The U.S. has enjoyed unchallenged economic supremacy for so long few people can imagine a world in which the U.S. isn't the world's largest economic power.
But, explains Strategic Investment's Dan Denning, we took a step closer last week...
dailyreckoning.com
IMAGINE YOUR DAUGHTER AS A "Ke4"
by Dan Denning
The Chinese symbol for foreigner is Ke4. And Ke4's, traditionally, are not well liked in China. For good reason.
The period from 1644 to 1911 - known as the Qing Dynasty in China - is not a happy one for Chinese nationalists. In the 15th century, the Chinese were forced to build the Great Wall to keep the Mongols out. And in the mid-19th century, they fought two wars trying to prevent Great Britain and France from forcing opium into Chinese markets. The Chinese lost, and were forced to accept humiliating terms and open their ports to Western commerce.
Today, the Chinese again are opening their country to markets, but on very different terms. Today, the Chinese have an advantage. And it would not surprise me at all that if in another 50 years, the sons and daughters of America are serving as nannies, gardeners, or English teachers in the households of the Chinese nouveau riche. Foreigners have always left their home country for better opportunities elsewhere. The United States is filled with people who've done so. We just never expected we'd someday have to send our own kids overseas to find a better job or more opportunity. But we very well might. And a lot sooner than you think.
You've probably heard all about the coming ascendancy of China as a world economic power. Eric Fry mentions it in his notes today. And consider the following from Strategic Investment's Marc Faber: "...most people around the world still grossly underestimate [China's] size, importance, and future potential. Already today, there are more refrigerators, radios, TV sets, mobile phones, and motorcycles in China than in the US, and I have no doubt that within the next ten to 20 years the Chinese economy will become, in physical terms, by far the largest in the world."
Chinese economic production is deflationary. It appears to be a trade-off. Americans get cheaper goods. But we give up jobs for those goods. Chinese cost advantages in labor and production make Chinese manufacturing firms difficult to compete with.
Within the next 50 years, the Chinese will begin consuming too. Their economy will mature. And when it does, a great shift will take place. They will lead the world in exports. And they will also lead it in imports, including, perhaps, America's best and brightest.
Few people really understand the magnitude of this shift. The U.S. has enjoyed such unchallenged economic supremacy for so long that few people can imagine a world in which the U.S. isn't the world's largest economic power. But we took a step closer last week.
On Friday, the latest current account deficit numbers came out. The United States continues to gorge on the world's goods and services. The deficit expanded to a record $38.5 billion in August. It now stands at just over 5% of GDP. And as Morgan Stanley's Stephen Roach told an investment seminar in Tokyo yesterday, "That would mean the US would need to import US $2 billion worth of foreign capital per day [to achieve current account adjustment] - not an easy task with US equity indices at current levels."
In normal economies, this is a problem. Trade deficits usually demand an equal inflow of funds back into the debtor country to prevent the value of the currency from falling. After all, an economy that consumes more than it produces is not a "healthy" economy. And usually, the currency of a sick economy gets punished.
Not so in the United States. U.S. stock and bond markets are still attracting the bulk of the world's investable capital. All those dollars we trade for cheap goods are finding their way right back into American financial markets. And just days after the trade deficit numbers were released, we had two government officials assure us to move along, "there's nothing to see here." Instead of telling us that the trade deficit indicates a sick and chronically indebted economy with severe structural problems, they're telling us it's a non-issue.
In Monday's Financial Times, Richard Clarida, the Assistant Secretary for Economic Policy at the Treasury Department, said, "It is clear from the evidence that the U.S. current account reflects a lack of growth, and growth prospects, in the rest of the world. Moreover, the present deficit in the US current account does not suggest that a change in current U.S. economic policy is warranted."
Translation from the Newspeak: "It's not our fault the rest of the world isn't consuming its way to prosperity. We'll be damned if we're going to stop buying free cars and generally living well above our means through excess credit."
And so here we have the key flaw in U.S. economic thinking. US officials maintain that the U.S. economy is a safer bet than anywhere else in the world. And in that, they might be right.
But they couldn't be more wrong about gains in productivity powering the economy and staving off deflation. Illusory gains in productivity do not solve structural imbalances.
First, as Addison Wiggin adroitly outlined in yesterday's Daily Reckoning, Glenn Hubbard, chairman of the president's council of economic advisors, claims that productivity gains alone would stave off deflation in the U.S. Gains in productivity, Hubbard claims, are matched by gains in income. No evidence was offered, although I offer some of a different sort below.
And now, Knight-errant Greenspan has returned the to the fray. Yesterday, the chairman told us that "At minimum...it seems reasonable to conclude that the step- up in the pace of structural productivity that occurred in the that latter part of the 1990s has not, as yet, faltered." Strategic Investment contributor Dr. Kurt Richebächer has thoroughly discredited this Greenspan thesis, so let's move on to the really remarkable comment by the Chairman, one I suspect may haunt him.
In his prepared remarks yesterday in Washington, he made an eerily familiar claim. He said "...the transition to the higher permanent level of productivity associated with these innovations is likely not yet completed..." and that "new productivity-enhancing capital investment will pick up soon." It strikes me as either incredibly audacious or incredibly oblivious for the Chairman to use almost the exact phrasing of Irving Fisher. Just days before the Great Crash in '29, Fisher uttered the now famous words: "Stock prices have reached what looks like a permanently high plateau."
There are few permanent things in the world, much less in dynamic economies. The new technology Greenspan lauds as productivity-enhancing is, in fact, deflationary. Prices for computer technology are declining. Major U.S. companies in the telecom and tech sector engage in regular rounds of layoffs to compensate for the huge overhang in capacity.
Lower prices are great for consumers. But why is it taking so long for the government to acknowledge that the introduction of new technologies is almost always deflationary and profitless?
What's more, if there has been a "structural" change in the economy, as the Chairman claims, it's been to employment. America's headlong descent into the culture of consumption has, perhaps, permanently altered the employment landscape of America. We're consuming our jobs away.
Over the last 25 years, employment in services has grown about 10.6% a year. It marks a permanent shift away from America's manufacturing job base to a service base. A New York Times article from late August highlighted some disturbing numbers released by the Bureau of Labor Statistics. The BLS concluded that a large portion of the job layoffs of the last three years are "permanent layoffs." What did they mean?
Almost ten million people lost their jobs between 1999 and 2001. That was 7.8% of the workforce. We've touched before on how this kind of cost cutting is not good for the economy. While it gives one firm a temporary advantage over its competitors, the aggregate result across the economy is less prosperity, not more. One firm's costs are another firm's profits or a consumer's wages. And lower profits for other firms and lower wages for consumers mean less total spending, and eventually lower aggregate profits for the economy.
Only investment in new goods and services creates prosperity. Trouble is, artificially low interest rates have encouraged American households to spend today at the expense of tomorrow.
This bad habit is part of a larger macro-economic employment trend - one that favors China at the expense of the Unites States. The BLS also reported that from May of last year to May of this year, over 800,000 job openings disappeared from the marketplace. That was a decline of 19%. Not only did firms fire existing workers...but they also stopped hiring new ones.
These jobs are being eliminated. And it's having a predictable effect on the economy. For one, as some jobs disappear from the marketplace altogether, it lowers wage pressures. Worried workers are willing to take less in exchange for the security of a job. This keeps wage inflation low.
But more dramatically, the loss of jobs - especially manufacturing jobs - signals an irreversible trend in the American job market. The job vacuum is thus yet another bullet added to the deflation gun...
Sincerely,
Dan Denning,
for The Daily Reckoning
P.S. When it comes to labor costs, the U.S. simply can't compete with China. In the long-term, the U.S. economy is moving away from a manufacturing base and towards a service base. To the extent that this means there will no longer be job-creating investment in capital goods (machines and machines that make machines), the country is actually getting poorer, not richer.
Countries that consume more than they produce can't do so forever. Ascendant economies don't shed jobs, they create them. When you consume more than you produce, you impoverish your children.
Yet economies do not impoverish themselves all at once. They do it one bad debt at a time. And so it may take another 50 years for China to gain her position at the top of the world's economic ladder. And in that time, while many industries will die in America, many new ones will born in China. There are profits to be had in each case. |
