetime period in U.S. history. Record low interest rates, enormous budget deficits, and a weak dollar. And, yet, American manufacturing's performance, its growth, has only been so-so.

TUCKER: Groups like the U.S./China business council representing the multinational corporations with factories in China argue that the job losses in the manufacturing sector are not a sign of weakness but of strength, saying that jobs were lost because of improvements in productivity.

Bill Tucker, CNN, New York.


ROMANS: China's low wages and subsidized manufacturing centers mean cheap products for American consumers. But some say China is also the reason for those lost U.S. jobs. Where there is no dispute our trade deficit with China was $21 billion in June after another record year.

The U.S. economy is slowing now. Companies are slashing American jobs, which is why we've seen America's trade relationship become a campaign issue. It brings us to the question is the trade relationship between the United States and of China good for Americans?

Scott Paul is executive director of the Alliance for American Manufacturing. Erin Ennis is vice president of the U.S.-China Business Council, a group that lobbies for U.S. companies doing business in China. I thank you both for joining us.

I know this is a complex issue. Let's try to keep it as simple as we can for the pros and cons of this relationship because it is becoming a campaign issue and it's a big issue as people here are looking at a slowing economy. Erin, I want to ask you first, you don't think it's necessarily an unhealthy relationship but more like healthy competition?

ERIN ENNIS, V.P., U.S.-CHINA BUSINESS COUNCIL: Certainly. The things you need to keep in mind are the fact that as your analyst had pointed out, manufacturing employment is about 20 percent of U.S. employment in the United States. That's a number that's been declining for over 20 years, which means that China can't be the culprit. More likely behind that are things like productivity growth or other changes in the economy. But more importantly, that means that over 80 percent of the United States economy and employment is in services. So 80 percent of the people watching this program are actually services employees, not manufacturing employees.

ROMANS: So Scott, should we write off the U.S. manufacturing sector and say China is now the factory floor for the United States?

SCOTT PAUL, EXEC. DIR. ALLIANCE FOR AMER. MFG: Absolutely not. We won't be a strong country without manufacturing. Each manufacturing job supports four or five other jobs in the community. We need healthy communities and we need good paying jobs. Manufacturing jobs provide those wages. They help people get the American dream. And the fact is that service sector jobs or other jobs that the economy is producing don't pay nearly as well as manufacturing jobs.

Manufacturing also supports our defense industrial base, and we certainly don't want to be dependent on other countries like China to provide our own defense needs. We need to fix this relationship with China because it's really headed in the wrong direction.

ROMANS: Let me ask you, Erin, there are a lot of complaints about manipulating currency, about subsidizing manufacturing centers. China has a very well documented and publicized strategy for being dominant in different industries including manufacturing, and they'll do whatever they can and put any kind of money behind it. The national threat -- United States does not have such a national strategy. Our national strategy is let the free market work. What do you say, Erin, to the critics who say it's not a level playing field?

ENNIS: Well, I think the issue here is where we have had engagement with the Chinese, we've seen progress. The issues that you mentioned are very good examples in fact. China's currency, when we were threatening China with tariffs on their imports if they don't move on the currency, very little was done. In the past few years it's appreciated about 20 percent.

On subsidies, the United States told China they were going to take them to the WTO to combat illegal subsidies. Rather than allow that case to go forward China decided to settle in December. We've seen progress where we've had engagement on these issues. And that's where we should be going first. Where China is not competing fairly, however, we should use those tools like WTO.

ROMANS: Scott, when I look at the U.S. trade deficit with China since China's ascension into the WTO, it is a sea of red ink and many, many people have told me there's never been as much an unbalanced trade relationship in modern history. Is that true?

PAUL: It's exactly right. It's the most imbalanced trade relationship of any two countries. For every $1 of exports we send to China we take in $5 of imports. It's the result of the market not working. And what we have here is continued cheating by China. Erin cited small examples of progress but the fact remains that China's currency is still about 30 percent overvalued. It gives their manufacturers a tremendous advantage. China still subsidizes its favored industries. In the steel sector alone it provided $27 billion in energy subsidies. Everyone is aware of the labor rights abuses. Everyone sees the smog in Beijing. They know their factories don't meet the same standards as American standards. And we really have a lot of work to do to make sure there's at level playing field; otherwise we have seen the results. China accounts for 40 percent of our non-petroleum trade deficit right now, which is an enormous amount and it's affecting jobs and wages here in this country.

ROMANS: Erin, let me ask you, from the consumer point of view, somebody watching this program, to them, what is the advantage of this trade relationship with China right now? Is it cheap stuff? Is it low interest rates? What is the advantage at home?

ENNIS: I would say you need to take a step back and look at this trading relationship in the global context. The United States has an international economy. And we are dependent upon international trade for a variety of things. As Scott pointed out, many manufacturing jobs support other jobs. International trade consists -- supports one in five jobs in the United States. So on the front side, trade with China is helping to provide people's incomes. On the by side, trade with China is providing cheap goods coming in. You mentioned the trade deficit.

I would suggest people step back and look more broadly at this. There is no doubt the U.S. trade deficit with China on an individual base has increased since China joined the world trade organization. But when you look at that same trend for the U.S.'s trade deficit with Asia as a whole over the same period, what you'll see is that what we're importing from China are things that we used to be getting from Korea, Japan, Malaysia, other areas of Asia, rather than replacing a product that we had been making in the United States.

ROMANS: I want to have you both back to talk about it some more because I think this is going to become much more prominent on the campaign trail. I think people are starting to ask some questions especially with the slowing U.S. economy and maybe a slowing China, actually, as our economy slows and our demand slows. I think this is going to continue to be an important subject.

Thank you so much -- Erin Ennis, thanks for joining us. And also, thanks to Scott Paul.

PAUL: Thank you.

VELSHI: Great discussion. We should have them back and talk more about that it helps us get a better understanding of why this is a campaign issue, it is.

Coming up next on YOUR MONEY as gas prices climb, small car sales are increasing dramatically. We're going to tell you which compact cars are safe and which ones you might want to avoid.


VELSHI: As gas prices soar, smaller cars seem to be making a come back. GM and Ford say small car sales could hit the 3 million mark this year if auto makers can keep up with the growing demand for them. Small vehicles haven't sold in that kind of volume since the 1980s. If you're in the market for a compact car listen to this, Michael Quincy joins us now from "Consumer Reports" to tell us which small cars are the safest and which ones you should avoid.

Michael, the impression that these larger SUV, big cars, particularly since there's so many of them are on the road are safer than small cars, is that necessarily true?

MICHAEL QUINCY, "CONSUMER REPORTS": Not necessarily true. The majority of accidents are single-vehicle accidents and you are really only dealing with the mass of the vehicle that you are driving. I mean physics declares that if you have more space, more energy absorption around you a bigger vehicle is going to help you out.

VELSHI: So you've named specifically some cars, "Consumer Reports" that you think are worth considering if you were looking for a small car. The Honda Civic is one of the top ones on that list.

QUINCY: Sure, we really like the Honda Civic because it combines agile handling, good braking performance, reliable, energetic engine, good crash test results, head protection airbags, and stability control available in some models, but for 2009 Honda says it would be available through a lot more of the trim lines in specific.

VELSHI: The Audi A3, you like that.

QUINCY: Love the A3, great handling, great emergency handling, top-level crash tests from the IHS and NTSA. We really like the A3. It gives all the great standard safety equipment, including airbags, stability control and a good responsive engine. Really big on the a3.

VELSHI: And the Volkswagen Jetta that is another compact car people should consider.

QUINCY: Jetta has a great responsive handling. Stability control is almost available in every trimline and it will be standard across the line for 2009.

Jetta is a good reliability performance. And again all that great safety equipment.

VELSHI: Obviously people are thinking about some of these smaller cars because it will save them some money on gas. You could get carried away with the money saving, and you have some things on the list that you say you should avoid. Cars that people should avoid the Chevy Aveo sedan, the Hyundai Accent, the KIA Spectrum, and the Suzuki Firenza?

QUINCY: The bottom line with these cars is sloppy handling, poor brake performance, no availability stability control, just too many black marks to go against it to say you don't save money buying cars like this, because you aren't getting any safety benefits.

VELSHI: Right, you are in that car a lot so your sense of safety is probably very important if you are looking to do your own work. You keep bring up stability control, it is on a list of things that you think people should have, tell us a little bit about stability control, you also think anti lock brakes and side air bags and curtain airbags are things that people should have.

QUINCY: Stability control is probably the best invention since the seat belt. "Consumer Reports" is a big fan of stability control. This helps to keep the car on the road if it ever starts skidding. We think it should be standard equipment across the line. If it's available, tell your dealer I'm note going to buy this car without stability control. Don't let the dealer say you don't need it; you don't need antilock brakes or curtain air. You need all that stuff; "Consumers Reports" is a big advocate of all the safety features, because it can save your life.

VELSHI: Tell me about antilock brakes is there much that comes without antilock brakes?

QUINCY: Antilock brakes are pretty standard across the board. Some of the cheaper models that we mentioned before, "Consumer Reports" is fine, we buy the cars, and they are very difficult to find antilock brakes in some of the cheaper models, which is unfortunate. It should be standard equipment.

VELSHI: All right. And Mike, always good to have you here. Thanks so much. You can check out Mike's stuff at Mike Quincy is the automotive content specialist with "Consumer Reports." -- Christine.

ROMANS: All right. Ali, coming up, the Olympic dream may not be worth its weight in gold. We'll explain next on YOUR MONEY.


ROMANS: So what is an Olympic gold medal worth? The price of gold has doubled in the past four years since the last summer Olympics. An ounce of gold is now hovering about around $800 an ounce.

VELSHI: That should mean that Michael Phelps is a very rich man as the Olympic swimmer shatters world records and racks up gold medals, but unfortunately the gold medal isn't gold.

ROMANS: No, the gold and silver medals must be made of 92.5 percent pure silver. The gold medal must be gilded to at least 6 grams of gold. The Beijing version, by the way, also includes a special ring of jade.

VELSHI: While winning an Olympic gold medal is the price of achievement, the actual value of the raw materials adds up for a few hundred bucks.

ROMANS: Interesting. Thanks for joining us for this edition of YOURMONEY.

VELSHI: You're still a gold medal winner to me.

ROMANS: Aw. VELSHI: We will be back here next week, Saturday at 1:00 and Sunday at 3:00.

ROMANS: You have a heart of gold.

VELSHI: See you next week.