Economic direction and futures - The China Syndrome

Back in the late 90's off the back of a couple of work driven initiatives I got really consumed for a while on the future economic outlook for Western Europe and America. The sums just don't add up, sure you can argue that we need to each kids differently, sure we need to pay much more attention to skill development in the workplace etc. but ultimately the shift in manufacturing to the emerging and generally low wage economies is a very, very bad thing long term.

Yeah, I know, you made a ton of money from the last set of share options, and yeah the stock you bought in Google has gone through the roof, but no matter how you slice and dice it, you are doing little more for your country, your neighbours, your friends, your family than taking in their laundry. We cannot survive by eating our own children.

This stream of consciousness was reawakened on Mondays drive home while listening to Marketplace on KUT Radio in Austin. It's an excellent 30-minutes between 6.30-7pm. Mondays commentry was by Economist Marcellus Andrews, who succintly explained why all this cheap goods, foreign manufacturing was a bad idea indeed in his "The cost of sending our dollars to China" piece.

He said in a couple of hundred words what I'd have rambled on for hours to make the same point. You might want to read it online, or this link will launch RealPlayer to play the piece direct from, it only takes a minute or so.

Any comments or observations, especially from zincii as you might see things differently from Bermuda.
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I think that's a pretty decent summary - although he didn't capture the role of the US Government, which is in effect making banana republic style investments as a result of easy credit and poor government (my apologies if you're a Bush fan, this is simply my assessment re: financial control). I see it as being very similar to the reflexive sovereign lending boom of 25 years ago - although now under the influence of Chinese currency targets. When the US dollar unwinds it's probably going to be very ugly, and we can only hope it happens far enough in the future that other economies have grown enough to make the fallout less drastic. Most of my long-term financial assets are in Yen, and I have substantial borrowings in my business in dollars - so I have an effective personal long Yen, short Dollar position. I will likely continue to buy yen and borrow dollars for some time.

What other perspective could I offer?

With regards to Bermuda, while we use the US Dollar as our currency (or rather the Bermuda Dollar, which is pegged 1:1), the dynamic is entirely different. We are busy importing foreign talent and capital wholesale and instead of using it to fund personal expenditure are instead using it to create businesses, companies, and foreign investment. We are also small enough that in an economic slump all we will do is export all our unemployment by returning the 20,000 expats back to their home countries.
I guess I didn't mention that the USA will likely inflate its way out of the problem, leaving China holding a whole chunk of worthless dollars. It may hurt the USA, but China will make out just as badly.

In the long run, if the USA doesn't find a new unfair sustainable advantage over China then it's inevitable that standards of living will equalize.
Thanks for the fantastic contributions. I guess I'm concerned not having spent half a million on a US mortgage that you're right, inflation would be ugly though.

In general I'm more worried about the long term impact and would we(UK, US, etc.) could do to reskill or rebalance without resotring to financial vehicles to force the rebalancing. I'm just struggling to get any real ideas.

I'm on the board of a 501(c) Knowledgecontext, its CEO/Director-at-large Miguel Aznar has a pretty good program to help teachers cope with the ever changing technology landscape, and help kids to evaluate technology but its not even a needle in a haystack.
What can we do?

Aside from vote Democrat for national office (whatever one thinks of their politics, they do appear to be able to approach problems with responses other than denial, lies, or making them worse. Get the right people in leadership in government and the US will probably be able to match tax liabilities to present and future income (since the really scary thing is the US Government's financials in accrual accounting).

There needs to be a cultural shift as well - which could perhaps be driven by a change in tax law that would tax current spending rather than income, allowing people to save and invest tax-free. Couple that with a shift away from America's stunning home country bias - it's only the American news that doesn't even bother to report the rest of the world's stock markets. Then maybe America has a chance of going out and using this incoming capital to buy the rest of the world - which is how Bermuda will succeed in the long run, because there is no capital gains or income tax and a forced savings rate of 10% per year, we are busy buying the rest of the world. It's entirely possible that if my generation does things right, we'll have the passive income from foreign investments to make Bermuda a permanent fixture at the top of world GDP (which we have now by about $10,000).

On some level I think maybe my dad has the right attitude - when I asked him what we should do in Bermuda (since we have our own set of problems) he replied to me "Fuck'em. Make as much money as you can, spend your time with the people who matter, and buy a really big boat."
Oh yeah, I am also likely going to be having my first experiences exporting capital to China in exchange for inexpensive goods. Just got back from the Builder's Show in Orlando and met some interesting Chinese based companies who are exporting glass, kitchens, bathrooms, lights, etc. to the USA. We're looking at doing a 30 unit high rise building here in Bermuda and will likely be using these Chinese suppliers.


Good stuff for cheap... and all paid for by an economy driven by US Reinsurance companies.