Ok, in keeping with my "big picture" outlook, I got up quite early this morning and was feeling rather creative. After reading so much these last few months on the state of US, Euro-zone and China economies, I kept getting the urge to put it all in perspective. I guess that's how I work as an engineer - keeping an overall picture in place. Although of course this first draft is a rather "fun" version, I think I will now start to add the objective figures as time and data become available. Why am I doing this? Because I have a feeling, and the feeling is that the world will continue to polarize into trading blocs - most likely out of necessity. I'd like to keep a little roadmap of objective data and associated risks. This will be helpful in the future.
You see, the West is brutally failing. The US is habitually indebted and its debt, both on and off the books, is somewhere in the official range of +/- $40 trillion. The Euro-zone is caught in a similar and unrelenting reform-sclerosis, political-sclerosis and a demographic nightmare of older workers and no baby-boom in sight. This combined with a fat and lazy populace grown weak on social programs aided by high tax rates on those working. To a degree, this holds for the US as well, both Medicare and Social Security, the two holy-grails no politician dare touch. So we end up with only talk and cosmetics. Nothing more and a whole lot less (for the future).
Compare this with the hungry, talented, and well-educated East who are hungry for improvement, betterment and more comfortable lifestyles. They want a large portion of what we already have - and they have the tools (and financial weapons) at hand, to get the job done. China, with billions of US Dollars, holds a two-prong weapon : You don't buy our goods, we threaten to sell Dollars. Or, we take your Dollars, and buy your companies. Either way, we OWN you. And this is what they may be starting. They bought IBM's PC unit. They want to buy Maytag. They are looking to buy Unocal oil. As did the Japanese with the US auto industry, so will China with nearly every other industry. Of course, there is a fine balance which must be maintained politically between the producers (China) and the consumers (The West). This has been recently, and once again, shown in the textiles sector as trade tariffs appear. It may likely appear in other sectors, shortly. The West will try to build a "Chinese Wall" (pun intended) to keep out the Yuan hoards. They will likely fail. The West's own rhetoric of free trade and globalization will be acutely reversed if a parasitic and symbiotic balance is exacerbated. That is a global risk.
One commentator has said: "China knows only one mode of production, that is 'flat out' ". I agree. They must - they have too much internal pressure riding on it not to. The logical consequence being is that the West will not stand a chance at the price/production balance and will necessarily be faced with deflationary forces on the job front, thus reducing tax incomes and forcing a heavier burden on the social systems in the West. The question will then be for the West : how to escape the Grim Reaper?
If they block trade they have blocked consumption - if consumption is blocked then a large part of GDP is blocked - if GDP is blocked the market dives and jobs are lost - if the market dives, who the hell wants US Dollars - if nobody wants USD then the Fed pumps ever more and ever quicker - if that happens, keep the USD bundles and heat your home, they will be cheaper than wood pulp - is that what gold is sensing? In an investment world looking for yield with low risk, what offers that? Gold, I dare say.
Am I being facetious? To a degree yes but in a REAL scenario sort of way. This is not just a game, it might in fact be the ultimate "end game" for the West. A West fully indebted with inflexible and expensive labour, bogged down in a mire of demographic and xenophobic citizenry combined with a fiscal ball and chain, and enamoured with big expensive houses they cannot afford. Why complain that the citizens do not save when in fact those in power have set the perfect example ? I have not seen ANY POLITICIAN in the West tackling these issues straight on and telling it like it is. I have seen a lot of talk, but talk is cheap and probity has its price.
If the short-term game is deflationary forces followed by mid-term hyperinflationary forces then my advice would be get out of debt, try and keep your job, work hard and re-train on the side, learn a language or two and save like hell - that's what I am doing, I see no other choice.
The future in the West does not look bright, by a long shot. And just think, with all the trillions of US Dollars both in the private and official sectors, only a small percentage is required to buy the entire gold reserves on hand. A scary thought - for either there is too much cash liquidity on hand, or gold is underpriced, or both. Either gold will go higher or gold will come under government control. This is not some sort of gold conspiracy thing, it is rather my logical take on that of a commodity being in far greater demand than supply (at some future point). This was done with oil in the 1970s and may be done with gold in the future to ensure that some token of VALUE is backing up all the paper being created at will. Again, it comes down to perception. If gold will not come under government control then the only alternative is for it to once again become an anchor in a free-floating sea of coloured bills.
The path above will not happen over night, or next month, nor will it be without hiccups and without strange events happening. But those are just collateral events likely to bear no great relevance on the "big picture" - the cogs in the machinery have been set in motion and I still see no great efforts being taken in the West to come to terms with these fundamental shifts.
The most difficult thing for you to do now is to have any belief in the above scenario and act on it. The puzzle pieces are falling into place now. I will continue this dialogue in future Letters.
Well, that's it for this Wednesday... for more on this article and more charts please visit the homepage www.dinl.net in the Latest Letter box.
More on this in upcoming issues - if you would like to know more, please sign up for a free subscription to Der Invest Informant here. As well, please visit the site daily and read my Latest Letter.
I would like to take a moment to let you know how much I enjoy your newsletter for just the reasons that you mention as your goals in your recent note to subscribers. I have commented to friends and students that your analyses and musings are among the most altruistic and well written that I have found online. G. O., Geneva, Switzerland
Mr. Buss, Excellent letter as always of course. I cannot express my gratitude of "having eyes and ears", within the European Community. You, Sir, are simply, an information resource of inestimable value. Danke Schoen!! JZ, USA