I don't know if this has already been posted here, but
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BEST OF RICHARD RUSSELL
October 7, 2003
Recent headline from the Financial Times of London. "Why Europe Was the Past, the US Is the Present, and a China-dominated Asia the future of the Global Economy."
Following are some excerpts from this excellent five-part series in the FT.
"But behind the growth in Asia's export power lies another historic change: more and more of the containers moving in and out of Asian ports are going not to Europe or the US but to other Asian markets. East Asia is becoming an interlinked economy that may eventually match the clout of the European Union or the North American Free Trade Agreement (NAFTA)."
And another excerpt -- "Down the road from Hitachi is Wahu's favorite son, Chery, the first entirely Chinese company to make a successful modern car. No matter that both General Motors and Volkswagen have alleged gross theft of their intellectual property, Chery employees are fired by a sense of pride. 'It took just 33 months to build our first car from scratch,' says Zhang Ping, assistant to the general manager. 'When it came off the production line, nobody could hold back their emotions. Even the boss was in tears.'"
"Such are the endeavors -- multiplied in thousands of nameless cities throughout the world's most populace nation -- that underpin China's boom. The value being created in places such as Wahu is real and the lives of hundreds of millions of Chinese have changed beyond recognition.
"In 2002, China's 8 percent growth in gross domestic product accounted for 15 percent of the world's total growth. In trade, the figures are even more stark -- 60 percent of the world's export growth, and a similar proportion of import expansion came from China. The factories that are turning China into the 'Workshop of the World' last year consumed 21 percent of the world's traded alumina, 24 percent of its zinc, 28 percent of its iron ore, 17 percent of its copper, and 23 percent of its stainless steel, according to Deutsche Bank research."
Russell Comment -- The only question is -- "Is the Chinese business and production boom sustainable?" And the answer is probably yes -- but who really knows.
In the meantime, there's a great irony building. The US is battling with all its might to bring back the boom. Since 70% of US Gross Domestic Product consists of the spending of US consumers, bringing back the boom (if it can be done) means keeping US consumers spending.
Ah, the irony of it all! The irony is that US consumer spending is a main factor in keeping the US trade balance negative. In other words, the spending of US consumers means that the US trade balance stays negative. This in turn puts long-term pressure on the dollar.
As I explained in my weekend piece (yeah, I wrote again over the weekend), one way to ease the US negative trade balance would be for the dollar to head south big-time, maybe drop 40 percent against a wide basket of currencies.
In the US we work for dollars and we save in items denominated in dollars. But we have no insurance against a collapse or even a major decline in the dollar. Yes, we insure our cars, we insure our homes, we insure our health, we insure our lives -- but we don't insure the item that we work for and get paid in, and we don't insure the items we save, assuming our savings are denominated in dollars.
How or where do we buy dollar insurance? We can buy the ultimate insurance -- gold. Or we can buy gold shares, or we can buy bonds denominated in euros. And we can diversify into foreign stock funds such as the India Fund, the China Fund or the Tiger Fund.
Now get this straight. I'm not advocating buying gold for potential profits, I'm advocating gold for insurance against a system (the Federal Reserve) that openly states that it is devaluing the dollar. I'm advocating gold for insurance against an international situation that almost guarantees that the dollar must fall.
The reason I wrote all that opening stuff about China is that China is the new reality. China is part of a system that is pressing down on the US and on the dollar. It can't be helped, and it won't be helped. It's part of world evolution. It's part of the history of global economics.
The US trade deficit is now 5% of GDP, This means that the US needs about $50 billion in foreign money coming in each and every month. Most of this capital is being supplied by Asia, meaning China and Japan. China and Japan continue to buy Treasuries because they want to keep the dollar strong and their own currencies weak. According to Dr. Kurt Richebacher, "Asian nations are sitting on top of nearly a trillion dollars in US currency, most of which they've invested back in the US, completing the cycle."
Japan is now the largest holder of US Treasuries to the tune of $443 billion, while China is third, holding a total of $126 billion. And the BIG question is -- how much longer will these nations continue to soak up dollars in their attempt to keep their own respective currencies weak?
I obviously can't prove it, but I suspect that Europe with its euro is in serious competition with the dollar, with Europe probably thinking that the euro could be the next reserve currency. Remember, Germany is the "big gun" of Europe, and the Germans have twice been wiped out by inflation. Conversely, the US has been battered (during the '30s) by deflation.
It's always been my belief that Germany would take a recession before it would accept surging inflation. Europe also has a positive trade balance vs. the US with negative trade balances and lower interest than Europe.
