Submerging Markets

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Published on the Doomstead Diner on September 15, 2013

Discuss this article at the Economics Table inside the Diner

I remember a time not so long ago, call it 2010 or so, where the ever present meme in the Econ Blogosphere was the RISING STAR of the BRIC nations juxtaposed against the PLUMMETING STAR of the “Developed” countries.

http://eclecticcamel.files.wordpress.com/2013/03/superman-the-movie.jpg?w=594China had no where to go but up, Up, UP and AWAY as all the “productive” enterprise of factories were transplanted there from the fading Rust Belt of the FSoA. Pundits far and wide bemoaned the loss of those “well paid factory jobs”, the Backbone of the Middle Class in the FSoA in the post-WWII period from 1945 to 1970 or so. The loss of said well paid factory jobs being ascribed generally to those Nasty Unions who GOT the decent pay, and the deferred Promises to Pay of Pensions to live out your post “productive” life on the Golf Courses of Florida and in the Casinos of Las Vegas.

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If only those workers hadn’t asked for so much MONEY! We would still have those Factory Jobs! Of course, living on the Pay Scale of the typical Chinese Factory Worker, J6P here in the FSoA would have had a mighty hard time buying the Carz he was producing or the McMansions popping up like Buboes all over suburbia.

https://doomsteaddinerbeta.files.wordpress.com/2015/06/8661f-dollar_toilet_paper.jpg?w=336&h=220Besides the shift of Factories to places like China & India as rationale for the Bright Future for the Emerging Economies, the other Leading Indicator for the China Bulls was the ongoing debasement of the Dollar as World Reserve Currency. The repeated rounds of QE, the ever ballooning Federal Deficit and the vast array of unfunded liabilities like Social Security and Medicaire led many Pundits to declare the BRICs would abandon the Dollar, create their OWN Reserve Currency (backed by Gold in the popular meme of the Gold Bug crowd), and once the status of WRC was lost by the Dollar, the FSoA would rapidly get its comeuppance and sink quickly into 3rd World living standards.

Meanwhile, the Chinese would all move into the Brand Spanking New Cities being built all over the country, travelling to and fro by High Speed Rail powered by Thorium Nuclear Reactors. The massive problems in Wealth Distribution in Brasil and India would magically disappear, as the impoverished in the Favelas would rise quickly into the emerging Middle Class of these countries.

Fast forward to 2013, and what do you read NOW all over the pages of Zero Hedge? It’s not the Dollar that is Hyperinflating, it’s the Real and the Rupee! The Hot Money that flowed into India and Brasil chasing Yield while the “Developed” countries were in the Doldrums of recession is heading for the Fire Exits. If your Portfolio has a Factory in India on it, you are looking to Unload said factory while you can still find a Sucker to buy it from you at somewhere near the price you paid for it.

How did all these “Emerging Economies” start emerging anyhow? Where did the MONEY come from to take a country like Brasil, basically completely non-industrial prior to WWII and Electrify it, build Tourist Resorts on Ipanema and Copacabana beach and get an Oil Production industry going drilling deep offshore wells? It didn’t come from Selling Bananas or Coffee Beans to the rest of the world, bet your Coffee Beans on that one.

https://i2.wp.com/m.wsj.net/video/20130514/051413asiatodaywork/051413asiatodaywork_512x288.jpgThe money of course came from Loan after Loan to build up this infrastructure, which generally has never paid itself off and is just repeatedly covered up by still more loans, rolling over the old debt. There have been periodic crises of confidence in this Ponzi of course, my father was involved in the early rounds of loans which literally “went south” in the 1970s down there, and in reality made the banks that made those loans insolvent. The folks who made those loans didn’t give up though, they just swept that under the rug to Double Down on Industrialization through the 1980s and 1990s.

Heady times these were for the Investors in the Bubble of “Emerging Economies”. Cheap Labor and Corrupt Goobermints provided fertile ground for exorbitant Profits as ever more money was Borrowed by one Entity and then Loaned to another to further develop said economies along Industrial lines. For the average J6P living in these places, the Illusion existed for a time that they TOO would soon live the Konsumer Paradise Happy Motoring life of the the Amerikan Mall Shopper.

Somehow though, there as here, MOST people missed out on the Pot of Gold that hitching a ride on the Industrial Bandwagon brought to a few, and while a case can be made that longer life spans and improved Sanitation were improvements for the population at large, neither is it clear that the substitution of Wage and Debt Slavery for Explicit Slavery was a vast improvement for most people, while at the same time the overall degradation of the environment to achieve the “improvements” has been enormous.

Also increasingly clear to anyone really looking at the problem is that the improvements we did muster up here through the Age of Oil were entirely dependent on copious and cheap energy which came a bubblin’ up from Jed Clampett’s farm and the Desert Sands of Saudi Arabia for the first part of this ride up Hubbert’s Curve and soon Down the Seneca Cliff on the Roller Coaster ride of Industrial Civilization. It most certainly will not continue on in its present form much longer, and the Emerging Economies most recently added to this ride are the first ones being triaged off of it.

On the good side of this for them is they don’t have that far to fall here. In India for instance, many places never even GOT electricity to begin with, and even those that did have dealt with intermittent power disruptions for years. They aren’t 100% DEPENDENT on it, though certainly their biggest Shities like Delhi and Calcutta are to continue to operate in their present form with present populations.

The endless Loans to continue to extract the resources of the Earth for further “development” are rapidly disappearing, because the resources these loans are based on also are rapidly disappearing. If you cannot continue to extract ever more all the time and “grow” this sort of economy, in an organic sense the loans can never pay off. The folks in control of the credit creation bizness know this better than anyone, so they are loathe to hand out still MORE loans to places like Greece and Spain, India and Brasil to further develop their economies along these lines. No Loans handed out, no MONEY circulates in the economy, and “Development” of all sorts comes to a halt.

https://i1.wp.com/s3.amazonaws.com/data.tumblr.com/tumblr_l811ndWhLw1qbwvhpo1_1280.jpgBesides this, without the further issuance of more Credit, the PROMISES made during the expansionary period also inevitably will be broken, and already are being broken in the peripheral countries, and in the marginal municipalities rendered Bankrupt from the Industrial meme like Detroit. Detroit is hardly an anomaly though, it just is the Canary in the Coal Mine, harbinger of things to come to municipalities like Tokyo and Hong Kong, Singapore and Beijing, Berlin and Paris, Wall Street and the City of London too. As the Center of Credit Creation, these places will likely be the last to walk down the Road to Ruin already well underway in Detroit, but it will get there too over time, and likely remarkably quickly once the cascade really gets underway here. The Bottom Line is that without copious and cheap energy to run the systems these places depend on, they cannot and will not be sustained in their present form.

For those of us who observe the ongoing collapse of Industrial Civilization, the debates continue as to whether the Collapse will be Fast & Contagious, or Slow & Catabolic in nature. Will the decline in living standards occur rapidly for many people, or will it creep slowly through the population, with some continuing to live a fun Happy Motoring Lifestyle while others go Homeless and Jobless in the society? Certainly for the people living in MENA collapse is not Slow & Catabolic these days, the descent into Civil War and the fight for Survival is a rapid and ongoing problem there for them. It seems so Far Away to people living here in the FSoA, and the progress as the Failed State outcome jumps from country to country in the peripheral economies seems slow enough to people HERE that from this perspective, it can be seen as a Slow Catabolic Collapse. It is of course Relative to your Reference Frame though. I doubt Collapse seems Slow & Catabolic to the average Egyptian or Syrian these days.

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All sorts of interesting Anecdotal information is coming in as far as how preparations are being made for currency collapse of the Euro is concerned. Fellow Blogger Jason Heppenstall has been puttering around Europe collecting various family Possession distributed out around the continent to ship back to his new Doomstead on the West Coast of Jolly Old England. Recently wandering the aisles of a Big Box Store in France, he noted that some items were being priced in FRANCS as well as EUROS. In Spain, ever since the Euro was introduced prices have been labelled in PESETAS as well as Euros, despite the fact no Pesetas are circulating in that economy.

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From the Psychological POV, this is conditioning the population to re-accept one of these Legacy Currencies WHEN (not IF) the Euro Collapses, with the likely idea being to Peg in the mind of the currency user what it’s Value is supposed to be in buying the stuff on the shelves of the Big Box Store. But WILL IT when the time comes, and for HOW LONG will it? What do France and Spain have to Export to generate an International Trading Value for their own currencies? Whatever it is they do export in the end has to be exchanged for OIL they have to IMPORT to produce just about anything they might EXPORT.

The whole idea behind developing an Export based economy in the Industrial Era was to take the Energy from Oil and use it to create “Value Added” products other people would buy. The country that did this with the cheapest labor and best automation did the best at it, read that the Chinese in recent years, but every one of them was always dependent on mis-priced CHEAP energy they imported with CREDIT issued by the extractors of the Oil resource. If the mercantilist economy can’t get hold of cheap energy on credit to make Stuff, it has little to nothing to export at all, and moreover there is nobody “out there” with enough money to BUY whatever it is they are hawking, from Carz to Refrigerators to Iphones.

What is occurring here through Currency Devaluation is a triaging of the weakest nations furthest from the center of Credit Creation off the Credit Bandwagon. Forget the problem of Interest Rates Rising for some of these places, they won’t be able to access Credit at ANY PRICE. The only folks who COULD issue them credit would be the Central Banks, but this only further diminishes the credibility of the CBs as they issue credit on what is increasingly utterly WORTHLESS collateral you don’t even want to Repo if the debtor goes BK! Forget having a bunch of McMansions nobody can or will buy on your books, WTF wants a GHOST CITY in China on their books in a Repo?

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As Steve from Virginia has mentioned on Economic Undertow, any fuel SAVED by triaging one economy off of credit to buy oil leaves said Oil to be WASTED by another economy elsewhere. So if Happy Motoristas in Spain and Italy can’t afford to Gas Up their Carz, that leaves Gas to be burned by Happy Motoristas in the FSoA and China, for a while. It remains unclear how much reduction of this sort can take place before economies of scale break down and it is no longer economic to run refineries to supply ever shrinking numbers of Happy Motorists world wide. Not to mention of course the Political dislocations already taking place in many places as their economies collapse, leading to Civil War after Civil War in many places as groups of people scramble to get whatever is leftover from a collapsed economy in their country and hopefully start over again at some point with a more locally based economy.

It is the great DIFFICULTY of rebooting a Local Economy that presents the greatest challenge once you have already been triaged OFF the Global Economy that creates so much political problem in every neighborhood already facing this. You don’t reboot a local economy on a dime, you don’t turn factory workers, accountants and lawyers into farmers at the drop of a hat either without a lot of nasty blowback from that one. Just ask Pol Pot, who tried taking Cambodian City Folks out to the Farm for new jobs there.

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Overall, the folks who NEVER got the “Bennies” of Industrialization have the least distance to fall here and likely are the ones to best adapt as well. So though India and Brasil appear to be collapsing first and fastest as the Hot Money tries to evacuate, the dirt poor Indians in towns that never even GOT electricity won’t miss it when it is gone. One suspects the Retirees walking the Strip in Vegas will miss it a good deal more.

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