The Dollar Asset Standard

by John Mauldin

The real danger to the platform model? Governments and protectionism. As they point out, a Dell computer says “Made in China” but it is really more accurate to say assembled in China. It is made from parts and software from a score of countries. Of course, the “trade deficit” is counted as China’s. Yet, Senator Schumer regularly bashes China, appealing to his union supporters, but fails to notice things like this. Should we also get upset with Korea and Taiwan and Russia and Sweden and the rest of the countries who contributed? We live in a world where our ability to measure economic reality is becoming more and more limited.

In a world where the U.S. government counts Microsoft physical exports as “plastic” because the disks are plastic and only worth a few dollars at most (Dennis Gartman swears he was told this by a government official who was physically counting export shipping at a port), how can we trust the numbers?

But let’s let the GaveKal guys make their own conclusions. I quote this passage at length, because it set’s up the argument and some key points:

“As mentioned [in the book], one of the first implications of the ‘platform company’ model is that industrial jobs (those close to the hearts of our bearish friends and left wing politicians) in the ‘creative world’ disappear, only to reappear in Mexico, China etc… Over time, the job market in the developed economies moves to a minority of very creative individuals who work for themselves, and a majority of fellows who work in the service industry for the creative minds and/or the tourists coming in from the industrial world….

“If we assume that a new part of the world is getting richer (China, India, Russia, Brazil, etc.), then we should probably assume that some entrepreneurs in those countries are making it big.This assumption is not a stretch; there is enough anecdotal evidence to support (if you doubt that some new entrepreneurs are making it big, go to the Louis Vuitton store in Shanghai on a weekend).If we further assume that, in the countries getting richer, we will start to witness the emergence of institutional savings (pension funds, mutual funds, family offices, etc.), then we should expect big ‘savings flows’ from the rapidly growing developing world into the Western world.

“In simple words, the emerging markets’ newly rich will feel like investing a part of their newly created wealth in regions of the world where property rights are well protected and where there is a rule of law.The excess trade balances earned by the ‘industrial world’ have, in fact, little choice but to be reinvested in the assets of the ‘creative world’.The pension funds of the ‘industrial world’ will buy the companies which give their countries work.The successful individuals in the ‘industrial world’ will also buy real estate in the ‘creative world’ (because it also happens to be the ‘fun world’).This implies that the assets in the ‘creative world’ and especially the prestige assets will always border on the overvalued.Similarly, given the ability to change a producer if he becomes a little bit too demanding, asset prices in the industrial world will remain a little bit undervalued at all times…

“Which brings us to the following point: balance of payments consists of two parts:

1) The Capital Balance: if the above holds true, that part will always be positive for countries with well developed financial markets.

2) The Current Account: since the two parts add to zero (by construction) it means that the current account in countries with well developed financial markets (US, UK, HK etc.) should always be in deficit, and massively so…

“Taking this a step further, we can assume that, as a result of the constant capital flows, the countries with a well developed capital market will have an overvalued currency and a very low level of long rates.Which in turn leads to robust real estate markets and higher asset prices.

“We call this ‘the dollar asset standard’. Basically, diversified and safe assets in the Western world replace gold as the standard of value in the eyes of new savers in Asia, Latin America, or Eastern Europe.

“The first implication of this new ‘dollar asset standard’ is that overvalued currencies, combined with a low cost of money (i.e. low barriers to entry), will prevent anybody in the ‘developed financial market world’ from making any money in industrial goods.In turn, this development will ultimately force companies in the developed financial market world to move to the ‘platform company’ business model, specializing in design and in marketing, and letting someone else produce the goods.

“But this is where it get interesting: once they make the switch to the ‘platform company’ model, a number of companies will likely realize that they should domicile their research and marketing activities in countries with low marginal tax rates, both for their shareholders and their employees.”

This latter point is already happening, of course. Just this week, the Wall Street Journal ran a front-page story on how Microsoft saves billions in U.S. taxes each year by having an Irish subsidiary. Ireland has seen significant economic growth because of its low tax status, especially compared to the continental Old Europe. More and more companies are moving their operations and subsidiaries to low tax countries.

That is enough for this week. Next week we look at why the United States does not really have a cash deficit, as assets are rising faster than our trade deficit. This, according to GaveKal, can make the current deficit last a long time. Why does this happen? Also, rising incomes throughout the world will change trade and manufacturing. 300 million Chinese with cell phones? How should we then invest? Tune in next week.

And for those who think this all sounds crazy, we will then spend some with Bill and Addison, as they tell us it is never different. That there are consequences to poor economic policy and central banks playing with the money supply and interest rates, and that bubbles do not end happily.

[Ed. Note: You can get Bill Bonner and Addison Wiggin’s book, Empire of Debt here:

Empire of Debt: The Rise of an Epic Financial Crisis

You can get GaveKal’s book, Our Brave New World at www.gavekal.com. I highly recommend them both. As I said, this debate is central to our investment, political and social worlds. And don’t forget to order Just One Thing if you haven’t done so.