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March 10, 2006

Comments

Shloky

What about the possibility of the black swan in China setting off the unwinding of our bubble?

John Robb

It's possible. However, disorder in China is likely a net positive for us. However, if the Abqaiq attack was successful, it would have been that. We came within a hair of global financial meltdown.

John Stanforth

Even without black swans, HS Dent's long-term demographic data suggests a sharp decline in US consumer spending in 2009-2010, very possibly catastrophic to China given their extreme dependency on relatively stable US demand.

Also had an interesting discussion with an Intl Political Economy professor @ UCLA about how China's recent inventory surpluses internally make them even more dependent on the US than even their high exports figures suggest.

Thing is, if an unstable Chinese economy tanks because of an also-declining US economy, the bigger question is, what economy in the world would NOT be affected by such a large-scale event? Could be hugely disastrous all around.

PS: Combine this with the negative-8% savings rate (which, btw, was decent during the pre-Depression 1920s), and things look even more grim. If we're already over-financing our FEAST years, it's unclear how we'll survive the next famine.

John Robb

Totally agree John. If the US sneezes, everyone gets pneumonia. So, what if the US gets pneumonia?

More specifically, this kind of borrowing typically only occurs in a deep recession (in addition to low Fed fund rates). How do we prime the pump when we enter the next real recession? I can't imagine how it would work, which is usually a sign that things are broken.

John Stanforth

Very good question. Haven't really thought through the ramifications of this fully yet, but thinking out the worst-case aloud:

Most people suggest a US decline affects the "rest of world" (RoW) quite generally. My theory is, if China is accumulating inventory surpluses banking on next year's US import schedule, they should collapse on practically Day Two (where US is Day One, and RoW is maybe a few weeks later, figuratively speaking). I think we tend to gloss over this because China's "borrowing" is not accurately measured in nominal numbers, but rather, is effectively the delta of price-fixed worker labor vs FMV thanks to their screwy exchange controls. So if the worker population reaches breaking point as China tries to keep up with declining US demand (while sitting on increased inventory surpluses), there is a very real worker cost-of-living "floor" they're already dangerously close to hitting, and hitting it effectively translates to "breaking the bank" in a normal market economy.

Thus, nearly-simultaneous collapse of two large economies makes the RoW scenario even more bleak, from two fronts. In the end, the world at large is significantly worse off, right?

So then, backing out of that equation, if the key indicator of a -predictable- US decline (ie. black swans aside) is a new nadir in the population growth chart impacting consumer spending, then does a massive US immigration influx work to offset that with increased domestic demand? You'd need selective immigration (a new global brain-drain, effectively), and it's not clear where to find enough people to compensate for such a dramatic drop in domestic demand. "Guest worker visas" won't come close to smoothing that dip out.

Yes, it'd be harsh on a lot of other countries losing people, but we've mostly established they're screwed either way-- either immediately in the former case or over the following few years in the latter. No matter how you slice it, you're right--- things are seriously broken.

PS: Sorry for the long rambling post. The fun of commenting here is having people much smarter than I explaining why I'm wrong. And given how bleak this is, I sincerely hope my math is wrong. :)

PPS: Love the pneumonia analogy, btw. :-)

Steve Gall

John this is the crux of the whole problem with rampant expansive out of control globalization. It’s brought the end of the normal market economy as we’ve known it quicker than anyone could have imagined. The system just doesn’t scale. What to do? (Worldwide collapse is not a wise option)

Perhaps we better start convincing ourselves that it’s an accounting issue. We create a payment requisition and a trillion dollar invoice against a zero-sum voucher. Then we rewrite the rules and start over.

Don’t laugh, we really have to start thinking out of the box or we’re all going to hell in a hand basket.

phil jones

Hmmm. Maybe the answer's just to give green cards to everyone in China? :-)

Surely the Chinese are thinking of this too. Isn't it in their interest to build up other potential customers? Could India be generating enough wealth by 2010 to soak up all the exports China can throw at it?

John Robb

John, you are exactly right about the tight coupling. It's even worse. With global JIT manufacturing (take something off of the shelves in a Walmart or buy a powerbook from Apple and the item is immediately built and sent from China), our pain is immediately transferred to our suppliers.

This tight coupling makes for a dynamically unstable system since the entire world can fall in cascading failure faster than the slow mechanisms of the Fed and other central banks can respond. Dampening the impact would be almost impossible.

The decline of the US consumer market is like Peak Oil. It's out there, but there are forces at work that will push us to failure faster than it takes for these long term trends to have an impact.

John Stanforth

Steve: Your "accounting issue" reminds me of a minor Presidential candidate 20 years ago whose entire platform was "solving the deficit" with one single trillion-dollar coin. (The Fed apparently purchases paper currency for pennies but is required to purchase coinage at face value, according to him.) Of course, full-scale default of the US govt wasn't such a hot campaign platform, among other problems. :-)

Phil: "Green cards to everyone in..." would end up being INDIA, given the education level, language and business-culture similarities (ie. honoring contracts), and Indian cultural acceptance of emmigration to the West. (Not "everyone" literally, of course, but a huge chunk of people.) So my "they're screwed either way" scenario would actually be MUCH worse for India, essentially draining the top-80% of the country's production capacity, but still leaving them with 80% of their resource demands (Pareto loss on both sides). Oh, and the vaccum in Southern technology centers combined with the current chaos in multiple areas of the North topples the Center (federal) government.

Of course, as John points out, even such a drastic solution would take longer than we have to offset the current forces in play.

John: Your JIT manufacturing point probably explains my inventory surpluses mystery. I mean, they're really forced into inventory surpluses because their artificial labor rate delta requires them to maintain higher-volume production to keep their people working/fed, regardless of actual demand, but they can probably justify it through liberal SCM interpretations, if their inventory is mfg'd goods required for JIT -assembly- to meet next year's export schedule for finished goods. Without the JIT piece, we were wondering how in the world they could allow inventory surpluses to creep up year over year without consequence. You're totally right-- this transfers our pain to them instantly.

Bleak... "No reason for optimism" in this arena either, it seems.

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