It is September 2012:
One in seven Americans is depending on food stamps for survival.
Real US unemployment has hit about 16% (work-force participation is just 64%), in spite of official statistics showing unemployment have come down to about 8.1%
Median US household income has dropped from $55,470 in January 2000 to $50,964 in August 2012.
Simultaneously, according to official statistics, prices have increased 34% over the same period.
Apple's market capitalization is hoovering around $ 650 billion, making it the largest company by market value in the world.
Gold is trading around $ 1,770 per ounce, oil is at $99 a barrel.
Just 10 years ago, very few would think the above possible. What is going on?
In one word: "Convergence".
Or more precisely: Economic convergence between trading economies. Shortly put; because wages are lower in China, manufacturing continues to move to China, and will do so until Chinese labor becomes so expensive that it is more profitable to produce elsewhere. The prime catalyst of convergence has been the wide-spread roll-out of efficient information infrastructure.
In plain language - internet access and electronic data interfaces are enabling global supply chains and disrupting traditional economic patterns as producers and consumers find new, efficient ways of transacting. The lessons learned for developing nations still struggling with growth should be obvious: Focus on supplying the enablers - electricity (particularly for Africa) and access to the internet (Africa, Cuba, Burma etc). If you on top of that can maintain political and monetary stability, just lean back and wait for growth to follow.
Convergence benefits investors and foreign labor (e.g. consumers) in the country of production, and hurts local labor (e.g. consumers) that have skills that can easily be substituted. Apple would not be able to sustain a 50% profit margin on every iPhone and iPad sold, had it not been for cheap Chinese labor and cheap Chinese components. Foxconn, the assembler of Apple devices, employs 1.2 million people. If considering component manufacturing and subsequent value chain activities, Apple probably contributes to somewhere in the range of 3-5 million Chinese jobs.
And this is just Apple. HP, Dell,GE AT&T, etc are all American companies with substantial impact on Chinese employment. As they have shifted production to China, jobless Americans have found lower paying jobs at McDonald's, maintaining their ability to spend with borrowed money, leading to today's over-leveraged consumer
However, consumers (also US consumers) all want affordable products. So as outsourcing and trade leads to efficiency gains, it is for the greater good, right?
Not quite...
One in seven Americans is depending on food stamps for survival.
Real US unemployment has hit about 16% (work-force participation is just 64%), in spite of official statistics showing unemployment have come down to about 8.1%
Median US household income has dropped from $55,470 in January 2000 to $50,964 in August 2012.
Simultaneously, according to official statistics, prices have increased 34% over the same period.
Apple's market capitalization is hoovering around $ 650 billion, making it the largest company by market value in the world.
Gold is trading around $ 1,770 per ounce, oil is at $99 a barrel.
Just 10 years ago, very few would think the above possible. What is going on?
In one word: "Convergence".
Or more precisely: Economic convergence between trading economies. Shortly put; because wages are lower in China, manufacturing continues to move to China, and will do so until Chinese labor becomes so expensive that it is more profitable to produce elsewhere. The prime catalyst of convergence has been the wide-spread roll-out of efficient information infrastructure.
In plain language - internet access and electronic data interfaces are enabling global supply chains and disrupting traditional economic patterns as producers and consumers find new, efficient ways of transacting. The lessons learned for developing nations still struggling with growth should be obvious: Focus on supplying the enablers - electricity (particularly for Africa) and access to the internet (Africa, Cuba, Burma etc). If you on top of that can maintain political and monetary stability, just lean back and wait for growth to follow.
Convergence benefits investors and foreign labor (e.g. consumers) in the country of production, and hurts local labor (e.g. consumers) that have skills that can easily be substituted. Apple would not be able to sustain a 50% profit margin on every iPhone and iPad sold, had it not been for cheap Chinese labor and cheap Chinese components. Foxconn, the assembler of Apple devices, employs 1.2 million people. If considering component manufacturing and subsequent value chain activities, Apple probably contributes to somewhere in the range of 3-5 million Chinese jobs.
And this is just Apple. HP, Dell,GE AT&T, etc are all American companies with substantial impact on Chinese employment. As they have shifted production to China, jobless Americans have found lower paying jobs at McDonald's, maintaining their ability to spend with borrowed money, leading to today's over-leveraged consumer
However, consumers (also US consumers) all want affordable products. So as outsourcing and trade leads to efficiency gains, it is for the greater good, right?
Not quite...
There are at least three main challenges with this development:
1. Though trade generally leads to efficiency gains, the current trade balance is unsustainable, as US consumers ability to consume is enabled by China (and others) continuing to finance the US consumer (and government) with debt. As the Fed is effectively printing money to support government finances, it will erode the value of the dollar, and China and others will eventually shift their holdings to other assets, such as gold (they already have).
2. The large part of the work-force that is without a job does not contribute to economic development (this is called an "output gap" in economic terms), and their human capital is deteriorating, as they are unable to find jobs even at lower wages. As it will still take decades before Chinese and US wages have converged, future Chinese wage catch up may still leave little hope, as the US will then have a large pool of labor that has been out of the workforce for so long that they may never regain their past productivity.
3. The collective feeling of becoming poorer will widen feelings of dissatisfaction among the general public and eventually lead to social unrest, crime and instability. The US will move onto the path followed by several Latin American countries, where slums are existing next to middle class neighborhoods, crime and kidnappings are prevalent, and barb wire and guns are key to separate those who have from the have-nots.
For the record, this is not just a US problem. The Euro has also been kept artificially high by Asian central banks' currency purchases, painfully contributing to the economic difficulties experienced in the periphery of the Euro zone, where wages are relatively low in absolute terms, but still way too high to attract capital for investments when considering the full cost of doing business; corruption, inefficient and obstructive government, rigid labor laws and high taxes. Unlike in the US, real wages have so far not declined notably during the recession. What we are experiencing is not just a temporary recession that can be influenced by fiscal and monetary stimuli, it is the beginning of a paradigm shift that will influence the world for the next 50 years.
So, if this is the general direction, how-come the US Congress cannot decide on actions to prevent it?
US Congress are mainly capital holders with significant assets under management (an average net worth of USD 6 and 13 million for members of the House of Representatives and Senate, respectively). Most of them own businesses and/or (for example) Apple stock. As US labor cost come down, capital returns increase, and US companies with outsourced production also become more profitable. And since they consume the same amount of basic goods as every other American, they do not feel the pain of food and gas inflation. They are likely to allow for the trend to continue until it becomes unsustainable, and the society collapses as a whole, threatening property rights, and the value of their cash holdings disappear as it is inflated away.
There is anyway not much they can do, without going back to a gold based currency (preventing the Fed from printing money in response to Asian demand for their currency) they cannot change the fundamental flaw which has allowed for these imbalances to occur. And the economy is still far from reaching the point where this can be done yet - a major collapse must (and will) happen first.
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