How to Prepare for the Coming Devaluation

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Whoa. Did the whole global train just come to a screeching halt or is it just us? The Wall Street Journal reports that South Korean exports fell by 32.8% in January from the same time last year. That followed a 19% fall in November and a 17.9% fall in December. What gives?

Far East Asian economies built to export consumer goods to America and Europe are just now feeling the brunt of the consumer strike unfolding in the developed world. Savings rates are up. Credit card use is down. Exporters have too many goods and too few buyers.

“Adding to the country’s [South Korea’s] difficulties,” the Journal reports, “is that exports to China have fallen more quickly than the overall rate in recent months. A sizable portion of South Korea’s exports to China are partly completed televisions, cell phones and cars, which are finished in Chinese factories and exported to other countries.”

There is trouble in Singapore, too. The Times of London reports that, “Singapore – the world’s busiest port by tonnage handled and the home of some of the world’s largest shipping companies – is already feeling the pain of an alarming slump in global trade.” The port is becoming a giant parking lot for empty freighters with no commerce to conduct.

Rob Parenteau, who’s taken over the Richebacher Letter in the States, says that Asia is in danger of becoming the next Detroit. Or if we were to put in the form of a question, what if an entire region’s economy ramped up to produce goods for people who couldn’t afford to buy them any longer? You’d probably get a harbour full of ships waiting off shore, as the image from Google Maps shows below.

All those tiny dots are ships waiting to load goods and take them to a retail outlet near you. They could be waiting awhile. According to the Times, “With the credit crunch still affecting trade finance and the demand for Asian manufactured goods in acute decline, hundreds of container and dry-bulk ships now sit unneeded and at anchor outside Singapore. The stagnation, say brokers, is matched onshore.

By the looks of the picture below-admittedly we don’t know how recently it was taken-things are looking pretty crowded on shore. Too many goods, too few buyers.

Containers Full of Goods, Seeking Good Home

There is no shortage of productive capacity, that’s for sure. But that could be problem, especially for China. All those goods with no place to call home came from factories. Many of those factories were (and still are) in China. And the Chinese working in those factories-many of whom moved off the farm and into the city-are not especially happy with the current state of affairs.

And we are not talking a small number of people here. We are talking an entire Australia of workers who migrated to find urban factory work. Many have now returned from the Chinese New Year Holiday, only to find out they don’t have a job.

There is this from today’s Asian Wall Street Journal: Chen Xiwen, who heads the Chinese Communist Party’s office on rural policy, said Monday that about 20 million migrant workers — nearly a sixth of the total — lost their jobs in recent months. That number, the first official estimate, underscores the government’s challenge in maintaining employment and avoiding unrest.

“For those migrant workers who have lost their jobs, what are they going to do for income when they return to their village? How are they going to manage? This is a new factor affecting social stability this year,” Mr. Chen said at a news conference in Beijing.

You can say that again. The Far Eastern Economic Review calls it, “The Coming Crack Up of the China Model.” More on the origins of that phrase “Crack Up” in a moment. But what is the China model? It’s the model that keeps the Chinese currency artificially cheep against the U.S. dollar in order to give Chinese manufacturers-already armed with a distinct advantage in low-cost labour-a global competitive edge.

It worked, at least in the sense that Chinese manufacturing boomed in the last ten years. But the model also failed to produce substantial real wage growth for Chinese workers. This wage growth, and the expansion of consumer credit, would allow domestic demand to generate more economic growth in China that exports alone.

What’s more, if and when China ever allowed its currency to appreciate against the U.S. dollar, it would instantly increase domestic purchasing power. It would also instantly wipe out a good deal of the value of China’s massive U.S. Treasury bonds and dollar-denominated reserves. This is what’s known as a “pickle.”

Take a huge contraction in global trade. Add one part corruption. And two parts growing income inequality. Mix together vigorously and what do you get? Political instability.

“Violent unrest rocks China as crisis hits,” again reports the Times. “In the southern province of Guangdong, three jobless men detonated a bomb in a business travellers’ hotel in the commercial city of Foshan to extort money from the management. On January 15 there were pitched battles at a textile factory in the nearby city of Dongguan between striking workers and security guards.”

“On January 16, about 100 auxiliary security officers, known in Chinese as Bao An, staged a street protest after they were sacked by a state-owned firm in Shenzhen, a boom town adjoining Hong Kong. About 1,000 teachers confronted police on the streets of Yangjiang on January 5, demanding their wages from the local authorities.”

“In one sample week in late December, 2,000 workers at a Singapore-owned firm in Shanghai held a wage protest and thousands of farmers staged 12 days of mass demonstrations over economic problems outside the city. All along the coast, angry workers besieged labour offices and government buildings after dozens of factories closed their doors without paying wages and their owners went back to Hong Kong, Taiwan or South Korea.”

In the West, a dysfunctional financial system with many major banks insolvent. In the East, a dysfunctional economic model whose breakdown is leading to mass unemployment and social instability. And here in Australia?

Well, yesterday the government said the fall in revenues from the global black swan dive will lead to a $115 billion decline in government tax takings (what the government likes to call revenue). That’s a pretty big hole in the budget. It suggests that we’ve entered an era of regular government budget deficits and, if the RBA holds to form, lower interest rates.

These lower rates, and not just in Australia mind you, represent the coming devaluation of paper money against real goods. We wrote about this in the January issue of Diggers and Drillers. And in today’s essay section, you can read about what the devaluation means for one particular tangible good, namely gold. The Swarm Trader Gabriel Andre shows you the inter-market relationship between the Aussie dollar, the U.S. dollar, and gold. Check the essay section below.

The phrase “crack-up boom” first appears, as far as we can tell, on page 427 of Human Action, by the great Austrian economist Ludwig von Mises. Mises was writing about how changing expectations for purchasing power eventually affect people’s real-world economic decisions. Once people see trillions in new money coming down the pipeline, they flee for higher, firmer ground.

“Once public opinion is convinced that the increase in the quantity of money will continue and never come to an end,” he writes, “and that consequently the prices of all commodities and services will not cease to rise, everybody becomes eager to buy as much as possible and to restrict his cash holding to a minimum size.”

“For under these circumstances the regular costs incurred by holding cash are increased by the losses caused by the progressive fall in purchasing power. The advantage of holding cash must be paid for by sacrifices which are deemed unreasonably burdensome. This phenomenon was, in the great European inflations of the ‘twenties, called flight into real goods (Flucht in die Sachwerte) or crack-up boom (Katastrophenhausse).”

It may seem odd to ring the alarm about an inflationary crack-up boom at just the time when policy makers are publicly fretting about deflation. But deflation as such is not the bogeyman. You can have deflation when you have a constant money supply coupled with increases in productivity. Prices fall.

The deflation in asset markets, on the other hand, is what policy makers are worried about. But as Doug Noland points out in a must read update at PrudentBear.com, the “deflation” in financial assets is itself a result of a system of Wall Street Finance that is now in tatters and failed to produce anything of real economic value.

“The financial sector is a black hole right now,” Doug writes. “With myriad assets Bubbles having burst, there is an enormous amount of debt today insufficiently backed by asset values. At the same time, there is a tremendous amount of debt backed by households, businesses, municipalities and our federal government. In terminology I have used in the past, the Credit Bubble has left both the Financial Sphere and the Economic Sphere grossly inflated. Total system debt has been severely impaired.”

“There is very real risk at this point that policymaking is about to set course for bankrupting the country,” Doug continues. “The pundits are out there suggesting trillion dollar economic stimulus; trillions for the banks; hundreds of billions to support the securitization markets; and hundreds of billions more for households, businesses, and municipalities. There is a current need for ‘Trillions’ and future needs for ‘Trillions’ more. Once the Trillions start to flow there will be no easy way to end them.”

We have on our hands a financial system that has used cheap credit and leverage to erect a systemically destabilising class of financial assets backed by debt. Our policy makers are trying to safe that system through a policy of deliberate inflation. And in the meantime, they are blaming “extreme capitalism,” when the real culprit is perverted capitalism with its theory of unsound fiat money.

But we won’t get into that again today. How about some reader mail? We only have time for one, because it is so long. But as soon as we read it last night, we knew we had to reprint it.

I need to say to you the following about your ideas as expressed in today’s article re Rudd’s opinions about the capitalist system.

Your ideological opinions are not superior or inferior to any other ideologue. They are simply different.

The world needs different opinions and ideas to become a better place. The capitalist ideas have prevailed over a very long time and the result is many minor failures as well as catastrophic failures the likes of those in the 1929/30 and the one we are experiencing today. As well as many positive other outcomes.

If one considers the economy to be a an airplane in flight that fails every about 60 years or so one would attempt to address such failures and to prevent them at any cost. What Rudd is telling us is exactly that. We need to refine the capitalist system to prevent catastrophic consequences. This will be at some cost and the balance between gains and losses is our challenge. There is no sense in having responsibility without accountability. Accountability is about risk prevention.

The dog eat dog mentality of extreme capitalism is more dangerous and immoral than any Marxist ideal that any one can present. It is a fact that extremism is anti progressive and antihumanistic. Extreme capitalism is no better in any way than extreme socialism, but, a blend of both worlds is the best for humanity.

The gaff you have presented in your article are extreme ideological here say garbage without any relevance to logic or wisdom.

How can an audience take you seriously when such a blatant disregard for sound judgement is presented by you.

So get your act together stay with commentary on financial issues that are moral and within the law. You are not qualified to make commentary on ideological connections that are too far removed from human principles of fairness, social responsibility, the greatest good for the greatest number and meaningful support for diversity of ideas.

I have read the book suggested “Mobs messiahs and the market”. The book presents ideas of a distorted mind which has no basis on the scientific rationality and no sense of balance between human contributions and human failures. One should read about the fundamental mind set of a paranoid person first before reading this book in order to calibrate its worthiness in a world that is moving away from extremism. Extreme capitalism and extreme communism is evil. The world has known this for a long time hence the reason why The US has retained socialist policies to balance extreme capitalist ideals, hence why it is exercising socialist approaches to save capitalism.

Tell a self retiree that Capitalism should not be recalibrated after loosing 30% of their capital due to the behaviour of the bankers and other CEOs. Justify if you can why these financial gurus should not be brought to account for their cavalier style financial activities. If any one created a product that failed catastrophically they would be crucified by the legal system, yet capitalists are immune from accountability for financial disasters that were based on dishonesty.

Greed should never be allowed to dictate terms to humanity.

You may want to take stock of what Aristotle said about the extreme capitalist, I quote; These are the people who are slaves of greed and left unchecked to themselves they will injure themselves and everyone around them. After 2000 years we are witnessing this prediction many times over yet you advocate no need for recalibration of the system. What level of social intelligence is in play her I ask. Only individuals who are at the bottom of the Maslow hierarchy would think in such primitive ways that are far removed from the domain of wisdom.

A discussing article with out any basis in fact and wisdom.

Leo.

Discussing?

Discuss!

The above letter could go in a textbook for how to put the most logical fallacies in the shortest space possible. It really is remarkable, and in its own way, delightful. Appeal to authority…ad hominen attacks…false equivalence…it is a cornucopia of rhetorical devices. Really, our former rhetoric teacher would have been in raptures over what a “teaching moment,” this is. All we can say is that if you really believe most of what you’ve written, you should probably unsubscribe to the DR immediately.

And by the way, we never said people shouldn’t be punished if they’ve broken the law. Feel free to dispute what we’ve written. But at least read what we’ve said and criticize it accurately before ascending to the heights of “logic and wisdom.” We’re not saying we’re automatically right. But of course our ideas are different. And we’d humbly argue they’re better! That’s what brains are for, to make judgements with.

How about one more letter?

Hi,

I know this is not a “write-back show” but i must get a little off my chest. it is hard to sit through your political bias and then be expected to hand over money to such one eyed, money hungry columnists with little fact behind the ranting and raving ( i would rather listen to sam kekovich get paid to talk about lamb). Don’t get me wrong, i would normally consider myself on the right side of middle

I myself are a very tired of the Obama bandwagon but let’s remember his predecessor on the other side of the political fence had little grasp of directing a nation and too in my opinion Mr Rudd’s predecessor comes into this category as a back seat leader with no forsight. If only Mr Costello were the captain of Oz. For you to say that its bad for the ruling government to want to control what our influential young populus watch on TV or to question the merit of owning a car capable of doing 320km/hr, then you should be signing up as a student and reading some university texts on the definition of irresponsible.

Luke M.

For the record, we are biased against all politicians as a matter of principle. Markets work better than governments. But markets are just one institution that makes up a peaceful civil society. But by all means, let us know what university texts you think we ough to be reading.

Dan Denning
for The Daily Reckoning Australia

Dan Denning
Dan Denning examines the geopolitical and economic events that can affect your investments domestically. He raises the questions you need to answer, in order to survive financially in these turbulent times.
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20 Comments on "How to Prepare for the Coming Devaluation"

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brc
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How is Marxism possibly even being mentioned in the 21st century? Should we be bringing up the model of Feudal Lords and Serfs as well? Name one single country that followed Marxist ideology and turned out the better for it. One country that has seen improved wealth, living standards and life expectancy through the application of a Marxist model. Just one country. People such as ‘Leo’ continually get economics all wrong. It’s a way of understanding interactions between people, not a way of designing it. It’s an understanding tool, not a designing tool. The Capitalist/Free Market system wasn’t set down… Read more »
Pete
Guest

Ah, Leo the socialist/communist who doesn’t understand the free market we never had.

Ross
Guest
Let Leo suffer sitting alone reading Stiglitz’s 19th century styled socialist claptrap before taking him apart, let him think for a while that he can hang onto the tail of the dog trying to reinvent itself. Stiglitz is on the move trying to cultivate and get at tax money to garner for the cronies who play both sides of the coin and that have kept him on ice for their next bite. There’s plenty of money in chaos. And this is the same Stiglitz who said zilch about the Greenspan puts or asset inflation when they were happening.
8020 Financial
Guest

Leo is a moron, but I think he just might represent the majority.
God help us.

Shaun
Guest

It would be wiser not to publish taht letter, than engender the type of resposes above. Careful rational argument will persuade, in the end. Annoying though correspondents can be, to hold them up for others to throw childish missives at, diminishes your site, IMO.

Greg Atkinson
Guest
8020..I fear you might be right. So far the average punter seems to think Rudd and Co. have actually managed things well! I just wish Rudd would get to the point when he speaks. Can someone tell the Teflon Man (Rudd) that you can just say schools instead of “school educational system” and that building 21st century facilities in the 21st century is nothing to boast about. Mind you if he plans any IT facilities for schools they will actually be hooked into a 20th century internet backbone. I bet a large beer that there is no way that the… Read more »
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SEAN
Guest
Kev Kanute will fiddle us the loot! It’s a war out there. My monetary value (son) has been called up for national conscription. If he’s not killed outright he’ll return as a wasted numinaire- handicapped with multiple personalities of his former self. Beware the employment blackhole or is that portal? The entrance to one of these full employment portals had the slogan “Arbeit Macht Frei” across the entrance. And just when you think it couldn’t get worse, I suggest that you read Putin’s comments earlier in the decade on the “Commanding Heights” and how 21st Century warfare will be conducted–economically… Read more »
Curt
Guest

Excellent article. Inflation is the real problem and the government has been able to hide it for decades.

Joseph Cummins
Guest

What is so hard to understand about:

govt=debt=slavery

Today — govt claims businesses are privileges, thus having a job is a privilege.

Why do we continue asking wolves and parasites to provide security?

Richard Brewste
Guest
Discussions about capitalism vs. socialism is not without merit, but miss the mark as to the causes of our current econmics crisis. Our system of the Federal Reserve Bank in the United States and the other Central Banks around the globe is squarely at the center of our difficulties. The Federal Reserve Bank is not a government institution. It is a private institution that holds a monopoly on money supply, and holds the world hostage by its fundamental principle of debt monetization. Every dollar in existance has interest charged on it. It is a money tree – the fabrication of… Read more »
Dave
Guest
Leo seems to have missed at leastone important point. He argues that the poor retiree should be saved from his losses and therefore the government intervention is morally correct. However he also argues that bankers and other extreme capitalists should pay for their sins, an outcome which is being prvented by the same government intervention. Merrill Lych could not have paid its bonuses if the Fed and BOA had not rescued it. The bank would have collapsed. the cash would have disappeared and all the money hungry capitalists would have bread and water instead of bonuses. Dont you love the… Read more »
Pete
Guest
Exactly Dave. And when we start talking about ‘morals’ in the economy, is where we start to run into trouble. For instance, should two people who work equally as hard in their jobs earn different wages? Morally, no. Turns out one is a Taxi driver and the other is an investment banker. Oops! When we start regulating according to morally this and morally that, the market is constrained and investment is distorted. We become socialists (or even communists). I challenge anyone to name a socialist or communist economy that is prospering (and I mean where the citizens prosper, both economically… Read more »
Bertie
Guest

Rudd can’t do jack shit to change anything in this global economy. I do wish we had the other lot back in

Greg Atkinson
Guest
Pete..funny how CEO’s cop flak for high salaries but movie stars who often take the high moral ground on such issues are quite happy to pocket millions. Even if the film they make is a dud they still earn a fortune. How about sports stars as well..do you really think a star soccer player is worth millions a year? Like you say…it is a tough area to start meddling in. But if we have to start somewhere, let’s start with politicians. I want everyone of them to start filling in time sheets. However they are not allowed to include time… Read more »
Pete
Guest
Yeah Greg, economics is hard enough without a moral angle. Not sure I totally agree with the politicians thing. A few years back I certainly would have, but I think ‘some’ politicians actually do work hard to get where they are, and don’t actually get paid as much as the equivalent jobs they could (could have) scored in the private sector. Now I am not saying they actually do earn their wages…it’s just that I wouldn’t put them first in line. First in line would be every single person that works in Law (crazy charges for one of our basic… Read more »
Greg Atkinson
Guest
Pete I see your point. Actually I am a fan of the U.S system where cabinet pots are filled from the best candidates across the land. Trying to find a top class cabinet from amongst MP’s is not just going to happen…ever. I would also like to see less but higher quality MP’s. The private sector has to do more with less staff for a long time and MP’s (and their associated staff) also need to be more productive. By thinning the ranks a bit we would be able to pay them more based on performance. Having said all that,… Read more »
Pete
Guest

Right on Greg!

Duncan
Guest
BRC you are quite right when you point out that a free market is a natural phenomenom. The most plainly idiotic thing about it however, is that the agents therein are primarily concerned with generating short term profit for themselves without regard for the long term health of the system in which they operate. A case in point being the mortgage brokers who helped spwan the current “crisis” were rewarded for sheer sales volume, and NOT for the quality of the loans. This is not a political issue at all – it is a matter of common sense that long… Read more »
Bryce
Guest
Richard Brewste…point well put. The gold standard bandwagon is a good point of debate though. It was only 12mths ago that i would have sided with you there. Ive since dont a fair bit of thinking. I was a big fan of the Austrians, Ron Paul and the rest of the free market libertarians. Dont get me wrong, im a big gold bug and am very bullish on PMs. A gold standard however has a number of flaws which i am concerned about: 1) How to encourage ongoing economic growth with a limit on money supply? A gold standard is… Read more »
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