From - Gold Forecaster - Global Watch 13th October 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.
Political Pressures!
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 of capitalists.
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
This evolution 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.
The 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.
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