- Global Watch
The Shift in Economic Power
to the East - Part 2
- Denial, crisis and soaring gold!
Oct 16, 2006
In the first
part of this piece, we described how the shift in wealth
from West to East is long-term and structural and unlikely to
be reversed. At some point in time this shift will lead to economic
and political rifts that will heighten global tensions and prompt
financial and possibly military responses. The shifting of economic
power to the east is well along and unlikely to stop.
The workers in
the developed world are usually voters as well, so at some point
we expect a loud outcry from workers and demands for protectionism
by politicians, far greater than we see at present. Inevitably
this will bring politics, [on this issue] head-on with the interests
We do not expect the politicians
to roll over and be overwhelmed by commercial interests when
it comes to their future votes. To add fuel to this oncoming
crisis, the emergence of a cheap, global but competent, labor
force will have an ongoing, destructive effect on manufacturing
in the developed world [not just the U.S.] in the short, medium
and long-term. So when push comes to shove, how much transfer
of wealth and production can the U.S. [and the developed world]
cope with, until they become an extremely diminished power? In
turn, how long will they tolerate the entire process before sparks
begin to fly?
So Far, So Good
has been going on for quite some time now, but we have yet to
see a really declining $. We have seen a rising oil price and
a rising gold price, but with low bond yields. It seems as though
the market has ignored these evolutions completely. Or has it?
In the past, the pain of fixed
exchange rates came from the huge capital flows from weak countries
to the strong, forcing the weak down and the strong up. Then
exchange rates were 'floated', so all looked well in the 'seventies',
until the underlying pressures became too great. Then we had
Central Bankers telling the markets they would not revalue or
devalue, [usually just prior to them doing so]. In the seventies,
Central Bankers gained the ability to manipulate the exchange
rate behind the scenes in a 'dirty float' of their rates [where
they directly managed these rates]. Today the swing to the strong
[Eastern economies] is different with the nations in receipt
of the capital flows [surpluses] now protecting dubious $. Partly
due to the reinvestment of the $ by nations with surplus $ back
into the United States, the $ is not falling.
As of now the emerging nations
control 70% of the world's reserves and great deal of the U.S.
Treasury market. In other words surplus nations are taking ownership
of a great deal of the U.S.
However, with political jurisdiction
resting in the hands of the Administration, ownership may well
be less powerful than control, implying that at any time the
Administration considers it in the national interest it can freeze
these foreign owned assets emasculating any power they have!
But that will only happen when days are far darker than now.
Yes, the $ looks strong at
present, but at the expense of all this capital firmly in the
'control' of foreigners. Whilst the $ holds this value, emerging
nations are using it as the currency for developing infrastructure
and buying the necessary products to do so, as fast as possible,
or on buying future resources right across the globe. As this
happens, make no mistake about there is a transfer of power,
not just of wealth to the emerging nations!
Central Banks are seeing this
low inflation [with worries that it will rise] and congratulating
themselves on keeping inflation and interest rates low. But in
fact it is the integration of the national economy into the global
economy that is presenting such a pleasant picture.
Below the surface danger lies.
Should the reliance on the $ slowly be shared by other currencies,
there will be a weakening if not a collapse of the $ which will
then have to stand on its own merits. In effect, the control
of the $ strength is now passing, or has passed, from the U.S.
to the surplus $ holding, emerging nations.
process of feeding surplus $ back into the U.S. has buoyed the
U.S. economy, further extending this capital flow to the emerging
nations and taking it to new highs. By keeping interest rates
too low, there has been a build-up of excess liquidity, which
has flowed into the prices of assets such as homes, rather than
into traditional inflation. The housing market appeared to be
becoming distressed, but with the temporary drop in the oil price
some relief is being felt in the consumer's cash flow, staving
of disasters in many cases. Consequently, the "live-now,
pay-later" way of thinking, which has encouraged too much
borrowing and too little saving is still entrenched, making more
permanent the capital flows to the East. The visible result in
the States have been to widen the current-account deficit to
record levels persistently, effectively enslaving the
future of the $.
The emerging economies'
refusal to allow their exchange rates to rise, entrenches their
ability milk capital from the developed world to their own coffers,
giving them cheap capital to develop their nations even more!
When we hear the Chinese express
their view on the Yuan, that "when it is in the interests
of China the Yuan will be allowed to appreciate", we see
it as a warning that the $ will eventually be allowed to fall
heavily. The ripples from this change of policy will be felt
quickly and painfully. Subsequently, there is a risk that
the U.S. economy will face a sharp financial shock and a recession,
or an extended period of sluggish growth. But the assumption
that the rest of the world will follow the U.S. down should not
be quickly taken. America's total imports from the rest of
the world last year amounted to only 4% of world G.D.P.
Oct 13, 2006
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