I've been thinking about what I see happening in global commerce and compare it with what I see around me in my own community. An old boogie man has come back from the dead. While central banks fought the last war, the forces of deflation gathered storm seemingly unnoticed. Lets' review the increasingly common "wisdom".
The chickens are starting to settle on the roost. 15-20 years of arbitraging the difference between First world and Third world production costs have resulted in a massive hollowing out of consumer spending capability.
The reason to form "free" trade pacts with Third world dictatorships was that Firstworlders would loose a few low-end manufacturing jobs but gain a whole bunch of Thirdworlder consumers eager to buy their first color TV and car. Well, it seems that those doing the arbitraging have kept the lion's share of the results (not surprising) resulting in a large out-of-work underclass (that isn't even counted anymore in official unemployment statistics)of former Firstworlder consumers and a bunch of Thirdworlder workers (that given the nasty nature of their governments place extreme constraints on union formation) so underpaid they cannot replace the purchasing power of those removed from the consumption cycle, other than just purchasing the basics.
The resulting boodle from the arbitrage of the Third against the First, having no growing markets (other than those in investor heads) flood into equity markets running up the price of tulip bulbs hansomly. Meanwhile, prices for all sorts of basic goods quietly declined worldwide, oil, agricultural commodities, and metals---stating oh so well what was reality---people from Third world places (and former Eastern Block countries) selling everything that wasn't bolted down. But all parties come to an end, and perhaps the kegs have gone dry one this blowout of all parties, and at least some investors are blearly looking for the exits.
The results of declining equity prices will bring consumption to a screeching stop. Consider the savings rate in the US: .6%...why so low? Because people are spending the sunshine of summers past---mostly someone elses's sunshine delivered via the equity markets. Equity markets worldwide are linked together. Declines in Russia and Latin America hit big Firstworld banks and "their" equity markets hard. Investors in recently issued ADRS (notice that most of the ADRs have pretty thin histories) and emerging market funds get hammered. These people start to pull out of Firstworld markets fearing a replay of the beating they took in emerging markets, and so European and esp. US markets decline. Declining markets lead to declining consumtion. With declining spending comes slowing economies---and walla, Firstworld deflation.
We may be on the cusp of the last part of this scenario...but what happens when we really get rocking? What happens in the tornado? Are these prices for the truely scarce things of this increasingly crowed world, beachfront property, metals, oil, agricultural products going to be on fire sale forever? |
