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Like a bag of baby bunnies in a herd of dinosaurs
Thoughts about the Bushian economic quagmire, and roadkill on the globalization superhighway, with references to Bruce Sterling. (A rant, in other words.)
The Bush Regime has three public economic goals for
2005 in addition to quietly divvying up of the
nation's resources such forest, mining, oil & gas,
water, and federal contracts:
1) Social Security "privatization"
2) Reducing the ability of citizens to sue
corporations, which Bush calls tort reform,
medical malpractice reform, and asbestos
litigation reform.
3) Cutting the "on budget" Federal budget deficit
from by half within five years.
Unfortunately, none of these directly address
the urgent economic problems facing the country.
In fact, they may even make things worse.
After 4 full years in office, the trade-deficit
problem has only gotten worse, especially
with China. To date, Bush has publicly spoken
in favor of outsourcing and free trade (though
he used selective tariffs and domestic
subsidies to win support for his re-election,
his inconsistencies are never mentioned.)
As of 2005, it appears that America's economy
has a permanent structural trade deficit problem,
which is seriously compounded by massive public
and private debt as well as insufficient tax
revenues to pay for current expenditures by
the Federal government. And in spite of historically
low interest rates, approximately (if memory serves)
3/4 of the budget is devoted to paying interest
on the national debt. Not only jobs are going overseas
but the nation's wealth is being transferred abroad
at an alarming rate.
By "structural" trade deficit I mean that because
entire industries have moved overseas, no matter
how low the US dollar goes in relation to the
Japanese yen or the Chinese yuan, we will always
be importing products like TV's. And as American
manufacturers are squeezed relentlessly by
cheaper -- let's face it, smarter -- competitors
abroad, ownership of the basic means of production
is being transferred to foreigners such as Toyota
and Honda, for example.
At this point, something like half of all of the
US dollars in circulation are held overseas.
One day, sooner or later, those dollars will be
used to buy "things". Most likely, foreign-held dollars
will be used to purchase U.S. assets like homes, land
and factories from Americans who are forced to
sell because they no longer have jobs, and cannot
afford to borrow capital. America's rather open
economy poses few barriers in the way of foreigners
who wish to buy American land and businesses.
The 21st Century may well parallel the 18th and 19th
centuries, with poor and low-middle class American
citizens playing the role of the original Native Americans.
Nor can the Federal Government simply renege on
its debts. For one thing, the Mega Corporations would
not allow it. Defaulting on the national debt would
amount to nationalization of foreign holdings amounting
to hundreds of billions of dollars. Retaliation would
be expected, and countries like China could be expected
to nationalize US corporate assets (to the extent that
the Mega Corporations headquartered here can even be
said to have US nationality...or patriotism or loyalty
or basic human decency...SIGH.)
Another reason why a Federal debt default is unthinkable
is that the Feds own the money-printing presses. In
the event of trouble Alan Greenspan comes to the rescue
with freshly printed bills. Mountains of them. Always.
This is called the "Greenspan put", referring to the
implicit guarantee that the Federal government will always
come to the rescue of the biggest corporations, regardless
of the cost to the individual citizens.
Thus, the value of the currency is continuously debased,
leading to inflation and asset bubbles like we saw in the
stock market and are presently seeing in real estate and
other tangibles (oil, gold, silver, bonds and even foreign
assets!) In our reality, the present system as "managed"
by Congress, with its fiscal authority, and the Federal Reserve,
with its monetary authority, requires both constant inflation
and an influx of new citizens to keep what is essentially
a gigantic, humongous, bizarre Ponzi scheme from falling apart
and sending the perpetrators to prison or the electric chair.
As a basic assist to the "perps" (i.e. government authorities),
the Federal government uses what amounts to a Bronze Era
accounting system, "cash accounting" instead of the more
modern and potentially honest accrual accounting system
employed by nearly all businesses in the world. With
the cash accounting system it is possible for Fuehrer Bush
to fire off $10 billion of "free" Tomahawk missiles and other
munitions in 2003 that were bought, paid for, and expensed
in 2002 or earlier, and hence, do not show up in 2003's
"budget". Likewise, the government can spend the excess
Social Security income, instead of putting it in the mythical
lockbox, and pretend that future year payouts do not
exist for this year's budget. In point of fact, this year's
$412 billion budget deficit would have been more like
$600 billion if the "stolen" Social Security contribution
paid in this year were accounted for! And that is just
the open theft and wastage. The Defense Department is
unable to account for something like $2 trillion worth
of "stuff", and HUD, which Bush hopes to defund next year,
is renowned for misaccounting (so the mystery of Cayman Island
corporations with massive holdings of US Treasury bonds
is growing less mysterious every minute, eh?)
Now, all of the preceding yak-yak was context and background
for the exciting events of 2005 and beyond! We are nearly
at the point in time where the proverbial immovable objects
meet the irresistable forces, and events have the potential
to spin totally out of control, (central control is generally
illusionary anyway, but lack of control manifests most
tangibly and violently, with often deadly results for the
victims -- AKA citizens/voters.)
Going forward, America faces the problem of deindustrialization
thanks to China and India. We're not just losing the
factories but the capability to do engineering and science.
After four years in office President Bush plans to do nothing
except to try to tighten discretionary spending, deregulate
corporations, and to create a permanent funding supply
for corporate stock -- essentially replacing the US dollar
currency with a more valuable currency, corporate stock,
which will coincidentally be out of the reach of the
Federal Reserve's printing presses.
I don't know if you recall this, but the basic PR script for
President Bush during his famous tax-cutting years was
"I believe that if we let people keep more of their own
money they will demand more goods and services, and that
will create more jobs." More jobs were created, but just
not in America. The U.S. pulled out of the 2001/2002
recession but is generating barely enough jobs to
accomodate population growth.
Mostly, the Bush and Fed largesse generated jobs in Asia.
And while the "recovery" is supposedly "robust", with a +4%
growth in GDP in 2004, the real situation is somewhat
more dire. The government-reported inflation numbers are
artificial and massaged to understate inflation, thus
pumping GDP. And massive borrowing and deficit spending
were required to generate even what growth we did have.
Consumers borrowed and spent their way out of the recession.
So now, if Bush tries to cut the Federal budget, what will
be the impact on the economy? Will it head back into
recession in 2006?
And can Bush even cut spending by significant amounts?
Heretofore he and Congress have spent wildly, on budget
and off. Hundreds of billions for war and corporate
handouts, and tax cuts for billionaires and every special
interest group with a vote. In theory Bush can make
HUD go cold turkey, but it won't be so easy to stop
paying for the Iraq and Afghanistan wars (both off
budget). Plus, as Greenspan raises interest rates, the
government must pay out more money on the national debt!
Uh-oh!
Furthermore, thanks to the structural problems with the
U.S. economy, wherein we import far more than we export,
there is no doable way to eliminate the massive trade deficit
except with a recession and monetary devaluation.
But even the falling dollar cannot rectify the trade
problem with products that are no longer manufactured
in America! And without investment, there is no way to
build the factories we would need to replace foreign
suppliers.
To make matters worse, Bush's (actually Grover
Norquist's) great idea to "privatize" Social Security
means *more* Federal borrowing, not less, because the
Feds are spending every penny of incoming employee and
employer contributions to the system (off-budget, to
add insult to injury.)
Thus, we begin to see the irresistable forces and
the immovable objects in question. And the situation
becomes very interesting. As pure spectator sport,
the Bushian economic quagmire is fascinating in the
same way that car and train wrecks attract large
crowds. And for the gamesmen, the possibilities
are endless. No doubt there are, at this very moment
thousands of aspiring millionaires glued to their
Bloomberg terminals monitoring currency and bond
bid/ask spreads. Recall that George Soros once earned
$1 billion in a single day gambing against, and
righteously breaking the Bank of England. In the
currency futures markets it is possible to control
$1 million with a mere $10,000 "investment". And better
yet, why not use *options* on futures to control
$100 million with just $10,000! There are of course
more mundane areas of interest...
Politically the Bushian economic quagmire is epic. On January
21st, the Chimpident will become a lame duck president.
But will the stalinist Republican Party discipline
hold firm and deliver the necessary votes to turn over
control of Social Security to the S&P 500 corporations?
And will there be humorous twists invoving bonds, such
as a legal requirement that part of the privatized
funds be invested in bonds for "diversification",
perhaps leading to partial re-investment of "privatized"
individual accounts into Treasury bonds? That would be
hilarious. Stranger things have happened!
I could go on about this for days! ... The real estate
"bubble" meets the godzilla of interest rate increases
needed to combat inflation resulting from $48/barrel
oil resulting from war in the Middle East and excess
money supply -- but what will be done about the China
problem and their stinking yuan peg to the dollar. "If
the yen does this and the dollar does that..." blah-blah
blah (if you recall "Other People's Money".) Etc. Etc.
But that stuff is not what really interests me. What
interests me is what will happen to We The People, the
"we" in "US", especially the totally disenfranchised,
the economic roadkill on the globalization superhighway?
"We" are competing against 1 billion dirt poor Chinese and
Indian villagers, and we are 100% unrepresented in Congress.
Our services have essentially zero commerical value
in the 21st century Bushian world economy. Which leaves
what? Government "service", an ideologically unappetizing
proposition even for those of us who pass the Homeland
Security background checks and anal probes. Or how about
barter, dealing, gambling, prostitution, handy-person,
begging or monkhood?
As lone individuals we have less viability than a bag
of baby bunnies in the middle of a herd of dinosaurs.
Or so it seems at first glance. But things have a way
of working out. I find myself attracted to the ideas
of Bruce Sterling. Take, for example, this excerpt
from "Distraction", fictional year 2042 A.D. in the
"fictional" (ahem) bankrupt US:
"It was a misconception to imagine that the Moderators
were merely violent derelicts. The roads of America
boasted a great many sadly desperate people, but the
Moderators were not a mob of hobos. The Moderators were
no longer even a "gang" or a "tribe". Basically, the
Moderators were best understood as a nongovernmental
network organization. The Moderators deliberately
dressed and talked like savages, but they didn't lack
sophistication. They were organized along new lines that
were deeply orthogonal to those of conventional American
culture.
"It had never occurred to the lords of consumer society
that consumerism as a political philosophy might one day
manifest the grave systemic instabilities that Communism
had. But as those instabilities multiplied, the country
had cracked. Civil society shriveled in the pitiless
reign of cash. As the last public spaces were privatized,
it became harder and harder for American culture to
breathe. Not only were people broke, but they were taunted
to madness by commercials, and pitilessly surveilled by
privacy-invading hucksters. An ever more aggressive
consumer-outreach apparatus caused large numbers of
people to simply abandon their official identities.
"It was no longer any fun to be an American citizen.
Bankruptcies multiplied beyond all reason, becoming a
kind of commercial apostasy. Tax dodging became a
spectator sport. The American people simply ceased to
behave. They gathered to publicly burn their licenses,
chop up their charge cards, and hit the road. The proles
considered themselves the only free Americans.
"Nomadism had once been the linchpin of human existence;
it was settled life that formed the technological novelty.
Now technology had changed its nonexistent mind. Nomads
were an entire alternate society for whom life by
old-fashioned political and economic standards was
simply no longer possible."
* * *
Well, I cannot follow Bruce Sterling. Except with a
broom.
So for now, I say, "So long!" and "Think!"
P.S. Sterling is using the mathematical term "orthogonal"
in a non-traditional setting. Essentially what he means
is that a Moderator's piece on a 2D game board would have
no shadow, while in the "real" n-D world they would have no
significant aspect appearing in the computations of the
"system" (not until the end of the book anyway, hoho.)
2005 in addition to quietly divvying up of the
nation's resources such forest, mining, oil & gas,
water, and federal contracts:
1) Social Security "privatization"
2) Reducing the ability of citizens to sue
corporations, which Bush calls tort reform,
medical malpractice reform, and asbestos
litigation reform.
3) Cutting the "on budget" Federal budget deficit
from by half within five years.
Unfortunately, none of these directly address
the urgent economic problems facing the country.
In fact, they may even make things worse.
After 4 full years in office, the trade-deficit
problem has only gotten worse, especially
with China. To date, Bush has publicly spoken
in favor of outsourcing and free trade (though
he used selective tariffs and domestic
subsidies to win support for his re-election,
his inconsistencies are never mentioned.)
As of 2005, it appears that America's economy
has a permanent structural trade deficit problem,
which is seriously compounded by massive public
and private debt as well as insufficient tax
revenues to pay for current expenditures by
the Federal government. And in spite of historically
low interest rates, approximately (if memory serves)
3/4 of the budget is devoted to paying interest
on the national debt. Not only jobs are going overseas
but the nation's wealth is being transferred abroad
at an alarming rate.
By "structural" trade deficit I mean that because
entire industries have moved overseas, no matter
how low the US dollar goes in relation to the
Japanese yen or the Chinese yuan, we will always
be importing products like TV's. And as American
manufacturers are squeezed relentlessly by
cheaper -- let's face it, smarter -- competitors
abroad, ownership of the basic means of production
is being transferred to foreigners such as Toyota
and Honda, for example.
At this point, something like half of all of the
US dollars in circulation are held overseas.
One day, sooner or later, those dollars will be
used to buy "things". Most likely, foreign-held dollars
will be used to purchase U.S. assets like homes, land
and factories from Americans who are forced to
sell because they no longer have jobs, and cannot
afford to borrow capital. America's rather open
economy poses few barriers in the way of foreigners
who wish to buy American land and businesses.
The 21st Century may well parallel the 18th and 19th
centuries, with poor and low-middle class American
citizens playing the role of the original Native Americans.
Nor can the Federal Government simply renege on
its debts. For one thing, the Mega Corporations would
not allow it. Defaulting on the national debt would
amount to nationalization of foreign holdings amounting
to hundreds of billions of dollars. Retaliation would
be expected, and countries like China could be expected
to nationalize US corporate assets (to the extent that
the Mega Corporations headquartered here can even be
said to have US nationality...or patriotism or loyalty
or basic human decency...SIGH.)
Another reason why a Federal debt default is unthinkable
is that the Feds own the money-printing presses. In
the event of trouble Alan Greenspan comes to the rescue
with freshly printed bills. Mountains of them. Always.
This is called the "Greenspan put", referring to the
implicit guarantee that the Federal government will always
come to the rescue of the biggest corporations, regardless
of the cost to the individual citizens.
Thus, the value of the currency is continuously debased,
leading to inflation and asset bubbles like we saw in the
stock market and are presently seeing in real estate and
other tangibles (oil, gold, silver, bonds and even foreign
assets!) In our reality, the present system as "managed"
by Congress, with its fiscal authority, and the Federal Reserve,
with its monetary authority, requires both constant inflation
and an influx of new citizens to keep what is essentially
a gigantic, humongous, bizarre Ponzi scheme from falling apart
and sending the perpetrators to prison or the electric chair.
As a basic assist to the "perps" (i.e. government authorities),
the Federal government uses what amounts to a Bronze Era
accounting system, "cash accounting" instead of the more
modern and potentially honest accrual accounting system
employed by nearly all businesses in the world. With
the cash accounting system it is possible for Fuehrer Bush
to fire off $10 billion of "free" Tomahawk missiles and other
munitions in 2003 that were bought, paid for, and expensed
in 2002 or earlier, and hence, do not show up in 2003's
"budget". Likewise, the government can spend the excess
Social Security income, instead of putting it in the mythical
lockbox, and pretend that future year payouts do not
exist for this year's budget. In point of fact, this year's
$412 billion budget deficit would have been more like
$600 billion if the "stolen" Social Security contribution
paid in this year were accounted for! And that is just
the open theft and wastage. The Defense Department is
unable to account for something like $2 trillion worth
of "stuff", and HUD, which Bush hopes to defund next year,
is renowned for misaccounting (so the mystery of Cayman Island
corporations with massive holdings of US Treasury bonds
is growing less mysterious every minute, eh?)
Now, all of the preceding yak-yak was context and background
for the exciting events of 2005 and beyond! We are nearly
at the point in time where the proverbial immovable objects
meet the irresistable forces, and events have the potential
to spin totally out of control, (central control is generally
illusionary anyway, but lack of control manifests most
tangibly and violently, with often deadly results for the
victims -- AKA citizens/voters.)
Going forward, America faces the problem of deindustrialization
thanks to China and India. We're not just losing the
factories but the capability to do engineering and science.
After four years in office President Bush plans to do nothing
except to try to tighten discretionary spending, deregulate
corporations, and to create a permanent funding supply
for corporate stock -- essentially replacing the US dollar
currency with a more valuable currency, corporate stock,
which will coincidentally be out of the reach of the
Federal Reserve's printing presses.
I don't know if you recall this, but the basic PR script for
President Bush during his famous tax-cutting years was
"I believe that if we let people keep more of their own
money they will demand more goods and services, and that
will create more jobs." More jobs were created, but just
not in America. The U.S. pulled out of the 2001/2002
recession but is generating barely enough jobs to
accomodate population growth.
Mostly, the Bush and Fed largesse generated jobs in Asia.
And while the "recovery" is supposedly "robust", with a +4%
growth in GDP in 2004, the real situation is somewhat
more dire. The government-reported inflation numbers are
artificial and massaged to understate inflation, thus
pumping GDP. And massive borrowing and deficit spending
were required to generate even what growth we did have.
Consumers borrowed and spent their way out of the recession.
So now, if Bush tries to cut the Federal budget, what will
be the impact on the economy? Will it head back into
recession in 2006?
And can Bush even cut spending by significant amounts?
Heretofore he and Congress have spent wildly, on budget
and off. Hundreds of billions for war and corporate
handouts, and tax cuts for billionaires and every special
interest group with a vote. In theory Bush can make
HUD go cold turkey, but it won't be so easy to stop
paying for the Iraq and Afghanistan wars (both off
budget). Plus, as Greenspan raises interest rates, the
government must pay out more money on the national debt!
Uh-oh!
Furthermore, thanks to the structural problems with the
U.S. economy, wherein we import far more than we export,
there is no doable way to eliminate the massive trade deficit
except with a recession and monetary devaluation.
But even the falling dollar cannot rectify the trade
problem with products that are no longer manufactured
in America! And without investment, there is no way to
build the factories we would need to replace foreign
suppliers.
To make matters worse, Bush's (actually Grover
Norquist's) great idea to "privatize" Social Security
means *more* Federal borrowing, not less, because the
Feds are spending every penny of incoming employee and
employer contributions to the system (off-budget, to
add insult to injury.)
Thus, we begin to see the irresistable forces and
the immovable objects in question. And the situation
becomes very interesting. As pure spectator sport,
the Bushian economic quagmire is fascinating in the
same way that car and train wrecks attract large
crowds. And for the gamesmen, the possibilities
are endless. No doubt there are, at this very moment
thousands of aspiring millionaires glued to their
Bloomberg terminals monitoring currency and bond
bid/ask spreads. Recall that George Soros once earned
$1 billion in a single day gambing against, and
righteously breaking the Bank of England. In the
currency futures markets it is possible to control
$1 million with a mere $10,000 "investment". And better
yet, why not use *options* on futures to control
$100 million with just $10,000! There are of course
more mundane areas of interest...
Politically the Bushian economic quagmire is epic. On January
21st, the Chimpident will become a lame duck president.
But will the stalinist Republican Party discipline
hold firm and deliver the necessary votes to turn over
control of Social Security to the S&P 500 corporations?
And will there be humorous twists invoving bonds, such
as a legal requirement that part of the privatized
funds be invested in bonds for "diversification",
perhaps leading to partial re-investment of "privatized"
individual accounts into Treasury bonds? That would be
hilarious. Stranger things have happened!
I could go on about this for days! ... The real estate
"bubble" meets the godzilla of interest rate increases
needed to combat inflation resulting from $48/barrel
oil resulting from war in the Middle East and excess
money supply -- but what will be done about the China
problem and their stinking yuan peg to the dollar. "If
the yen does this and the dollar does that..." blah-blah
blah (if you recall "Other People's Money".) Etc. Etc.
But that stuff is not what really interests me. What
interests me is what will happen to We The People, the
"we" in "US", especially the totally disenfranchised,
the economic roadkill on the globalization superhighway?
"We" are competing against 1 billion dirt poor Chinese and
Indian villagers, and we are 100% unrepresented in Congress.
Our services have essentially zero commerical value
in the 21st century Bushian world economy. Which leaves
what? Government "service", an ideologically unappetizing
proposition even for those of us who pass the Homeland
Security background checks and anal probes. Or how about
barter, dealing, gambling, prostitution, handy-person,
begging or monkhood?
As lone individuals we have less viability than a bag
of baby bunnies in the middle of a herd of dinosaurs.
Or so it seems at first glance. But things have a way
of working out. I find myself attracted to the ideas
of Bruce Sterling. Take, for example, this excerpt
from "Distraction", fictional year 2042 A.D. in the
"fictional" (ahem) bankrupt US:
"It was a misconception to imagine that the Moderators
were merely violent derelicts. The roads of America
boasted a great many sadly desperate people, but the
Moderators were not a mob of hobos. The Moderators were
no longer even a "gang" or a "tribe". Basically, the
Moderators were best understood as a nongovernmental
network organization. The Moderators deliberately
dressed and talked like savages, but they didn't lack
sophistication. They were organized along new lines that
were deeply orthogonal to those of conventional American
culture.
"It had never occurred to the lords of consumer society
that consumerism as a political philosophy might one day
manifest the grave systemic instabilities that Communism
had. But as those instabilities multiplied, the country
had cracked. Civil society shriveled in the pitiless
reign of cash. As the last public spaces were privatized,
it became harder and harder for American culture to
breathe. Not only were people broke, but they were taunted
to madness by commercials, and pitilessly surveilled by
privacy-invading hucksters. An ever more aggressive
consumer-outreach apparatus caused large numbers of
people to simply abandon their official identities.
"It was no longer any fun to be an American citizen.
Bankruptcies multiplied beyond all reason, becoming a
kind of commercial apostasy. Tax dodging became a
spectator sport. The American people simply ceased to
behave. They gathered to publicly burn their licenses,
chop up their charge cards, and hit the road. The proles
considered themselves the only free Americans.
"Nomadism had once been the linchpin of human existence;
it was settled life that formed the technological novelty.
Now technology had changed its nonexistent mind. Nomads
were an entire alternate society for whom life by
old-fashioned political and economic standards was
simply no longer possible."
* * *
Well, I cannot follow Bruce Sterling. Except with a
broom.
So for now, I say, "So long!" and "Think!"
P.S. Sterling is using the mathematical term "orthogonal"
in a non-traditional setting. Essentially what he means
is that a Moderator's piece on a 2D game board would have
no shadow, while in the "real" n-D world they would have no
significant aspect appearing in the computations of the
"system" (not until the end of the book anyway, hoho.)
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IMC Network
By: Tim Wood on: 15.01.2005 [12:04 ] (162 reads)
http://iraqwar.mirror-world.ru/tiki-read_article.php?articleId=36508
Excerpt:
[...]
So what we have is all the spending in the United States, but production and investment and capital formation in China which leads to an interesting situation.
You have the growing trade surplus of China, obviously everything is produced in China and consumed in the US. The Chinese have a growing trend for business in the United States, and it is not that the Chinese pursue unfair trade practices – they import goods – they just don’t import them from the United States. You have the Chinese imports from South East Asia which are growing at a very rapid pace.
In other words the Chinese probably pursue kind of a political agenda. They export to the United States but they want to strengthen the other Asian countries in order to have strong neighbours that will depend in future more and more on the Chinese economy as an engine of growth and less on the US.
Korean exports to China today are larger than to the United States, Japanese exports to China are growing at around 30-40% annual rate, whereas to the US they are falling. Japanese exports to Taiwan, Hong Kong and mainland China are larger than to the US so you can see the Chinese economy is growing rapidly, and I will return to this subject in a minute.
In essence the Chinese have had imports growing at about the same rate as their exports over time and in fact in the last two years frequently import growth has exceeded export growth with the result that the Chinese trade surplus has been diminishing. In the first four months of this year they had a trade deficit; recently it is positive again. But I hope that you can see what the problem is, which is reflected in America’s net asset balance.
The newest net asset balance will tell you how many assets the US has overseas compared to assets foreigners have in the United States. All through the 70s we had a positive net asset balance in the United States. In other words Americans had more assets outside the country than foreigners in America. But after 87, as a result of the growing trade and current account deficit, this net asset balance has been deteriorating with the result that today foreigners have assets in the US equivalent to $9tr and Americans have assets in foreign countries equivalent to $6tr which is a negative net asset balance of around $3tr. That’s around negative 30% of US GDP.
By the way, you can see here that is gets worse with Bush policies. Bush combined with Greenspan? Recipe for disaster
So now you have to see that this has got to grow by the annual current account deficit which in the second quarter of this year was running at an annualised 6% of GDP.
So every year the deficit grows until you eventually get to a negative net asset balance of 50% and one day to 100%.
Now you have to ask yourself. “Are the Chinese out of their minds to still buy US Treasury Bonds?” They can also see that the US is in deep problems. Here again the Chinese pursue an agenda, they know very well that with the economy growing at around 8% per annum they are on collision course with the United States for a variety of reasons. They also know that militarily they are inferior to the United States. However, they can harm the US economically very badly by keeping the dollar relatively strong.
Production and investment will shift to China and other Asian countries and you have to also see that as a result of modern technologies a larger and larger portion of tradable services can now be transferred to countries like India. And ideally you would also outsource the CIA to Bangladesh!
This is a trend that is here to stay.
The Chinese also supported the dollar for a long time because they love President Bush and his administration! Because with the continuous human rights abuses, suddenly in the eyes of the African continent, Latin America; the Chinese leadership looks like Cinderella and finally, this is a sign, the Chinese showed all the presidential debates in the Chinese media. This is the first time it has happened because they wanted to, the people of China to see what kind of quality of presidential candidates democracy generates. Now nobody in China wants democracy!
The dollar will obviously go down.
Now the question is if the Chinese revalue, say by 50% - they double the value of the currency. Would anything change? I don’t think so. If you have factory wages of $100 or $200 nothing will change, they will go to 300 or 400. But they don’t have healthcare expenditures, they don’t have pension fund liabilities, retirement benefits and so forth. Production will still shift to Asia and the investment activity will be in Asia.
The only way in the long run that this imbalance will be corrected is that consumption in the United States will decline. It can decline if people will spend less or it can decline because inflation starts to exceed income gains and then the purchasing power diminishes.
In short, we have in the world five large currencies. We have the US dollar, the euro, the yen, the Chinese currency and gold.
Currency realignment won’t do the trick. All paper money will depreciate in time in its purchasing power. The only currency that will gain relative to currency will eventually be gold and silver, and precious metals and hard assets. But in the mean time what is happening here and this has to be clearly understood: there is a transfer of wealth from the Western World to Asia. The ownership of assets is shifting to Asia and in this environment we have to consider how to invest.
First of all, the Chinese economy is growing very rapidly and is very large. China produces more steel than the US and Japan combined and is still growing very rapidly. They produce five times more cement than the United States. Some consumer markets are much larger in China than in the United States. I have to explain that in China we have a deflationary boom.
Take a TV set that costs US$2,000. Then 1m Chinese households can buy it. If the price declines to say $200 then suddenly 100m Chinese households can buy it. Or take the motor cycle population, it grew in seven years from 12m motor cycles to now 90m motor cycles because prices were declining so more and more people can buy it.
Optically the US is a $11.2tr economy, China $1.2tr economy, GDP wise. But in physical terms adjust it for the difference in the price level I would say that the Chinese economy is already 60% of the US economy and still growing.
In the process of industrialisation there are certain things that happen, energy needs go up. China is a large oil producer but it has had to import increasing quantities of oil and let me tell you what happens in terms of industrialisation.
In the US from 1900 to 1970 per capita consumption of oil rose from 1 barrel to 28 barrels. In Japan industrialisation 1950 to 1970, South Korea 1965 to 1990 per capita consumption rose from 1 barrel to 17 barrels. In China we are at 1.7 barrels; in India 0.7 barrels. The whole of Asia has 3.6bn people including Japan and it consumes 20m barrels of oil a day. The US has 295m people and consumes 22m barrels of oil a day. For sure oil demand in Asia will double to 40m barrels of oil per day. Whether it takes six years or 15 years, that I don’t know, but it will double.
So the demand side is very strong, the incremental demand lead to rise in oil price as you can see. By the way, in your lifetime you won’t see oil at $12 a barrel again ever. That is finito, over.
Now we had some inventory accumulation this year, In the first nine months the Chinese imported 34% more oil than last year. I think they didn’t need 34% more oil so there has been some inventory accumulation. So oil prices could easily, in my opinion, go anywhere between $30- $40 in the months ahead when growth slows down, but the trend is definitely for oil demand in Asia to rise as people go from the bicycles to the motorcycles to the cars. Once they move from the countryside to the cities they need the refrigerators, they need transportation, heaters and so forth and so energy demands rises a lot.
On the supply side world supplies today are 80m barrels of oil a day. In the US oil production has been down since 1971 and elsewhere in Indonesia, Venezuela, and Oman it’s also been down.
The structure of the oil industry is interesting. You have 4,000 small fields producing 53% of total oil production of the 80m barrels, slightly more than 40m barrels. They have an average daily production of 9,000 barrels. Then you have 14 large fields, they’re large designed by fields producing over 500,000 barrels a day. All these fields were discovered before 1965 and six of them are in the Kingdom of Saudi Arabia. The six in the Kingdom of Saudi Arabia they have an unusual structuring to think that one field produces more than half the production. It used to produce more than 5m barrels; it’s dropped to 4.7m.
What I want to say, it’s very difficult to replace these 14 fields, none of which was discovered after 1965. So I think the total oil supplies at 80m barrels today cannot be increased much. In the 70s the oil shock was a surprise shock because Opec was cutting production, they noticed the price shooting up, but this time around Opec isn’t cutting production, it’s actually increasing production but it can’t increase it much more so I think in the long run oil will go up and not only oil. You can see that the demand for all commodities has risen.
The Chinese used to take 6% of the world’s copper market in 1990. 12% in the year 2000; now they’re the largest copper user, 21%. Iron ore, 27% of total production in the world.
The incremental demands coming from the industrialisation not only of China, but also of India, from rising standards through this wealth transfer from the Western World to Asia, will lift commodity prices.
You can see that although we’ve gone up since 2001 in real terms adjusted for inflation, commodity prices are still extremely low. So I think that we are at the beginning of a major cycle.
Some commodities may have overshot already, but agriculture is one of my favourites because food production in China has been declining. They have a water problem, and through the industrialisation and the construction of golf courses there’s less land available for agriculture.
So I would go and look at some agricultural commodity prices that haven’t moved much yet like corn, soya beans, wheat, sugar. The Swiss drink 50 times more coffee per capita than the Chinese, but the Chinese have a population 200 times larger than the Swiss so their market is already larger. If they go to the per capita consumption level of the South Koreans, Taiwanese, Japanese – non-traditional coffee drinkers – they will take up three times the coffee crop in the world.
The point is not to plan to invest the inheritance that you got from your uncle, but if commodity prices go up then usually it creates an unfavourable environment for financial assets, certainly for bonds.
The 1970s were a hostile environment for equities. Secondly and more importantly, economies have business cycles there are war cycles and usually when commodity prices start to go up international tensions increase. I think that tensions will increase over oil in future. Rising commodity prices lead to international tensions and then at the end of the rising commodity price when countries really go to war for commodities, commodity prices go through the roof.
So you may have to wait some time until the next war will lead to gold prices that will be at least as high as the Dow Jones or higher. In the meantime this wealth transfer will lead to an unusual situation.
At the moment, the Japanese market cap is 9% of total market cap in the world. The US is 52% and the rest of Asia is 3.5%. So for 12.5% you get the whole of Asia’s 3.6bn people will the fastest growing economies of China, Vietnam and India but for the US you have to pay 52% for a country that is economically doomed.
So I think this will change in next five to ten years time the US will be anywhere between zero and 20% and Asia should be between say 30 and 50%. By the way, in 1990 Japan was more than 50%. This can happen in many ways, it can happen both go up, Asia goes up more than the US. Both goes down Asia goes down less than the US or the US goes down, Asia goes up or it can happen both stay at the same level but through currency realignments. That is quite possible that the dollar goes down, it could be that the Dow Jones goes to 100,000 but the dollar drops by 99.9%. It happened in Latin America. By the way the apostles of the new economy they are right, the US has a new economy, it resembles Mexico and Brazil.