Globalisation - a race we can't win

To put it another way, how much more does a Chinese have to earn, to live well and still undercut America?

In the sheet below, I compare six countries in terms of nominal per capita GDP (in US dollars equivalent). These have to be reinterpreted in terms of purchasing power parity, i.e. if local prices are lower, you can enjoy the same things for less money. (Nominal and PPP terms are taken from slightly different IMF surveys, but you get the idea.)

The last couple of columns answer the question, "How much income would each national need, to match America's standard of living?"

Doubtless there's problems with the methodology - PPP may well change as each country's nominal GDP increases. And it seems clear that the whole world can't live exactly like Americans do today. (It's also interesting to note that pricey, high-tax countries like the UK and Japan can't catch up with the USA without exceeding the latter's per capita GDP.)

But on these figures, China could match American living standards, on a quarter the income. So the low-pay trading advantage it enjoys is huge now, and is likely to remain so.

And look at India and Vietnam - they'd only need about one-fifth American per capita income to have the same in PPP terms. In fact, they could out-compete China in labour costs, which is one reason for China to move away from labour-intensive work like trainer-stitching, and towards heavy industry.

So Vietnam undercuts China undercuts America...

And given India's enormous population, its higher proportion of cultivatable land (compared with China), its well-established political and legal institutions, and its many millions of English-language speakers, it may be that India is the economy to watch this century.

IMF per capita GDP figures quoted from Wikipedia here (nominal) and here (PPP).

Subprime worrying Europe

Looking at the German stock exchange (^GDAXI in the sidebar widget), the market has opened lower. For Reuters comment, see here.

UPDATE (10.08 a.m.)

The FTSE is looking skittish, too. As Reuters reports: "Richard Hunter, head of UK equities at Hargreaves Lansdown [says], "... as a general rule of thumb, we've certainly been following (Wall) Street on the way down although not necessarily on the way up."

Income inequality rising in China

As China industrialises, the difference between rich and poor is rising, as measured by the Gini Index. (The above chart is from the Wikipedia entry. 0 is perfect income equality, 100 means all the income is held by one person. ) The Gini score for China is around the same as for the USA.

By contrast, China's very rich neighbour Japan has the lowest Gini rating in the Far East, similar to Australia's. It seems possible to achieve prosperity without great inequality.

Speaking of neighbours, see how France's very high score in the 1950s has plunged, whereas the UK's has risen steadily since the 1980s. We in Britain are now significantly more unequal than the French, and far more so than the Belgians and Italians.

Gold and other commodities?

For those who want to hear from the bears on their bullish attitude to gold and natural resources, here's Monica Day in The Rude Awakening last Friday:

Be Fearful, Be Brave - By Monica Day

There's a fundamental rule about investing - you've probably heard it before: Be brave when others are fearful, and fearful when others are brave.

Bill Bonner, editor of Daily Reckoning, opened the Eighth Annual Agora Financial Investment Symposium by suggesting that most people are braver than they've ever been. And that means the rest of us should be very, very afraid.

He's right, of course. Hedge funds are taking in more money than ever…despite the questionable nature of their holdings. Twenty thousand new condos are under construction in Miami…despite the current crisis in the housing sector and the ticking bomb that is subprime lending. The Dow is hitting new highs…with some mainstream commentators calling it the greatest economic boom ever.

Indeed, Bonner agrees it is "great." But more like how the "Great War" and the "Great Depression" were great.

It begs the question - what should you do when you're fearful?

"Nothing," Bonner explains. But that's hard when you have money.

So what exactly constitutes nothing?

If you're a regular reader of these pages, Bonner's answer won't surprise you a bit: Buy gold.

Doug Casey…the Mogambo Guru…and a number of speakers have agreed. Although gold is already up to a 27-year high, it still seems cheap compared with the state of the economy - and the risks the market is facing - right now.

Doug Casey ran through a list of other asset classes and gave his reasons for not wanting his money in them, and he came to this conclusion:

"Where should your money be? GOLD! That's it. Honestly. I've looked at everything and anything - I'll buy anything if the price is right. Gold isn't just going through the roof - it's going through the moon. Mark my words, the gold bull market hasn't even really started…."

And of course, the Mogambo Guru had his own unique way of making a gold recommendation:

"Run out and load up on gold…and in the future when gold prices are astronomical and there's chaos all around you…you'll look around you and notice that you're rich and everyone else is poor and you'll say, wow, that Mogambo dude was right. It's a shame he was such a hateful, detestable little man. And you'll be right…but you'll be rich! So who cares…"

Of course…the "buy gold" line of thinking was not unanimous. Some of the experts and analysts at the Symposium offered worthwhile alternatives to simply buying gold. Natural resource expert Rick Rule was one of them.

Rule believes that you must be brave if you're going to invest in natural resources. Not crazy, mind you. But brave. Meaning you have to be a discriminate investor. You must buy when others are selling, sell when others are buying. This tactic, Rule admits, "is psychologically hard, but functionally easy. And it's the only way to make money consistently in the volatile resource markets."

Byron King, editor of Outstanding Investments, examined investment opportunities among oil and gas stocks. Because the world is no longer awash in oil, King declared, the energy sector - both traditional and alternative - will be awash in great opportunities.

The "cheap oil" days are over, he warned, which means the energy-dependent American lifestyle will become costlier to maintain…maybe much costlier. "We've invented the cheap-energy system that has given us prosperity and freedom," King explained, "now we begin the descent. We'll either have to invent our way out of it, or go back to the way it was before."

He was talking, of course, about our petroleum-based economy… in the face of Peak Oil. Once mocked, denied and ridiculed, the realities of Hubbert's theory are now coming to pass as, one by one, the world's oil fields pass their peak production rates and ease into decline.

If people like Byron King and Bill Bonner are right, the shock of recognition is going to come. But the flip side of this looming societal trauma, says King, is that all kinds of energy companies will make all kinds of money.

Our resident Maniac Trader, Kevin Kerr, also banged the natural resource drum - but to a slightly different beat: Food.

More specifically - how in the world is China going to feed all those people? Even with its one-child policy in place, the population of China is expected to go from 1.3 billion today to 1.49 billion by 2025. But only 11% of China's land is arable farmland. Compare that with 26% in the U.S. to feed a smaller population and you can start to see for yourself: China is in desperate need of a solution.

Plus, it is struggling with other issues. Combine factors such as soil erosion, inadequate water supply, lack of qualified labor for farming, lack of modern farming equipment and methods and extreme weather patterns, and you've got a darn good crisis in the making. But crisis spells opportunity.

A lot of bad things might happen in the world. Some we can foresee, while others will be like the proverbial Black Swan - completely unanticipated. But if you pay attention…and play your hand right…the bad things shouldn't happen to you.

Doug Casey said it best…

"Internationalize yourself. Keep your citizenship in one country, your bank account in another and live in another…treat the world as your oyster."

Why gold?

The Market Oracle yesterday and Gold Seek today both feature an article by Michael Kosares from his own site (USA Gold) on why he thinks you should own gold.

One reason is the fecklessness of the US Government:

"...the national debt stands at $8.9 trillion - nearly $30,000 for every man, woman and child in the United States. And there appears to be no end in sight to the fiscal madness. The debt clock ticks non-stop at the rate of about $1.3 billion per day.

I should point out that there is a difference between the "deficit" and "additions to the national debt." The deficit often quoted by politicians and the mainstream press is discounted by borrowings from the social security fund - a machination meant to dilute the real budget deficit which is the actual addition to the national debt."

I only knew recently about this business of putting their hands in the social security till and leaving an IOU. That is disturbing, because of the desperation it implies. Wasn't it the financial cost of the First World War that led to the raid on British social security funds and the switch to a rob-Peter-to-pay-Paul system?

Kosares starts his article with two quotes (I've added the sources):

"[U]nder the placid surface there are disturbing trends: huge imbalances, disequilibria, risks -- call them what you will. Altogether the circumstances seem to me as dangerous and intractable as any I can remember, and I can remember quite a lot. What really concerns me is that there seems to be so little willingness or capacity to do much about it. . . We are skating on thin ice." - Paul Volcker, Former Chairman of the Federal Reserve (Washington Post, 10 April 2005)

"[W]e live in a globalized environment and in a country which has enormous fiscal and external deficits. So you have to figure out some way -- which I have not done I might add -- to protect yourself if we should have a real currency problem here." - Robert Rubin, Former Treasury Secretary (interview with Kim Schoenholtz, Citigroup New York, 10 October 2006)

He discusses 6 trends: the US National Debt, the trade deficit, dropping real rates of investment return, derivatives, debt to foreigners, the US dollar's decline.

The conclusion, obviously, is that in times of doubt and distrust, gold will act as a haven for real wealth, as it has done in the past. "Price appreciation... is a sidebar to gold ownership. The main story is gold's asset preservation qualities."

More on Brad Setser

Further to the last, it's worth struggling through Brad Setser's presentation to the Congressional committee even if (like me) you're not an economics buff.

In essence, he says that America has gotten away with its continuing trade deficit over the last few years, for several reasons:

• the effective interest rate on foreign debt held by the US, is higher than on loans made by foreigners to America


• foreign equities have had higher yields and better capital appreciation, so US overseas investment has done better than foreigners' share holdings in America


• the weakening dollar has amplified the effects in both points above


• foreign central banks' willingness to buy US debt has kept US interest rates low, making Americans' debts easy to service and fuelling share and property booms

But it can't go on for ever. Either America's debts will continue to increase, or foreign sovereign wealth funds will buy more and more equities, or both. If foreigners slacken in their support for US debt, interest rates will rise; and losing equities to foreign owners takes away from America's future wealth and income.

Setser concludes:

The US will likely both have to sell more equity to the rest of the world and pay a somewhat higher interest rate on its external debt than it has recently...

While rapid central bank reserve growth and large official financing of the US deficit can help the US postpone the necessary adjustment, the longer the adjustment is deferred, the greater the long-term risks...

Bringing the US deficit and emerging economy surpluses down without tremendous costs will also take time. If the US and the world are to adjust gradually, they need to get started.

Yet again, I wonder whether the UK's enormous purchases of US dollar-denominated securities since June 2006 make sense for Britain.

Another thought: seeing two late market interventions last week, Dan Denning in The Daily Reckoning Australia (3 August) speculated that there may be "...in the financial market a buyer of last resort who comes in to goose the indexes at critical times, when investor confidence is especially fragile."

Rather than the Plunge Protection Team, could it be foreign sovereign wealth funds buying-in on the dips? Maybe that's why the Dow has bounced back 286 points today, as I write.

China close to owning $1 trillion of US assets

This graph is from evidence given by Brad Setser (of Roubini Global Economics) to Congress on June 26. His presentation was on US debt to foreigners and the economic vulnerability that it implies. The full PDF document can be found here.

Noriel Roubini himself theorises that the US is approaching a Minsky turning point - i.e. a credit crunch - as reported in FXStreet last Friday.