Something Wicked This Way Comes, Part II

Bill Bonner takes on the great nabobs of positivism…and dares to reveal what they fear to expose.

"Bush isn’t so smart, showing off his economic program in Ohio. He should go to places where his plan really created employment. India, Thailand or China…"

– Jay Leno

This week, we continued our research into the world’s next big thing: we had dinner in an Indian restaurant, on Charlotte Street in London.

The friendly waitress explained that she was from the Kerala province…in South India.

"And I am going back there," she said. "India is booming…."

She served us many spicy dishes; they were edible, but unspeakably piquant…and left us in a restless state for the entire night. Tossing and turning, we had visions of millions and millions of dark-haired, dark-skinned workers…toiling night and day…studying calculus and memorizing the periodic tables…taking apart computers and reassembling them…writing code and answering phones…

Alan "Bubbles" Greenspan, George W. Bush and all the great nabobs of positivism assure us that there is nothing to fear. Our favorite columnist, Thomas L. Friedman of the NYTimes, explained that "the next big thing almost always comes out of America….[because]…America allows you to explore your own mind." Friedman’s oeuvre rests on a few key illusions. He believes the world would be a better place if America were more aggressive about "empowering women" and "building democracies." He also thinks that technical innovations give America a permanent advantage. Americans are always innovating…always figuring thing out. Heck, we even invented outsourcing, says Friedman:

"This is America’s real edge. Sure Bangalore has a lot of engineering schools, but the local government is rife with corruption; half the city has no sidewalks; there are constant electricity blackouts; the rivers are choked with pollution; the public school system is dysfunctional; beggars dart in and out of the traffic…" and so forth.

We would probably like the place – except for the engineering schools, Bangalore must be just like Baltimore.

Outsourcing American Jobs: What New Jobs?

Innovation is supposed to create new businesses, new technology, new industry…and new jobs. Last we heard, a busload of unemployed whiners was making its way across the U.S. to try to get a little media attention to the outsourcing issue – as if there were not already enough. "We would be happy to be retrained for new jobs," said one of the complainers, "but what new jobs?"

By this stage of a ‘recovery,’ say economists who keep an eye on this sort of thing, the U.S. economy should have created 2-3 million more jobs than we have today. In the month of February, for example, American innovators created barely one-tenth as many jobs as ‘normal’ – that is, only 21,000 rather than 200,000. But as Jay Leno tells his viewers, the missing jobs didn’t disappear. They just turned up in Bangalore, rather than Boston where they were supposed to be.

This does not worry Republican economists. Like used clothing and old school buses, yesterday’s jobs get exported to poor countries…while shiny new ones are created in America. What new ones? We don’t know, but they assure us that America is so innovative, it will think of something. Always has, explained Greenspan in his recent Congressional testimony.

"This time may be different…" said colleague Dan Denning last week. "Never before, since the beginning of the industrial revolution 300 years ago, have there been so many people outside the Western world ready, willing, and able to compete with us. Never before have they had so much money. While Americans spend all their money – and then some…the average Chinese worker saves more than 20% of everything he earns."

Outsourcing American Jobs: More Engineers in Bangalore

There are more engineers in Bangalore, India, than there are in California, U.S.A. They work well…and cheaply, taking home an average annual pay of about $6,000. And they seem to be just as innovative as their American counterparts. The software for DVDs was developed in Bangalore, not in Silicon Valley, says the French newspaper, Libération. In the 7 short years of its existence, the Philips research center in Bangalore alone has come up with 1500 new inventions.

Foreign workers have been cutting into American salaries for many years. Assembly line workers in Taiwan, Mexico and other labor hellholes have undermined factory wage growth in the U.S. Over the last 30 years, real hourly earnings on the shop floor have actually gone down.

No one particularly cared – because America’s economy was shifting to service and consumption anyway. Factory workers were out of fashion and out of luck.

But the consumption binge has run its course. Americans have little left to spend. And now the foreigners are lending them money…and taking the service jobs that were once thought immune from overseas assault. And now, in today’s news, we read in the Houston Chronicle that the lawyers are worried; even law firms are outsourcing routine legal work to India.

These trends may not worry Democrat economists any more than they trouble the Republicans…but it’s an election year, so they can’t pass up an opportunity to swindle the voters and get their names in the paper. Pandering to the lumpenmasses, the Democrats offer to "do something" to "protect American jobs." What they would do would be either futile or destructive, but that is to be expected.

John Kerry’s "Jobs for America Bill," for example, does a little of both. It would require employers to give notice before they outsourced anything. Other proposals limit the ability of U.S. companies to take advantage of less expensive foreign labor…or limit the ease with which consumers could benefit from lower prices. No serious economist would suggest such things, without at least having his fingers crossed behind his back.

Outsourcing American Jobs: Americans Earn too Much Money

There are a lot of dopey things said to voters with the cameras running. But no one is going to look the American worker in the face and tell him that he earns too much money for what he does. A politician might as well pour gasoline over his head and light a match; the media would scorch him in a matter of minutes…his career in politics would be in cinders…and he’d have to go out and get an honest job.

We do not like to disappoint readers. But we are not running for anything. And if by some misfortune we were elected to public office…we would immediately confess that we had spent a drug-crazed night with a Russian prostitute…and demand a recount. So, we offer this little reflection on outsourcing with nothing at risk but our reputation…which is to say, we have little to lose.

For many, many years Americans have had the easy ground in the international labor market. The playing field was tilted in their favor by the skills, capital, infrastructure, institutions and habits built up over many generations. They will still have an advantage for many years…but the playing field gets leveler every day.

Regards,

Bill Bonner
The Daily Reckoning
March 26, 2004

P.S. "What’s different this time," continued Dan Denning, "is that these huge economies – principally India and China – are on the rise, whether we like it or not."

"By the middle of this century," begins a letter from our friend Martin Spring, "Russia’s living standards will be some 40 percent higher than America’s are today, China’s will have reached the same level as Japan’s today, Brazil’s will be about the same as Britain’s today. Indians will have about the same incomes as Italians have today.

"That’s the forecast of a research study by the investment bank Goldman Sachs based on the assumption that the emerging economies maintain ‘growth-supportive’ policies.

Here are some of its other conclusions:

* The four largest emerging economies, which the bank calls the BRICs – Brazil, Russia, China and India – could within 40 years become larger in combination than the world’s six biggest economies today, the "G6" – America, Japan, Germany, Britain, France and Italy.

Currently they are less than 15 percent of the size of the G6. In U.S. dollar terms, China could overtake Germany in the next four years, Japan by 2015 and the U.S. by 2039. India’s economy could be larger than all but the U.S. and China in 30 years.

* Over the next five years China’s GDP per head is expected to grow at an average of 11.2 percent a year, Russia’s by 10.3 percent, India’s by 7.5 percent and Brazil’s by 6.3 percent. The equivalent projections for today’s giants are just 1.7 per cent for the U.S., 0.9 per cent for Japan, 2 percent for Germany, 1.9 percent for Britain and 1.5 percent for France.

* However, because today’s developed economies will continue to grow, their living standards will be very much higher by mid-century. Americans’ GDP per head is expected to rise from $38,700 to $83,700, Britain’s from $26,000 to $59,000, Germany’s from $23,100 to $49,000 and Japan’s from $34,300 to $66,800.

* India’s economy has the potential to show the fastest growth over the next 30 and 50 years because its population is expected to continue growing. It "has the potential to raise its U.S. dollar income per capita in 2050 to 35 times current levels".

* However Russia’s GDP per head is expected to grow faster because its population is expected to shrink.

* South Africa, although it won’t qualify as a giant, is likely to see its economy grow from $83 billion in 2000 to nearly $1.2 trillion by the middle of the century.

* About two-thirds of the BRICs’ increase in dollar GDP will come from high real growth, driven by productivity and population increases, and the rest from currency appreciation. Their real exchange rates are expected to grow at an average rate of 2.5 per cent a year."

Editor’s Note: Bill Bonner is the founder and editor of The Daily Reckoning. He is also the author, with Addison Wiggin, of the international bestseller: Financial Reckoning Day: Surviving The Soft Depression of The 21st Century (John Wiley & Sons).

"Asia trade boom boosts Japan, Inc.," says the BBC.

"Japan’s trade surplus highest in 5 years," says the Financial Times.

"If we’re wrong, it wouldn’t be the first time," says our own London colleague, MoneyWeek magazine editor Merryn Somerset-Webb, just back from Tokyo, "but it looks like Japan is finally recovering."

The world turns.

When Japan’s stock market blew up 14 years ago…at first, the world’s financial experts could not believe it. Japan was still the ‘miracle economy.’ It might suffer a temporary setback, they thought, but it had been a long time since they had stopped doubting that Japan would always be at the forefront of the world’s economic progress.

But instead of miraculously gathering themselves up and retaking their places as financial geniuses…the Japanese seemed more and more maladroit. While America boomed and bubbled, the miracle economy fell into a deflationary funk…and nobody in Japan seemed able to do anything about it. They cut rates…they increased government spending…they did all the things that Americans would do 10 years later.

And for a while, it looked like they would succeed. Then, stocks fell apart and things got much worse. In just a bit more than a decade, Japanese stocks and real estate lost about 75% of their value…and Japan’s policymakers went from being the world’s greatest geniuses to its biggest incompetents.

But now, finally, the ‘miracle economy’ looks as though it is about to stage a rather ordinary comeback…the kind of recovery you expect after a long period of slump and sluggishness. The sun has finally begun to rise on Nippon.

Meanwhile, on the other side of the globe…the news is still good. The ‘house party’ continues – with more homes sold, old and new, last month than the month before. Durable orders rose in February. Jobless claims got no worse. And, yesterday, the dollar actually went up.

We don’t know whether it was the news, the weather, or just the random luck of things…but stocks rose sharply yesterday, with the Dow up 170 points. "All is well," Americans tell each other. "Nothing ever happens. All will always be well…forever and ever…amen."

The U.S. economy has been in so illuminated for so long…and Japan in such black shadow…people can hardly imagine that the light might change. But the earth turns…and the meek inherit it.

Curiously, stocks, real estate, employment, interest rates, government spending – all the things Americans count upon to maintain their fat and happy lives – depend on foreigners, especially the Japanese. The Bank of Japan alone spent nearly $70 billion of their own money in the month of January trying to keep alive Americans’ fantasy economy. This amount was preceded by more than $250 billion the year before…and another $20 or so billion after. Even this was not enough; the dollar fell anyway.

Last week, the Wall Street Journal reported that the Japanese were finding better uses for their money then buying U.S. paper. The rumor caused the dollar to fall (and the yen to rise) even more. Most likely the trend will continue. Japan will keep more of its money for itself. America – deprived of cheap foreign financing – will fall into a long slump, a continuation of the bear market that began in January of 2000.

We could be wrong, of course. Ninety percent of investors and consumer households in America bet that we are. They’ve run up record levels of debt…and count on low rates to keep the money flowing. But if the foreigners stop lending to Americans, lending rates won’t be low for long. Borrowers will squeeze the market for every last penny…rates will rise all over the globe…and an unaccustomed darkness will creep across the United States.

Whether these things will happen or not, we don’t know. And whether Japan pulls itself together or not won’t matter to most readers. But whether the U.S. falls apart matters so much, readers are advised to brace themselves…almost as if it were a sure thing.

*** Stocks were the unquestioned stars of yesterday’s market performance. The Nasdaq accompanied its blue-chip cousin to higher territory yesterday, adding 57 points to its tally. To the lumpen’s delight, the S&P also went up 18 points.

Currencies, in the meantime, rested in the wings. The euro lay where it fell on Wednesday, trading unchanged against the dollar and the yen. But Sterling took a surprise hit…on news that Bank of England Gov. Mervyn King said the strong pound was making "life difficult" for Britain’s exporters.

*** Oil cooled for a second day – May crude lost $1.50 to stand at $35.51.

But the prospects for the summer car trip we were planning still look grim. For the third day in a row, reports the AAA, gas prices in the U.S. hit an all-time high: the average price for a gallon of regular is now $1.742 at the pump.

"We are in a new era for the price of oil," Phil Flynn of Alaron Trading tells us. "I believe that $40 a barrel will be the new line in the sand." In the meantime, Mr. Flynn told CBSMarketwatch, the current national average of $1.74 a gallon for gas could easily surpass $2 by summer.

Our friend Lord Rees-Mogg thinks he has found the culprit behind higher oil prices: China.

"The motorization of China," writes the peer, "is already pushing up the price of oil, now around $37.50 a barrel. It is likely to go further and create a world oil shortage.

"China changes everything. It changes the outlook for the world oil price, and therefore the forecasts for inflation. It changes the future of technology; it could eventually mean the end of the hundred-year reign of the internal combustion engine, and its replacement by fuel-cell technology…

"Everything happens faster than one expects. The world is being changed before our eyes…"

[Ed note: Back on the DR website, Lord Rees-Mogg reports on a major scoop the Times of London managed to entice out of Fujio Cho, President of Toyota…which portends, among other things, a higher price of oil…

See: "Toyota’s Scoop and the Coming Oil Shortage" ]

*** Poor Jamie Olis. The former Dynegy financial VP got a 24-year sentence for his part in defrauding investors. He should have killed someone instead; he would have gotten out sooner.

*** It’s all a bit weird, isn’t it? If you bought a corner dry-cleaning shop, and then discovered the guy had lied about how much money the store brought in, you might sue to get your money back. The guy might even pay a fine…but you wouldn’t expect to put him behind bars, would you? It’s just money, after all.

But everything’s a federal case now. Every prosecutor seems to be running for higher office. And everyone faces jail time.

*** What’s so great about democracy? An email received from a source we cannot recall.

"The Founders gave the old steel tip to a ‘tyrant’ who took only three percent of their income. Today, federal, state and local governments take 50 percent of our income. Bring back King George III and 47 percent of my money! He wasn’t the nicest guy in town, but – in addition to not raping us on taxes ­ he did not force us to attend and subsidize his state indoctrination centers (read public schools) or tell us what we could or could not put in our bodies [as the FDA does every day]."