Category: Trade Page 2 of 11

On August 31, 2023

I remember the first time I heard of Francis Fukuyama’s “The End of History”, and I remember thinking “no one can be stupid enough to believe that.”

But I knew I was wrong, because it kept popping up. The article became a book, even, and fools further down the intellectual stupidity chain made careers out of sub-theses, like Thomas Friedman’s “the world is flat”.

The thesis of the “End of History” was that the ideological wars were over: democratic market capitalism had won, everyone knew it, and history was in effect over because the great ideological war of the 20th century between capitalism/democracy, communism and fascism/democracy had ended. Everyone admitted that democratic capitalism had won and was the best system and now inevitably it would sweep the world and usher in an era of prosperity and relatively good government.

This is what elites wanted to hear after the fall of the USSR and Francis was the one to tell them. He was considered a great intellectual, made lots of money and elites proceeded to act as if he were right.

There were a lot of knock on consequences but there two were most important. The first was that without a competing model, western elites felt free to really rev up the immiseration train started by Reagan and Thacher. Post-war elites had been genuinely scared of Communism, in the “we could wind up dead” way and that had driven a lot of their acquiescence to cutting ordinary people a good deal. (A lot, not all. Much of it was just that the Great Depression cut their legs out from under them, and FDR then broke their kneecaps.)

The shipping of industry to allies and to the third world did not start at the end of the Cold War, but it did go into overdrive. The old police was to make sure that the countries it was sent to were not a real threat: either small to medium developing, or American allies. Now, however, the offshoring and outsourcing train traveled to China. Deng had opened up markets and privatized a large chunk of the economy, and Fukuyama had said that capitalism lead to democracy, so by shipping all that industry to China, well, the West would make them into a democracy.

The Chinese Communist party, in this storyline, were a bunch of suckers, who were inviting in the very forces which would overthrow them.

The line in poker is that if you don’t know who the sucker at the table is, it’s you, but the real danger is when you think someone else is the sucker, and they aren’t.

The CCP had understood Americans and the West very well. Ironically they were aided in this by Marxism and their belief that capitalists were blinded by greed. They offered Western elites cheap labor and high profits and dangled the dream of access to a market of a billion people.

There was a time when it was understood that what made countries mighty was industry, and that you kept the industry at home. In the post-war era that was relaxed: by you still didn’t send your industry to anyone who might well become an enemy.

But history was over and there were no enemies and the West, with its transnational elite largely shorn of patriotism figured they’d co-opt Chinese elites and make them no longer nationalist.

They didn’t understand that the CCP didn’t feel that way: they were proud of being Chinese and they also believed that if they lost power a lot of them would wind up dead. They obsessively studied the fall of the USSR (and its communist party) and were determined that wouldn’t happen to them. And they deeply resented the west, including America, for the “century of humiliation.”

Sure, they were willing to go to a mixed economy with a lot of capitalism, but they were determined to stay in charge and never become democratic capitalists, and they wanted to return China to its natural place as the richest and most important country in the world, a position it had occupied for most of the last 2,000 years (before that it was India, and before that it was Mesopotamia with Egyptian interregnums.)

So you had two bets. The West, led by America, bet that if they shipped industry to China, China would become just another country like them, happy to be part of an international community running on laws that had been created when China was at its weakest.

The Chinese Communist Party bet that they could let some capitalism in and catch up in technology, and even exceed the West in terms of industrial base.

We now know who was right, and it wasn’t the West. Our tech boycotts are a sign of weakness, not strength. We know we can’t stay ahead of them without restricting their access, but it’s very much a case of slamming the barn door after the horses have left. The tech lead moves to where the manufacturing floor is. Britain stayed in the lead technologically for about 20 years after the US became the #1 manufacturing power, for example, but it was a lagging indicator, and ironically Britain had done the same thing America has done with China: it invested big time, built the factories and transferred a ton of tech.

Fukuyama was full of it. He sold a fairy tale to an elite desperate to believe they had won forever and he in selling it and they in believing it took the exact steps required to ensure it wasn’t true, by empowering the only nation in the world strong enough to challenge America. (India was never in the running due to severe corruption and governance issues.)

But the people who engaged in this foolishness (from the POV of the Americ and its allies) reaped their mortal reward: the elites became stinking rich, and Fukuyama become wealthy and was regarded as a genius for telling the story his audience wanted to hear, even if it was obviously wrong.

History never ends. There is no end-state ideology or system and when someone tells you the world is exactly as wonderful as you want it to be, run.

As China Rises, Europe Falls

On January 3, 2023

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Some interesting news in the semiconductor wars:

BREAKING: Netherlands firm ASML's stocks have been falling since China's Huawei unveiled a new patent in Extreme Ultraviolet Lithography, confirming the worst fears of the firm's executives who have opposed US restrictions (Motley Fool).

— SGM World News (@SGMWorldnews) December 31, 2022

Now, ASML had indeed opposed US restrictions. They said explicitly that in the case of sanctions, China would learn how to make the machines themselves.

Europe’s technological lead is being destroyed by following US policies. Energy intensive firms are fleeing Europe because US energy prices are much lower (this is due to sanctions on Russia and the sabotage of the Nord Stream pipelines) and following US sanctions on China means that China just learns how to make what Europe supplies them now.

It’s sort of rocket science, actually. As you may remember, the US banned China from the International Space Station, so China just built its own and now looks likely to have a base on the moon before the US.

Woops.

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China, to repeat myself, is the world manufacturing floor. Mercedes moved their auto-design center to China. When the US took the lead over the UK in manufacturing, the UK retained its tech lead for about 20 years, but it did lose it.

Repeated sanctions on any area where the West has the lead, whether space, aerospace, semis or anything else only provide a perfect complete tariff to a country with millions of engineers and scientists and more manufacturing capacity than any other country in the world. They speed up, not slow down, the day when China will both have the tech lead and the manufacturing base.

Back in the late 90s and the early 2000s I warned, repeatedly, against transferring the manufacturing floor to China. That was the decision point, that was when it could have been stopped.

Sanctions against key points only make sense if you’re going to either go to war or move massively back to industrial policy, and the West is not going to do either of those things. I’m not sure a full move to industrial policy would even work, but it’s certainly what should be done. However, it could only be done if you were willing to crash real-estate and securities prices by about two-thirds, because the cost-structure matters.

What Europe should be doing is aligning itself with the rising power, China, or remaining a neutral bloc and negotiation places where they will keep the tech lead with China, as part of specialization. China wants trading partners and they see benefits in not having to rush every tech sector out of fear of sanctions. The US is both going down and fundamentally, at a policy level, willing to feast on Europe to slow its decline. Euro elites though they were part of a trans-Atlantic elite, but they only sort of were. When push comes to shove, American elites will let Euro elites swing. Generations of dominance have created an American elite willing to almost anything, or perhaps even anything, to retain dominance.

Europe has hitched itself to the wrong ship, and trusted the wrong nation, thinking that being a satrapy is the same as being an equal ally, and they have joined a cold war that will hurt them more than help them.

They will pay the price.

A New Age Of Vertical Integration

On December 27, 2022

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There was a time when companies preferred vertical integration: they wanted to own their supply chain. Then, for a long time, the mantra was to concentrate on one’s core business and let other specialists take care of all the non-core parts of your business.

Well…

The reason vertical farming failed is that if you want to do it you also need to control your power source. In a world where civilization is slowly collapsing, you need vertical integration.https://t.co/jXtY1GOKg5

— Ian Welsh (@iwelsh) December 25, 2022

This is no longer viable business practice. In a period of civilization collapse supply chains become unreliable: you may not be able to get what you want or you may not be able to get it at a price you can afford.

Supply chains will become more unreliable as time goes on. Leaving aside the fact that logistics companies make out like bandits during periods of supply constraints and thus have little incentive to fix the problem, climate change, environmental collapse and the new era of cold and hot war will make supplies more and more unreliable and scarce.

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The more something matters, the more this will be true: many countries couldn’t get vaccines, no matter what, and countries which created them gave them to themselves and their allies first. When water, food, minerals and energy becomes scarce, countries and companies will prioritize themselves first, their allies second and everyone else not at all. Strong countries, faced with famine, will not export food they need, and weak countries will be forced to export resources they need even if it means death and deprivation for their people.

If you need something, you better make it yourself, or be in lockstep with a company or country who needs you as much as you need them.

The smaller you are, the worse this will get. Amid the shortages of the pandemic small and medium enterprises, including stores were largely cut off: the biggest customers got served first and everyone else got the scraps.

A reliable supply chain and predictable politics are necessary for ages where companies and countries specialize. Eras of war and decline and collapse are eres of vertical integration and keeping ones suppliers close. The extreme version of this was feudalism: make or grow everything you have locally, because you can’t count on anything more than a day’s travel.

Most areas of the developed world won’t wind up that bad for some time yet, but that’s the extreme end of the road we’re on. Hopefully we’ll never get there, but wise countries and companies will no longer rely on widespread supply chains they have no control over.

Losing the Power of the Printing Press

On November 9, 2022

If you look up whether governments can “just print more money,” what you’ll find at most sites is the answer, “No, because it only increases the amount of money, not the amount of economic activity.”

This is not true, and it’s not true in a number of ways.

If there is under-utilization of capacity, you can print. Here’s US capacity:

The US has been running substantially under capacity for a long time.

But, you say, there was a lot of money printing (private and public, most money is created by banks, brokerages, and so on), and capacity utilization didn’t go up. In fact, it went down.

Well, yes, because the money went to other countries like China, where it increased capacity vastly, or it went into assets (the housing bubble, stock bubbles, and so on), or it bought private jets and yachts and so on.

Which is to say, it’s not just about money creation; it’s about who gets the money. Since virtually all the money creation of the past 40+ years has gone to rich people, capacity has been created for what they want. And because it was cheaper and more profitable to build capacity overseas, that’s where the money created went.

OMG THE CARNAGE!!! pic.twitter.com/1HEKwmTX7w

— Rudy Havenstein (Checkmark Goes Here) (@RudyHavenstein) November 2, 2022

In addition, there’s the fact that the US dollar is used to buy oil and is the general medium of exchange in most foreign trade. It’s also the “gold” currency, in that during crises it tends to go up, so people want to hold a store of it against bad times.

All of these factors are contingent. If oil was not sold primarily in dollars, or trade settled in dollars, for example, there’d be a lot less demand for dollars. If the trade regime didn’t allow for vast imports and exports, but the world was more autarchic, then building new industry overseas wouldn’t make any sense, and so on.

This is to say, nothing is eternal. The dollar’s position is a historical artifact, based on specific circumstances which did not, and will not, always exist.

Remember, there was a time when the center of the world economy was Britain (chart from Mike Todd).

What you see in that chart (and it’s going to keep getting worse) is the switch from London to New York; from the pound to the dollar, because the pound wasn’t the primary international currency any more AND (and this is important) the UK kept de-industrializing so there was less and less relative demand for its products, though the City of London retained an important financial role, which kept the pound higher than the economic situation of Britain would otherwise have allowed.

Developing countries, as a rule, cannot run the printing the press because people only want enough of their currency to buy whatever goods and services they produce. In addition, because most Third World countries have vast import requirements (more so as time has gone on), and their agricultural bases have been destroyed, printing money causes inflation very fast. It’s not just an internal matter, more money chasing goods, it’s that people try and use the new money to buy goods produced externally, and their exchange rate collapses.

When the US prints money, a lot of it goes into other countries reserves and the reserves of people and companies. It pools, as it were, uselessly, and to the extent that it is “more money chasing the same goods,” its effect is spread over most of the world and not just internally.

Once this was true of the British pound.

The original conception of comparative advantage was based on the assumption (true at the time) that money mostly pooled inside countries and could not be used to create production in other countries. If Britain produced less widgets because French widgets were cheaper, the money freed up in Britain would go to produce something in which they had a comparative advantage, say woolens, instead of fleeing overseas. (See Ricardo’s Caveat for the long form of why comparative advantage doesn’t work with free capital flows.)

Now, you can also print money if you give it to the useless classes, i.e., the rich. In that case, it drives bubbles (see the SPX chart above or art prices) or creates niche markets, like yachts and private jets. It doesn’t drive general inflation, it only drives inflation for what useless people want.

Unfortunately, that inflation does eventually cause various crises, but for a time, it seems “free” — you make the rich much richer without causing widespread inflation.

What matters, then, is who you give the money to, and what they spend it on. Volcker crushed wages because, in addition to wanting to make useless people richer, he didn’t want ordinary people to have more money because they would spend it on things which lead to buying more oil, and given oil prices at the time, that would lead to more inflation. He needed to smash oil prices, and he did so by smashing wages to smash oil demand.

If you print money and give it to ordinary people, and it just leads to them buying more stuff from overseas, it won’t move that capacity utilization number you see in the chart at the top very much.

But this isn’t to say that printing money doesn’t “work.” It does work. It always does something. Someone benefits. If you print a bunch of money, and make sure it goes to ordinary people in your country, and that your country increases utilization and/or increases how much it produces, then it can produce a general wave of prosperity. After all, when wages rise higher than the cost of goods and services, that’s prosperity, but companies don’t like that unless they’re still making more money because they’re selling more overall.

(That last sentence, by the way, is the secret of the post-war good era. Meditate upon it.)

You lose the power of the printing press when no one wants your currency because you can’t produce enough, or increase production, AND it isn’t necessary for other things (like international trade).

This goes in stages. Britain, outside of the EU and with less and less industry, and with less reason to send money to the City of London, is in danger of losing the power of the printing press in the way Third World countries do. “There’s no reason to buy any more of this than however much you need to buy their goods.”

At that point, you need to figure out how to re-industrialize and under a free trade order like the neoliberal one, that’s hard. Every time you try, money floods out of your country instead of increasing activity inside of it.

As for the US, it’s in an extraordinarily privileged position, but as China and the BRICS move to conduct more and more trade without dollars, and as trust in the US to run the international monetary system drops and drops due to repeated sanctions and thefts of reserves, that privilege will decline, and the US will find more and more that if it wants goods from another country, it will need to provide not dollars (though they may still be exchanged), but actual goods and services itself.

If you can’t pay with goods and services, you pay by selling your patrimony — companies, land, resources, etc.

The power of the printing press is great, but it can be used for ill and good. It can create real economic growth and widespread prosperity under the right conditions, conditions which are partially under a country’s control. But if you become too weak or poor, you can lose even the theoretical ability to create those conditions. There is essentially nothing most African countries can do to restore enough sovereignty to allow them to use the printing press for good, and if you’re a relatively rich country which does still have the freedom of the printing press, there is always the temptation to use it foolishly or venally, as the US mostly has in recent generations.

Money is a social creation. So is how we run the economy. It can be made to work for everyone, for a few people, or as a machine of impoverishment. The choice, on aggregate, is ours.

The Great Favor the West Is Doing China by Banning Equipment Needed to Make Chips

On November 7, 2022

We really are run by fools.

“If you shut out [China] with export control, [they’ll] strive toward tech sovereignty… [Then] they’ll be able to do it all by themselves and the market [for European suppliers] will be gone.”

The great problem in the neoliberal era is that the usual road for tech and industrial catch-up, protectionist tariffs is mostly closed. (This is how Britain, the US, and almost everyone created their industrial base and caught up in tech.)

Despite what a lot of people seem to think, China isn’t a command economy. It’s a capitalist one, albeit with a large state company sector. Letting markets in is explicitly how Deng created the Chinese economic miracle.

So China buys a lot from other countries. It is a trading state, and that makes it more difficult to catch up in some techs.

Now, if this was done to, say, Bangladesh, or probably even India, those countries would be screwed — they don’t have the industrial and knowledge base. But China has these things; sure, it wasn’t cost-effective to do all the research necessary to learn how to make this equipment when they could just buy it, and after all, they need to buy some things from their customers.

But if they can’t buy it, they can learn how to make it themselves. Sure, it’ll cost them two or three years. It’ll hurt. But they’ll get over it, and then they can make it for themselves.

The knock-on effect is fun, though: Once China can make this equipment, they can sell it to other countries, which means those countries (Brazil, Iran, India, etc.) don’t need to get it from the West, and sanctions become much less effective because there’s another option on the table.

So by sanctioning China, the West will soon lose its ability to sanction not just China but pretty much the rest of the world.

Fun!

This is also true of the sanctions on aircraft equipment, by the way. China, which has a rather advanced space industry, will learn how to make its own civilian aircraft, and then, instead of everyone having to get aircraft from Europe (Airbus) or the US (Boeing, though Boeing is losing the ability make aircraft), they’ll be able to get it from China (and possibly Russia as well).

Now sanctions like these have their place: You do them just before you’re about to declare war. But if we aren’t going to do that (and there are certainly factions in Washington who do want a war with China soon), then it’s just foolishness.

Let’s hope it’s just foolishness.

Growth Through Real Estate Bubbles v.s. Sustainable High Income Growth (China)

On November 4, 2022

All right. Let’s talk some basic development stuff, primarily in the neoliberal era.

Because industrial policy was disallowed with a few marginal exceptions due to the “rule based order” enforced by a variety of trade agreements and organizations, the traditional route of protecting domestic industries and growing behind tariffs became very difficult to do.

Various countries used different dodges. Russia, to get out of the Yeltsin era collapse, went whole hog into resources: advanced nations had to have oil and natural gas and minerals, and bribed key financial regions like London’s city with huge influxes of resource-money.

China did something different. They opened up partially and let foreign companies in, but they used bureaucracy to keep them under control (as had Japan, in part) and offered foreign elites huge labor arbitrage profits. They bribed the West’s elites with personal wealth, in effect. In exchange they insisted on, generally very strictly, in real technology transfer. Meanwhile, they created a protectionist bubble thru monetary policy, keeping the exchange rate in their favor.

But the other thing they did is what Turkey tried. They created a self-reinforcing property bubble. Municipalities and states built tons of new homes, people flooded in from the countryside to get the new factory jobs and the service and government and construction jobs which supported industry. Prices went up, municipal and state budgets went way up and a virtuous cycle was created, for a time.

Turkey did the same thing, but the problem is Turkey didn’t have an expanding industrial base, and that’s why Turkey imploded sooner.

All bubbles, including property bubbles are time limited. The more of a real economy you have, the longer they can run, but eventually inflation in property becomes too high, and most citizens can’t afford the housing. Meanwhile, inflationary increases in living costs make workers too pricey, and the industrial base begins to suffer.

You can start from three positions.

Like the US or UK or much of the EU you can start with an industrial base and cannibalize it, or..
Like Turkey you can start with a poor but big country and cannibalize an increasing part of your population, plus what little industry and agriculture you have (India is similar, but much larger and managed to get some industrialization out of this strategy), or..
Like China you can build your industrial base at the same time.

Whatever you do, this strategy eventually runs into the roadblock of a cost structure which becomes too high to allow actual productive industries.

At that point, you have to tame the housing market and other out of control costs (medical, food, whatever). If you don’t, you’re pushed back from 3 to 1, or if you did 2, the artificial prosperity begins to collapse. (India’s calories per capita have spent decades decreasing and someone who spent time there in the 80s, I can tell you Indians weren’t overfed to start with.)

So China’s now in a position where rather than bubbles, especially the housing bubble, being synergistic with industry and improvements in technology, they’re starting to strangle growth.

The route out (minus mercantalist imperialism, which is long run a loser too) requires you to stop relying on property bubbles, and start strangling your cost structure. The “free” money from asset bubbles has to go away, and you have to create a consumer society: not one like we have now, but one like we had in the post-war liberal era. Housing costs have to be kept at a level where people can buy or rent homes fairly easily: 30% of wages for rent or so, and at most about 5 years wages to buy a small home or condo.

Since the free profits of bubbles and speculation have to go away, companies have to make real money by providing real services and not just count on “real estate always goes up” or (America) “people have to have health care, so we’ll increase prices thru the roof.”

This is the task that China now has. It’s a hard task, akin to getting of hard drugs like heroin or SSRIs or Xanax. It hurts, because the financial pipes are reliant on what amounts to free or easy money.

During this transition, headline GDP and so on will suffer, there is no way around it minus looting expeditions, especially since simply running the printing press (something we’ll talk about in another article) defeats the point, which is making companies earn their money by providing goods and services for small markups at scale. (The post war liberal era worked on 3-4% markups for most mass goods.)

This is where China is. Where America and most of the West is similar: except it’s after destroying much of the industrial base and real consumer economy that doesn’t rely on massive price gouging on items people must have. There is no way to bring the good jobs back for most of the population in the US or UK or Canada or Australia without crushing the cost structure, strangling property speculation and prices and in the US tackling the medical and drug cartels.

China’s making the attempt. A lot of what they’re doing is clumsy and crude (but then, so was the one child law, but it worked even if it caused future problems.) So far the UK and Canada and the US and most of the West are not even trying, which is why you hear more about friend-shoring (aka to cheap places that are Western allies) rather than re-shoring, which can only be done for the goods that are either very high margin or which elites have realized are too militarily strategic to do in other countries.

This is why, as far as I’m concerned, the smart money is still on China, and if it wasn’t for climate change and ecological collapse, I’d consider it a done deal even if it took a couple more decades and a lot of screaming and shooting.

As it is, we’ll see. But China’s at least trying to do the right thing.

The Inflationary Consequences of Friendzoning and Decoupling

On October 24, 2022

During the rise of China and the “One World/Free Trade” period, one good thing which can be said for offshoring is that it helped reduce inflation.

It, indeed, drove much of the inflation reduction, with most of the rest of the inflation reduction being concerted efforts to keep wages low, with a strong assist from the Bureau of Labor Statistics to use methods like hedonics to pretend that inflation was lower than it actually was.

The new mantra is “friendzoning” — not so much bringing industry back to the US but moving it to friendly countries. Vietnam and Bangladesh are mentioned often, and Mexico will benefit as well. But friendzoning has limits, these countries don’t have the capacity to quickly take on all the production done for the US and Europe, nor do they really have the technological ability in the medium run.

This means that the determination to have a new cold war, and possibly a hot war with China will drive inflation higher for years to come.

The solution would be to, more than friendzone, re-shore: bring production back to core nations. But that would require reducing the cost structure: and I don’t mean wages so much as I do predatory finance and driving rent and housing prices down massively — about two-thirds at a minimum, along with no longer health-care predation. Do those things and wages don’t have to rise nearly as much, and the US (and Europe to a lesser extent) become much more competitive.

But to re-shore, you have to, in effect, give ordinary people a decent deal and not treat them as assets to shorn, but rather as productive assets to be cared for. (Note you don’t have to do this out of the goodness of your heart, our elites don’t have any of that.)

For the time being, this seems unlikely, so don’t expect inflation to go away. All the Federal Reserve can really do to stop it is push the economy into the dirt, but that’s not going to be a long term solution unless it stabilizes at “you’re a third world nation”, which, actually, probably won’t solve it either.