Income Lag? Blame China

Interesting article in The Economist about China and its growing economic (and therefore political) influence. I was particularly struck by these comments on the global wage arbitrage:

Csf302In America, Europe and Japan, the pace of growth in real wages has been
unusually weak in recent years. Indeed, measured by the growth in
income from employment, this is America’s weakest recovery for decades.
According to Stephen Roach, an economist at Morgan Stanley, American
private-sector workers’ total compensation (wages plus benefits) has
risen by only 11% in real terms since November 2001, the trough of the
recession, compared with an average gain of 17% over the equivalent
period of the five previous recoveries (see chart 3). In most developed
countries, average real wages have lagged well behind productivity

The entry of China’s vast army of cheap workers into the international system of production and trade has reduced the bargaining power of workers in developed economies. Although the absolute number of jobs outsourced from developed countries to China remains small, the threat that firms could produce offshore helps to keep a lid on wages. In most developed countries, wages as a proportion of total national income are currently close to their lowest level for decades.

Csf301The flip side is that profits are grabbing a bigger slice of the cake (see chart 4). Last year, America’s after-tax profits rose to their highest as a proportion of GDP for 75 years; the shares of profit in the euro area and Japan are also close to their highest for at least 25 years. This is exactly what economic theory would predict. China’s emergence into the world economy has made labour relatively abundant and capital relatively scarce, and so the relative return to capital has risen. It is ironic that western capitalists can thank the world’s biggest communist country for their good fortune.

Hat tip: New Economist


China and the world economy: From T-shirts to T-bonds
The Economist, July 28th 2005


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  1. touche commented on Jul 30

    India is almost as important as China in this equation. China is sopping up manufacturing jobs and India is sopping up jobs in services, so the US is vulnerable in both sectors. And, yes, the US consumer is plunging deeper into debt to maintain a lifestyle despite these trends.

    Investors need to realize that some US companies are going to be decimated when US consumers hit their debt ceiling. Some US companies with substantial operations overseas may still prosper, but the bulk of investment opportunities lie overseas. You all need to think of yourselves as global investors and not be stuck on the local markets as most of you are.

  2. gary Lammert commented on Aug 1

    From the smaller perspectives to the larger perspectives:To understand Mr. Greenspan’s logic and approach to interest rates, it is important to appreciate the implications of the Congressional Budget Office’s GDP projections for the fiscal out-years for the United States. At a compounded real GDP growth rate of 3.7 percent the real GDP grows about 20 percent every five years. That 3.7 per cent growth rate is roughly what the CBO has projected as an average for the out-years of 2004-2010. Extrapolating from the historically aberrant past 50 years of complete and continuous positive performance of US GDP growth, the CBO has used these anomalous long term average GDP growth rates to construct very similar linear projections for future years. (During the 150 years prior to 1947 the number of years with declining US GDP’s roughly equaled the number of years with growing GDP’s)

    All CBO projections of future governmental tax receipts and disbursements of discretionary and nondiscretionary spending are premised on a linear continuation of this average or near average past GDP growth rate performance. From 1962 total federal annual outlays have been confined to a very narrow percentage of the real GDP – from 17.5-23 percent with the majority of years within a 4 percent band from 18-22 percent. Even social security during the next forty years will do adequately well- if – if GDP growth remains within the CBO projected targets. The whole house of cards, dependent upon the linearity of continued GDP growth, is up against the 70 year cycle of consumer saturation macroeconomics, the second such 70 year cycle for the Second Great Fractal starting in 1858.

    In the decision making process to raise or lower fed fund rates and thereby, interest rates, Mr. Greenspan’s primary focus exactly parallels the CBO’s targeted GDP growth. Without maintaining ongoing growth, the whole system unwinds necessitating larger and larger, and finally impossible, percentages of the GDP to be consumed in taxation or additional federal borrowing to maintain entitlement programs and essential discretionary spending such as for defense. Against this primary focus is Mr. Greenspan’s real understanding that irrationally-too-low or reasonably-low-too-long interest rates leads to exuberance in new speculative asset arenas, invariably culminating in collapse. Prospectively from the vantage point of the Second Great Fractal evolution, there is really no ‘just the right way or amount’ for the Fed to cook the interest rate porridge to escape the consequences of the current global overcapacity and worldwide consumer forward consumption.

    It is important to recollect that the CBO has been incredibly wrong in the recent past with its use of linear GDP projections. The euphoric trillion dollar budget surpluses predicted in the late nineties by the CBO were turned inside out and upside down into massive federal deficits with the implosion of the NASDAQ asset bubble. Enter that inevitable collapse. With the high tech 32 month slow motion crash in 2000, real GDP growth contracted to about .4-.5 percent in 2001, 1.6 percent in 2002, and 2.7 percent in 2003 – all substantially below the 3.7 percent desired equilibrium level. With the Federal Reserve’s implementation of a rapid lowering of fed fund rates, the incentivised US consumer stepped up to the plate and borrowed his and her way to a 2004 real GDP growth of 4.2 percent. Compare this scenario with the 45 percent decrease in nominal GDP from its high of 103.5 billion dollars in 1929 to 56 billion in 1933, non-coincidentally 32 months later, and Mr. Greenspan will, at the least, have to be given temporary applause in his levitation act for delaying the inevitable. Cyclewise, the Chairman is at a bad point in history.

    The downside of the lowering fed funds to 1 percent, was the development of the speculative housing mania which has eerie parallels to the practice of buying on ten percent margin by the shoeshine boys of the late twenties. With LIBOR interest-payment-only loans and no money down, the proportional leverage for the individual investor in the last five years was on a magnitude significantly greater than the prospects of the ten percent on- margin stock acquisitions in 1929. The 20’s small-time investor was required at least have the ten percent up front to pay the margin broker with expected interest payments of 7-13 per cent. In the twenties this might represent an initial leveraged investment of ten to fifty dollars for the bulk of saving, thrifty spit shiners. As well most Americans in the late 20’s did not participate in the stock market. At the nadir of the fed fund rates in 2003, no-principal payment loans were available with no money down and an entry level interest r ate of near one percent. Under these conditions just about every wage earner who could afford the price of a monthly rental could do much better with a house mortgage. After the crash in 1929, regulatory action was brought to bear on the risky and imprudent loan practice of ten percent marginal buying. Seventy years later there is a surprising lack of intelligent anticipation and proactive federal regulatory action to prohibit the same sort of deju va lending problematic practices in the housing mortgage arena.

    On 29 July 2005 the Wilshire 5000 (TMWX) had its third unretraced exhaustion gap occurring at 10AM EST at a level of 12450 gapping nonlinearly upward to a four year high at 12453-4, adding thereafter a few extra points. The exhaustion gap and peaking phase lasted only seven or so minutes before a reversal below the 12450 level occurred. July 29, a very odd and caricaturized key reversal day, was, nevertheless, technically, a key reversal day. Once again reflecting on the enormity of the 15 trillion dollar Wilshire summation index and the two antecedent un-retraced exhaustion gaps to new multiyear highs, this caricature of a key reversal day – will most likely – have to do.

    It would be instructive to see if the Wilshire has ever, in its entire history, had three unretraced exhaustion gaps each going to a major multi-year high. Software available to the general public cannot acquire minutely charts for the March 2000 peak.

    The three major European markets: the DAX, the CAC, and the FTSE all demonstrated key reversal days on July 29, 2005 with (exhaustion) gaps to multi-yearly highs followed by decay fractals ending at or near the low of the trading day.

    While it is still possible for further equity growth within the 22/54/52 of 54 week maximum theoretical fractal time frame, the latter third and final 52-54 week terminal fractal composed of daily fractals numbering 51-52/130/ and 66 of a theoretical 103 maximum days, substantial further valuation growth is now much less likely to occur within the context of the above multiple-equity-indices, very characteristic, technical apogee footprints.
    Gary Lammert

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