Global Wealth Shifts as Asians Stock Up On Bad Debt


Yesterday, we promised a new idea. Alert readers may have noticed – we didn’t deliver.

But when you have a new idea you don’t just throw it out like small change. It requires a certain amount of preparation…a bit of fanfare…a drum roll and a countdown.

The subject yesterday was European debt. The bond vigilantes came ashore in Portugal, attacking Portuguese government bonds. They seemed to be heading for the Spanish border.

All over Europe, the cry went up: “Can anyone stop them?”

It was as if the Huns were at the doors of Vienna…or the Moors were massed at the walls of Poitiers. Where is Charles Martel when you need him?

The funny thing about yesterday’s news was that Japan had come to Europe’s aid. Following China’s lead, Japan said it would lend the poor Europeans some money.

What are these strange benefactors up to? Why would Japan – with the highest debt load in the world…and barely able to finance its own deficits – lend to Europeans? But the Asian rescuers are just exchanging bad US-dollar debt for bad European debt. They must figure that they are up to their eyeballs in American paper…might as well diversify into some Euro trash as well.

The other thing it signals is more shift of wealth, from the West to the East. Asians are now creditors to Europeans and Americas. That’s just the way it works. The old world goes into debt to the new world. America is part of the Old World now. The Asians will now be calling the shots.

Which brings us closer to our idea.

But hold on…one second, Dear Reader… Let’s look at yesterday’s financial news.

The Dow rose 34 points. Gold rose $10. Nothing much to talk about.

But check out these headlines from The Wall Street Journal:

“Job openings fall in tough market,” says one.

“Downturn’s ugly trademark,” begins another. “Steep, lasting drop in US wages.”

Now just hold on a cotton-pickin’ minute. What happened to the recovery?

It did just as we said it would do – it vanished. The Great Correction began in 2007. It is now in its 5th year. But it’s not over.

Case-Shiller, the real estate analysts, now report a that the “double- dip” in housing is here. Prices are falling again in many areas.

Prices at the consumer level are not exactly falling…but they’re not rising much either. The official CPI is flat at barely 1% increase per year. This isn’t much comfort to the average household – which has higher food and energy bills (not included in the core CPI reading) to pay. But the low figures show us that we’re still in a Great Correction, not an inflationary recovery.

And, there were fewer job postings in November than the month before. And here’s the bad news: if you lose your job, a pox will be on your house for generations. No kidding. According to a study by a Columbia economist, you are likely to earn less in your next job, if you get one. Not only that, fast forward to 2030 and you’re likely to still be earning less than colleagues who weren’t laid off.

But it gets worse. Your children are likely to earn less too…and heck, maybe even your grandchildren.

The article mentions a manufacturing manager with two masters degrees. He was earning good money until he lost his job. Now he’s sweeping floors. He’s a janitor earning $9 an hour.

What good are those two masters degrees? Apparently, no good at all.

Another of the people spotlighted by the WSJ hopes to beat unemployment by going back to school. More degrees will lead to better job prospects, she thinks.

She should read the article. It doesn’t seem to work that way. More education may not pay off. Why?

Again, we return to our new theme…our new idea.

And now…more of our thoughts…

There are some activities that are positive sum activities. That is, they are productive. They increase the total of real wealth in a society.

There are other activities that are zero sum activities…or even negative sum activities. War, for example. Excess legal wrangling. Paperwork. Too much time spent in schools. Too much support for the unemployed, the malingerers and the loafers. These things decrease the total of real wealth in a society.

Sometimes people are bright, honest and hardworking. Sometimes they are lazy, shiftless and cunning. They always prefer to get wealth and status by the easiest means possible. In some societies, the best way is by working hard. In others, it is by being clever…becoming a lawyer…a banker…or a government hack.

A new society…or a fresh economy (such as one that has just been flattened by war or hyperinflation)…or a new model for an economy…is generally a wealth-creating society.

A free society is also generally a wealth creating society. People do what they want. If they want wealth, they are free to create it.

But as societies (or economies) age, they become decadent, arthritic, and backward-looking. They shift from wealth creating to wealth shuffling…and then to wealth destroying. They evolve into societies that are more concerned with redistributing wealth than with creating it…more focused on the appearance of wealth creation than with the real thing.

People shift with their societies. When hard work and creativity pays off…they become hardworking and creative. When connections and corruption pays, they are up to the job.

That is true in almost all aspects of the society. Education, for example. In a new or free society people turn to education because they want to learn useful skills…or for the pure love of learning and contemplation. In decadent societies they covet degrees and diplomas – often in such drivel as “communications” and “political science,” not to mention “gender studies” – and count on the paper to get them a cushy job where they don’t really have to do anything. Since everyone believes “education” is such a good thing, there is little resistance to further spending by government and parents – even though the threshold of declining marginal utility for this type of education may have been passed long ago.

This is also true of military spending. A little military spending may be a good thing – it protects the society from outside predators. But “defense” spending soon becomes totemic. Eventually, the decadent state is realizing a net negative return. The private entrepreneur switches from producing work boots at a 10% margin to furnishing the Pentagon with combat boots at a 20% margin. Not only is the productive economy squeezed to support the defense establishment, the over-financed military itself increases the odds of attack by foreign powers…and decreases the real defensive position of the society.

Then, of course, there is the government itself. As Jefferson pointed out, a little of it may be a “necessary evil,” but a lot of it is unnecessary, expensive, and a nuisance. Government does not create wealth. Governments shuffle wealth and stymie it. So, the more government you have, the less wealth-creation you have.

Right now, America is beginning a transition. It is an old, decadent society…headed for bankruptcy…and trying to find a new model. One of the elements of that new model is lower wages. People who thought they should earn $100,000 a year because they have a masters degree are finding that their services are really only worth $9 an hour. More generally, people in the advanced, decadent societies – who are accustomed to earning 10 times as much as a person in China, India or Brazil – look over their shoulders and see the foreigners gaining on them. Americans’ real wages, for example, are likely to be stagnant or falling for many years. Meanwhile wages in emerging markets are likely to double every 10 years or so.

The latest figures from the US show national income still increasing at about 1.5% per year. Nominally. Before inflation. Adjust for the increased cost of energy and food (both of which are moving up fast…some setting new record highs) and the real income of the typical family in the US is actually falling.

Tomorrow, we’ll talk about the role of the Federal Reserve…the banks…and the financial industry…

Stay tuned.


Bill Bonner.
for The Daily Reckoning Australia

Bill Bonner

Bill Bonner

Best-selling investment author Bill Bonner is the founder and president of Agora Publishing, one of the world's most successful consumer newsletter companies. Owner of both Fleet Street Publications and MoneyWeek magazine in the UK, he is also author of the free daily e-mail The Daily Reckoning.


  1. Good assessment of the situation.

    Looking at the history major powers fall maily by failing to respond to the inside affairs.
    Soviet Union is the last historical even we had in this regard and I am agree that USA seem to be the next best candidate in the same row.
    Now it’s just a matter of time and also what happens outside USA. The last shot could be a major natural desaster, which seems to look very far and unrealistic by many or a big China, if they can and want to cash their credits in a nasty or even friendly way.

    No one can tell what is going to happen exactly, which I don’t regret. But what I regret is that no one also can tell what ordinary people can do to minimise the impacts or in many cases to save their lives.

    I am fully agreed with what has been mentioned about more government, more costs and more army development, more cost and more wars.
    I believe this actually is leading us to the solution.
    A global worldwide organization with smaller local federations, all in peace and no arsenal as what we see today. I want to add more but it seems there is no room left here :)

    Michael Mabood
    January 13, 2011
  2. Love it!

    Simply cannot get enough reading on the Fed, banks and financial industry!

  3. Here’s a critique of AUS that I recently wrote.  I studied Economics over 20 years ago at University.  Only recently did I actually learn about Economics.

    This is what’s really happening in Australia.

    My opinion is that in Australia, there are no longer any productive industries apart from agriculture.  Mining, while absolutely essential to production should never be considered a productive industry.  It is actually the first step of a logistics chain that involves the extraction and transport of naturally ocurring commodities from the earth to the producer’s factory, rather than the creation of commodities.  The real value-adding occurs in the factory.

    In Australia, what you end up with is an economy where the overwhelming proportion of people are non-productive.  Instead of working to make goods for themselves and others, they are working to sell mostly imported goods to each other, sell services to each other, count money, lend money, govern, police and defend.  In order to finance their high lifestyle expectations, (remember they are painted differently from their immediate neighbours), they need to borrow from overseas and sell their resource commodities overseas, often at marginal rates, usually using imported capital, and always using foreign shipping services.  This is not a sustainable economic model as it has no place for wealth creators. A genuine wealth creator would arguably be the most stupid person in such an economy.

    The other issue with the economy is that while people here are cunningly finding themselves cushy high-paid jobs in banks, telcos, retailers, public utilities, and public service, people in Asian factories will be learning how to produce goods.
    Remember the great Japanese companies like Toyota, Panasonic and Seiko?  They were not started by governments or MBA qualified graduates.  Instead they were started by humble but very ambitious factory workers who thought they could make something better or the same thing in a better way. They were they guys who thought “The Boss is a DH, the foreman is a DH, I’ll go my own way”. I’d argue that in a real sense, the embryo of an industrial business is not the MBA graduate and certainly not a government clerk or politician, but the skilled and ambitious factory worker, who wants to better himself and his family.  The factory floor is in a very real sense the incubator of Capitalism, because that’s where the Capitalist of the future receives his skills, of which motivation is the most important skill a man or woman can possess.  The humble worker with smarts and ambition can become the very best Capitalists of all Time.

    Both Karl Marx and Adam Smith would be absolutely hysterical.  Both of them were correct.   Real wealth is created by both Labour and Capital.

    Wealth is Created by Workers and Capitalists.

    And this is the crux of the issue facing the Western economies.

    They have unwittingly exported to Asia the very industries that train and skill the people who will build the next generation of wealth-creating capitalists and industries.

    What you have as a result is an ‘advanced’ economy that cannot generate new wealth, and is forced to deplete it’s own natural wealth (resources) at ever-increasing rates and incur debt at ever-increasing rates to enable the purchase of ‘cheap’ goods that enable the high lifestyle expectations of it’s population to be realised, at ever increasing rates.
    On the other hand is a ‘developing’ economy that in the process of making and selling ‘cheap’ goods to the advanced economy, is actually developing the next generation of inventive and wealth creating industries.

    Who is really buying the ‘cheap goods’ now?

    The implications of this for Australia and similar countries are quite disturbing.  Eventually, mines play out and debt levels reach an absolute limit.  At some point in the future there would be real income reductions in Australia.  The income reductions would probably be large enough for it to be viable to import the wealth-creating factories that were exported to Asia, and by then possibly from Asia to Africa.

    Realistically though, Australians have been living on the hog (actually sheep, coal, dust and rust) for far too long.  They’ve long since priced themselves out of the international consumer goods markets, and given themselves highly paid, make-believe jobs, in non-productive and protected sectors like retail, finance, utilities and government.  No-one in their right mind would want to set up an enterprise in Australia, when salaries are so high.  Who in their right mind would invest millions into a farm to make less income than a senior public official, whose only ‘investment’ is a uni ‘degree’ and good ‘mates’?

    Is a Toyota mechanic in Perth really 20 times better than a Toyota mechanic in Beijing?  Can a factory operator in Melbourne seriously make 20-50 times more goods than a factory worker in Shanghai, using the same machinery?  Does a senior Australian CEO produce more goods than the average Australian farmer?  I’d be surprised if more than a handful of Aussie farmers make an average annual profit greater than the top Autralian CEOs. Got the message? Yet?

    No amount of Government policy, Business Groups, Unions, IAs, AWAs, Liberals or Labourites, Socialists or Conservatives can avoid the Day of Restitution.  What would happen here, like what’s already happening in the US is inevitable, because it is built-into the globalised economic system that has been so heavily promoted for the last few decades.  What no-one mentioned about Globalisation is that it can work in both directions.  It is the process by which poor and ambitious nations can become richer by their effort and thrift, while the rich and complacent nations can become poorer by their lack of effort and spend-thrift.

    The real development in the so-called ‘developing countries has already occurred.

    It occurred years and even decades ago in the minds of the one of a million of those throngs of hungry factory workers who thought they can do better on their own.  Once the thought that “Maybe I can do it better”  enters a persons mind, you have a potential Capitalist.  And it takes only one of a million of them to become the embryo of a new business or industry.

    Asia has hundreds of millions of them. 

    Take that thought to the bank, and you might even end up owning the bank.

    D Pritchard
    January 29, 2011

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