When globalisation was just getting going it was a great thing for the rich countries. They could outsource manufacturing and other labour-intensive industries. Even at home, they could import – or let sneak across the border – millions of foreigners to do the dirty work. Profit margins rose as labour costs fell. And even though the price of raw materials was edging up, the lower labour expenses more than made up for it.
But that darned planet...it just keeps turning! Now, the Asians have a little change in their pockets and they’re getting uppity. They want to buy OUR oil...our wheat...our nickel...our copper...and our beef. So prices are rising – OUR prices.
And now, get this, Chinese producers say their labour costs are rising too. “This development,” reports the IHT , “a long-time coming in China, has picked up as coastal regions full of cheap workers begin to experience labour shortages.”
Yes, those millions of Asian schleppers and bussers...whom we were nice enough to employ in unheated sweatshops at US$1 an hour...now want more money! The cheek.
The ingrates! If it weren’t for our willingness to impoverish ourselves by buying things we couldn’t afford and didn’t really need anyway, with money we needn’t have, they’d still be working in the rice paddies with wooden sticks.
But that is the way things go, dear reader.
The dollar is going down...along with the value of almost all US-centric, domestic, dollar-priced assets. Stocks. Bonds. Wages. Houses. That’s where the ‘de’ in deflation comes from.
But it could be worse. In fact, it is worse. There’s the other kind of ‘flation’ too. Now, Americans will have to pay more for everything – energy, food, housing...and all those stupid gadgets from Asia.
Bill Bonner
The Daily Reckoning Australia
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About the Author
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.
Comment by Coffee Addict on 28 September 2007:
Yes Bill, the East Coast of China is moving up the feeding chain rapidly.
I'm always willing to admit I was wrong in being a market bear. At the moment I'm a fence sitter. Please correct my back of the envelope metrics concerning global prospects.
1. The US economy constitutes about a third of the world economy. A severe US recession rolled out over the next 18 months (say 10% of GNP) that would knock 3% off world growth. This would be my worst case scenario.
3.Outside the US, the hardest hit would be exporter countries like Japan which due to ongoing economic stagnation and reliance on the export of high end consumer products will also move into recession.
4. I expect the growth in economies like China and Korea to at least halve but recession in the growth economies will be avoided. The Indian and Russian economies will also continue to grow.
5. Europe also constitutes about a third of the world economy. A major recession in the US would (intuitively) result in a minor recession in Europe. The Euro is likely to replace the $US as the defacto world currency.
6. The severely weakened $US may present good long term export tidings for the US automobile, technology, aircraft and manufacturing industries. This is one aspect how the invisible hand will shift the US economy. Americans may find that invisible hand adjustments force them to live with in their means for a couple of years at least. What a shock!
7. What will it mean for Australia? Well, commodity prices may l fall during the adjustment period but the world will in fact continue to spin. The world population growth and a growing middle class in Asia, South Asia and Russia will indeed overhaul the impact of a US recession within a year or two. That’s my prediction.
8. As for the detail of the credit markets that I now observe as very small part of my day job, who knows? The invisible politics of Wall Street clearly have an interest to ensure that the likes of Bear Sterns don’t fail completely. The bottom feeders have arrived. Central bank intervention seems to be taking the risk of wide range of imminent failures off the table. Adjustment will instead of occur through inflation and $US devaluation (as socialisation of private losses).
9. So what of the future of structured credit products? The market will return but only if there is significantly improved transparency and honesty which will in turn allow risk to be priced more accurately. I now think it likely (though not certain) that the large majority of Australian investors in structured credit products of their cash back on maturity.