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The World Rebalances


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As I understand it:

Currently the world economy is struggling due to a demand deficit which was previously masked by a credit boom in the West. However the credit boom was never really the true problem, the problem was the massive supply of goods coming from Asia. This led to attendant large trade surpluses. When a country runs a trade surplus what it is doing is to give goods and services to countries and receiving money, rather than goods or services in return. This money is reflected in the build up of foreign reserves. Eventually the country than runs a trade surplus will need to either watch its foreign reserves turn to dust (which would mean it has given its goods and services for free) or receive goods and services in return (spurring employment in the deficit country). In essence, trade surplus countries are lending money to trade deficit countries. This leads to the question how long can long can we keep running deficits? Well, the answer is simple. We can keep running deficits just as long as others wish to run surpluses.

We can therefore see that as surplus countries boost consumption (and they will need to do so), the trade deficit will narrow. As the trade deficit narrows, employment should increase, tax take rise and the deficit narrow. It is cyclical. If we are to argue that the UK faces the possibility of no takers for its debt, we equally need to argue that China and Germany are going suddenly abandon their growth models and boost consumption so rapidly the trade surpluses are reversed before the UK is able to readjust. I put it to you that this is highly unlikely to happen.

There is a great deal of talk of the rise of Asia. Asia will not rise until which time it is prepared to consume Western goods and run a more balanced trade policy. Otherwise it is simply dependent on Western demand, but Western demand has peaked and that dog won’t hunt anymore.

We should therefore start to see wages rising in developing countries and manufacturing moving back to the West. We should also see increases in investment, particularly renewable energy, across the West.

http://www.thejakartaglobe.com/news/jakarta-council-recommends-44-minimum-wage-increase/556305

http://online.wsj.com/article/SB10001424052702303612804577533232044873766.html

This process will not be smooth, indeed I’d imagine we face a deeply unsettled 20 - 30 years. There is also the problem of peak oil, peak population, global warming and attendant environmental degradation which also need to be dealt with and makes the future much harder to see. People always sneer and say “It is different this time” sarcastically. I would argue it is and would be interested to know of any examples of economies facing resource problems and population peaks. Outside of Jared Diamond’s book “Collapse” I have no knowledge of research in this area.

Edited by FaFa!
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As I understand it:

Currently the world economy is struggling due to a demand deficit which was previously masked by a credit boom in the West. snip

first line and I spot reverse logic.

The BOOM is excess lending by institutions as they become lax in the criteria on which they lend...it doesnt mask anything it is the cause of the apparent demand as more money is poured into the system to meet the new demand, which causes more demand.

However, Inflation accompanies this, and the central banks try to fight this by RAISING rates.....this is supposed to dampen demand..

as the demand subsides ( clearly the demand is due to money supply if raising borrowing costs dampen it), the BOOM is slowed.

This however hasnt been done properly, and the slack in demand as indicated by GDP has been made up with PUBLIC BORROWING so that we DONT get into a recession.

In other words, they really do think they have controlled BOOM AND BUST, by eliminating BUST.

The MASK is not the credit Boom, the mask is the Government trying to prove IT is in control.

right now, we are in the 5th year of the BUST Phase.....extended and masked by exceptional borrowing and printing world wide.

They are fixing the wrong problem...Money isnt the problem.....the wealth behind it is.

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first line and I spot reverse logic.

I think we are about to get into an argument like this:

Anyway, my point was there is a lack of demand globally due to under consumption in trade surplus countries. This was covered up by essentially lending the trade surplus to the deficit countries. However the point was reached where the people in the deficit countries could neither service the debt nor repay the capital. The demand deficit then becomes exposed. Hence the demand deficit predates the credit boom.

The problem is no-one in the trade surplus or the trade deficit countries wants to re-balance and alter their behaviour as this would be too painful. However, they will be forced to, eventually, by events.

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There is a great deal of talk of the rise of Asia. Asia will not rise until which time it is prepared to consume Western goods and run a more balanced trade policy. Otherwise it is simply dependent on Western demand, but Western demand has peaked and that dog won’t hunt anymore.

We should therefore start to see wages rising in developing countries and manufacturing moving back to the West. We should also see increases in investment, particularly renewable energy, across the West.

What Western goods do you refer to? The "beauty" of globalisation is that there is 1 global cost base and that's where manufacturing of durables relocates. That's why Jaguar Land Rover are setting up a plant in China. http://www.guardian.co.uk/business/2012/sep/06/jaguar-land-rover-cars-overseas . It will only become a matter of time before these cars are being exported back to Europe.

Manufacturing will only return to the West if we become more competitive than the developing world, or if distribution costs force manufacturers to shorten their supply chains.

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The manufacturing isn't coming back. The skills for many jobs have gone, the wages required to compete wouldn;t pay for a camper van pitch. The banks we have are only suited to one thing - suiting themselves - they have no interst or skills required to invest/support anything.

We can forced out what is left with current policies though.

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As I understand it:

Currently the world economy is struggling due to a demand deficit which was previously masked by a credit boom in the West. However the credit boom was never really the true problem, the problem was the massive supply of goods coming from Asia. This led to attendant large trade surpluses. When a country runs a trade surplus what it is doing is to give goods and services to countries and receiving money, rather than goods or services in return. This money is reflected in the build up of foreign reserves. Eventually the country than runs a trade surplus will need to either watch its foreign reserves turn to dust (which would mean it has given its goods and services for free) or receive goods and services in return (spurring employment in the deficit country). In essence, trade surplus countries are lending money to trade deficit countries. This leads to the question how long can long can we keep running deficits? Well, the answer is simple. We can keep running deficits just as long as others wish to run surpluses.

You logic is akin to people are fat because there are massive supply of food, and people fail exam because there are plenty of entertainment...

It is always other people fault even if you enter into the deal voluntarily.

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You logic is akin to people are fat because there are massive supply of food, and people fail exam because there are plenty of entertainment...

It is always other people fault even if you enter into the deal voluntarily.

I am increasingly of the opinion that at a high enough aggregate level, free will is meaningless. People make choices at the micro level choosing from a variety of selections permitted by their governments.

Stuff breaks or gets used up, growing population, increased wealth in the east, the normal places.

In order to have this wealth in the East, you'll need an increase in consumption. You appear to believe that Asia will detach from the rest of the globe and simply consume what it produces in a closed economy. This is unlikely, IMHO

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and who will buy them? The Greeks? The Spanish? The Italians?

Where is the demand for the manufactured goods?

There will always be "winners" with disposable income and a desire for status symbols. Here they may be bankers & lawyers, in Somalia they're called warlords. For manufacturing of durable goods to come back to the West, we need to be able to out compete the rest of the world.........

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You logic is akin to people are fat because there are massive supply of food, and people fail exam because there are plenty of entertainment...

It is always other people fault even if you enter into the deal voluntarily.

+ 1

The UK monetary authorities could, and should, have curbed the credit bubble. They had tools enough for it, usually IRs, but since this bubble was mainly property based, mortgage regulation would have prevented most problems. But there was a lack of competence and political will.

BTW, Mervyn is also trying to blame the "surplus countries", obviously... :rolleyes:

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I am increasingly of the opinion that at a high enough aggregate level, free will is meaningless. People make choices at the micro level choosing from a variety of selections permitted by their governments.

In order to have this wealth in the East, you'll need an increase in consumption. You appear to believe that Asia will detach from the rest of the globe and simply consume what it produces in a closed economy. This is unlikely, IMHO

Has been happenng for quite a while as their trade balances boomed. All that's left now is for the service companies to follow, which they have started to do too. It won;t be a closed system as such but a massively shifted consumption patter according to the shift in REAL earnings.

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Edited by OnlyMe
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There will always be "winners" with disposable income and a desire for status symbols. Here they may be bankers & lawyers, in Somalia they're called warlords. For manufacturing of durable goods to come back to the West, we need to be able to out compete the rest of the world.........

I see what you are saying but I don't like the term "out compete", to my mind it suggests we need to reduce wages to Somali levels. We just need Asia to inflate wages, which it will. This will make their manufactured goods less competitive.

BTW, Mervyn is also trying to blame the "surplus countries", obviously...

I don't see it as a blame thing. I see it as a simple mechanical thing. If you have surplus countries, you must have deficit countries. If you have a surplus that means you must be building foreign reserves. These foreign reserves must go somewhere etc etc etc.

Even if the UK had avoided the worst of the financial storm, all that means is the shitstorm would have hit someone else. In the short term it would be ok, but in the long term it rebounds on you. Germany and China are about to become excellent examples of this.

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Has been happenng for quite a while as their trade balances boomed. All that's left now is for the service companies to follow, which they have started to do too. It won;t be a closed system as such but a massively shifted consumption patter according to the shift in REAL earnings.

They cannot increase consumption and have manufacturing dominate their economy as previously. As one sector expands, others must accommodate it. I feel you are saying that China et al can simultaneously be manufacturing and consumption giants, I beg to differ.

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+ 1

The UK monetary authorities could, and should, have curbed the credit bubble. They had tools enough for it, usually IRs, but since this bubble was mainly property based, mortgage regulation would have prevented most problems. But there was a lack of competence and political will.

BTW, Mervyn is also trying to blame the "surplus countries", obviously... :rolleyes:

Always the 'exogenous factors', never King's career incompetence.

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They cannot increase consumption and have manufacturing dominate their economy as previously. As one sector expands, others must accommodate it. I feel you are saying that China et al can simultaneously be manufacturing and consumption giants, I beg to differ.

Why not? That is exactly what the US did, they manufactured, exported to the rest world and consumed themselves as thepr export trade paid for higher incomes and made the country richer. The jobs were very much embedded on their own country and much of the consumption then became circular - the more they built and the stonger tgheir industry became the more competitive they were and the more they could consume themselves.

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Always the 'exogenous factors', never King's career incompetence.

Exactly.

Did we borrow too much? Blame the lenders... :rolleyes:

And now we don't have a "recovereh" because of Europe... and not because the past decade was a fake, unsustainable economy, based on a credit bubble, as opposed to solid fundamentals and productivity. :rolleyes:

It was a bubble! A bubble! It burst!

What part of it people can't get??

"Recover" what? The bubble??

It was a bleeding bubble!

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Fa!Fa! - good post but I think you miss one important aspect.

You say 'surplus countries lend money to deficit countires'....but it's a little bit more than that. We are selling our companies and our land. We are selling our fishing rods as they seek a productive return on their surplus and we seek to continue consuming. It makes the re-balancing much, much harder. Over 50% of all new build property in London is being sold to Far East 'investors' and rents are not falling, quite the opposite. So whilst what you say may be for the future, we still have a long way down to go before things get so bad 'they' don't want to 'invest' any more and we're forced to look at ourselves without clothes on..

Yes they are asset stripping us and the rentier class are taking over so how can demand improve here? People have too much rent or debt to service, yet TPTB want to push more of the same onto us while rates are low.

The trick is inflating the rest of the world and forcing them to push their wages up then we can raise ours and people can take on even more debt to fuel consumption.

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Fa!Fa! - good post but I think you miss one important aspect.

You say 'surplus countries lend money to deficit countires'....but it's a little bit more than that. We are selling our companies and our land. We are selling our fishing rods as they seek a productive return on their surplus and we seek to continue consuming. It makes the re-balancing much, much harder. Over 50% of all new build property in London is being sold to Far East 'investors' and rents are not falling, quite the opposite. So whilst what you say may be for the future, we still have a long way down to go before things get so bad 'they' don't want to 'invest' any more and we're forced to look at ourselves without clothes on..

China were perfectly happy recycling thei USD trade surpluses into US Treasuries as greenspan and then bernanke set about formentng a bubble that helped destroy 60,000 facturies and effectively shipping their output lock stock and barrel to China.

Maybe the same is happening in london, except directly into the hosuing market - it will completely ****** up companies with cost bases in london.

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China were perfectly happy recycling thei USD trade surpluses into US Treasuries as greenspan and then bernanke set about formentng a bubble that helped destroy 60,000 facturies and effectively shipping their output lock stock and barrel to China.

Maybe the same is happening in london, except directly into the hosuing market - it will completely ****** up companies with cost bases in london.

Agreed, but a few changes to our tax system can be done at our government's leisure to encourage foreign investors in London property to sell up, possibly at a loss, which would amount to the UK economy getting something for nothing from these trading partners. Some whacky lib dem and green types have been making noises about the empty flats in central london owned by welathy foreigners, at least some sort of debate is starting. Even the tories have slapped 7% stamp duty on £2 million houses - I reckon they did this partly to get some revenues out of foreigners speculating in London property.

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It's all distraction. The Chinese are playing the long game. The plan remains the same. That's the problem with economics bods, narrow thinking. I know the debt ain't never going to be repaid, you know it, the Chinese know it and the Yanks know it. So what is going on here? You can't figure out why they are continuing to give more.

The Chinese objective is the industrialization and modernization of China. An objective they have achieved. The Yanks and the Euros are dependent on Father China because they no longer have any factories or engineers. The idea is to continue this plan a bit longer. Sucking out the last, most resistant, bits of tech that the West has left. Then when it's over, they are left in control. They can cut off their supply line and the hapless degenerate natives will be as helpless as an African tribesmen. It doesn't matter what this plan costs because once you are the only one left with any expertise, you call the shots and can grab it all back. China shall be the centre of the world and the other nations shall feel privileged to make their training shoes.

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As I understand it:

Currently the world economy is struggling due to a demand deficit which was previously masked by a credit boom in the West. However the credit boom was never really the true problem, the problem was the massive supply of goods coming from Asia. This led to attendant large trade surpluses. When a country runs a trade surplus what it is doing is to give goods and services to countries and receiving money, rather than goods or services in return. This money is reflected in the build up of foreign reserves. Eventually the country than runs a trade surplus will need to either watch its foreign reserves turn to dust (which would mean it has given its goods and services for free) or receive goods and services in return (spurring employment in the deficit country). In essence, trade surplus countries are lending money to trade deficit countries. This leads to the question how long can long can we keep running deficits? Well, the answer is simple. We can keep running deficits just as long as others wish to run surpluses.

We can therefore see that as surplus countries boost consumption (and they will need to do so), the trade deficit will narrow. As the trade deficit narrows, employment should increase, tax take rise and the deficit narrow. It is cyclical. If we are to argue that the UK faces the possibility of no takers for its debt, we equally need to argue that China and Germany are going suddenly abandon their growth models and boost consumption so rapidly the trade surpluses are reversed before the UK is able to readjust. I put it to you that this is highly unlikely to happen.

There is a great deal of talk of the rise of Asia. Asia will not rise until which time it is prepared to consume Western goods and run a more balanced trade policy. Otherwise it is simply dependent on Western demand, but Western demand has peaked and that dog won’t hunt anymore.

We should therefore start to see wages rising in developing countries and manufacturing moving back to the West. We should also see increases in investment, particularly renewable energy, across the West.

http://www.thejakartaglobe.com/news/jakarta-council-recommends-44-minimum-wage-increase/556305

http://online.wsj.com/article/SB10001424052702303612804577533232044873766.html

This process will not be smooth, indeed I’d imagine we face a deeply unsettled 20 - 30 years. There is also the problem of peak oil, peak population, global warming and attendant environmental degradation which also need to be dealt with and makes the future much harder to see. People always sneer and say “It is different this time” sarcastically. I would argue it is and would be interested to know of any examples of economies facing resource problems and population peaks. Outside of Jared Diamond’s book “Collapse” I have no knowledge of research in this area.

+1 Over production, demand destruction and wealth consolidation. Simples. All that energy wasted producing all that tat really should be put to something more constructive....

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and who will buy them? The Greeks? The Spanish? The Italians?

Where is the demand for the manufactured goods?

yes.

but while they havent defaulted, they are prevented from doing so because they want to save the banks.

The banks are that important unless you want some serious bung.

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