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Guest Post: Why Competition Between Global Players Is Heating Up

Tyler Durden's picture





 

Submitted by Charles Hugh-Smith of OfTwoMinds blog,

The game of depending on ever-expanding debt and exports for growth is over.

When the global financial pie is expanding, there's plenty of swag for everyone, so competition is limited and cooperation is rewarded. If we step back, what is most striking about China's emergence in the global economy over the past 30 years is how little actual conflict between global players this generated.

The reason is obvious: China's rapid development and integration into the global economy created vast markets and profits for every major global player: the U.S., the European Union, Japan, southeast Asia, Russia, the petro-states and commodity states.

The conflicts were by and large mere jostling and squabbling; even the supposedly important issues such as Chinese purchases of U.S. Treasury bonds, and China's subsequent trimming of its Treasury holdings, had little discernible effect on global trade or profits.

To fully understand why this period of cooperation is ending and competition is heating up, we need to understand two key dynamics of global capitalism. As I noted in Is This the Terminal Phase of Global Capitalism 1.0? (February 8, 2013), the return on capital invested in material production systemically declines as urbanization raises wages, externalized costs (pollution and resource depletion) come home to roost and the central state raises taxes to pay for rising social welfare and income security programs.

The solution is to move production to locales with low wages, no environmental protection and low taxes. This is precisely what China (and other emerging economies in Asia such as Indonesia and Vietnam) offered the developed economies.

The other solution was to move capital in the domestic home economies from marginally profitable production to highly profitable financialization: securitizing home mortgages, originating derivatives, leveraging debt and all the other tricks of the financialization trade.

Together, these two shifts of capital quadrupled global wealth in a mere 17 years: assets rose from $51 trillion in 1990 to nearly $200 trillion in 2007:

Global stock market capitalization rose from $11 trillion in 1990 to $65 trillion in 2007. This was largely the result of massive profits generated by shifting production overseas and from the financialization of the domestic economies--what I call the neocolonial-neofeudal model. The E.U., Neofeudalism and the Neocolonial-Financialization Model (May 24, 2012)

As a result, stock market valuations broke away from the real economy of goods and services reflected in the GDP (gross domestic product):

The neocolonial-neofeudal model of financialization is fundamentally an exploitative parasitic skimming of wealth, and so it has limits--limits that follow an S-curve:

The most important feature of the chart of global assets is that it has clearly topped out in an S-curve. After a rapid ascent, asset growth has gone nowhere for years; even worse, the riskiness of these asset classes is leaking through the propaganda.

It is not coincidental that shadow banking assets expanded at an explosive pace.

Shadow banking has also topped out. (Although it is beyond the scope of this essay, it should be noted that China has a vast and generally misunderstood shadow banking system that includes private wealth instruments and local government development deals. Though data is difficult to come by, it appears China's shadow banking system has also topped out.)

What hasn't topped out is debt, both sovereign and private, which has reached unsustainable heights. Does anyone seriously believe these trends are sustainable?

Here is U.S. Federal debt, which is clearly following an exponential curve:

This brings us to the second dynamic of global capitalism: when the expansion ends, competition heats up as sovereign nations and global corporations alike battle for a slice of stagnant markets and shrinking profits. Wages in China have risen by 40% or more in the past few years, and the central state has started taxing individuals and businesses. Off-the-chart smog in Beijing and other cities (the most visible externalized costs) is forcing the Chinese government to tax and spend on basic environmental regulation and cleanup.

As a result, profits are harder to come by and production is leaving for cheaper climes.

In other words, the easy-money party is over for both China and financialization. Now that these profit centers have matured, global capital is struggling, not just to find a profitable, safe home but to keep from imploding as the risks of financialization are becoming more difficult to mask.

We now see why nations are resorting to outright currency devaluations: their ability to service rapidly rising debt is decaying along with global profits. The competition for global capital is heating up, as every major player faces a Hobson's Choice: they can print or create debt-money to fund their debt and risk inflation strangling their economy, or they can raise interest rates to attract global capital. This increases the costs of their debt service, crimping further borrowing.

Either way, the game of depending on ever-expanding debt and exports for growth is over.

This global competition is playing out on multiple interlocking levels. For example, since the chief export of America is dollars, the U.S. can create as much money as it pleases and export inflation to everyone accepting dollars for payment. Given that China is also creating vast quantities of debt-money itself, inflation in China is unavoidable.

China Accounts For Nearly Half Of World's New Money Supply (Zero Hedge)

 

Between January 2005 and January 2013, Chinese bank deposits have soared by a whopping $11 trillion, rising from $4 trillion to $15 trillion! We have no idea what the real Chinese GDP number is but this expansion alone is anywhere between 200 and 300% of the real GDP as it stands now.

China knows that it is this close from setting off another inflationary conflagration, with the help of Bernanke, Draghi, Carney et al of course, just as it did back in 2011. And it will be runaway Chinese inflation, once more like in the spring and summer of 2011, that will be the gating factor on the current bout of monetary injection lunacy that has gripped the developed world's central banks.

Everyone needs to create more debt to keep their debt pile from collapsing, and sell their surplus production to someone else to generate the cash needed to service the debt. Everyone is running the same debt-dependent, export-dependent game except the U.S., which by default is able to trade paper money for real goods and services because the other players have no other market of size to sell to.

The organs of propaganda are claiming global growth is still rapid and sustainable, but this growth is of the diminishing-return variety, based entirely on ballooning debt that is malinvested or squandered on current consumption.

We can anticipate global players will pursue ever more desperate measures to keep their debt-ships afloat, and this zero-sum competition will generate more conflicts. We can also anticipate that these conflicts will become increasingly unpredictable, as the global economy's phantom assets and unpayable debts have reached unprecedented levels.

 


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Tue, 02/19/2013 - 13:01 | Link to Comment LawsofPhysics
LawsofPhysics's picture

May I please see the collateral behind all those "financial assets" motherfucker?  Mark to fantasy bitches.

Tue, 02/19/2013 - 13:04 | Link to Comment Mr Lennon Hendrix
Mr Lennon Hendrix's picture

In the 80's WS did a lot of coke.

Now I think they are smoking peyote and living in an alternate universe.

Tue, 02/19/2013 - 13:43 | Link to Comment NotApplicable
NotApplicable's picture

Meanwhile, Benron uses the "Severing the Financial Link" chart to prove he was a good student of the Great Depression.

They dun broke it real good.

Tue, 02/19/2013 - 14:45 | Link to Comment LawsofPhysics
LawsofPhysics's picture

Indeed, notice that the y-scale is logarithmic.  

Tue, 02/19/2013 - 19:16 | Link to Comment Kirk2NCC1701
Kirk2NCC1701's picture

Scottie:  "Maintain maximum warp?  But captain, it's logarithmic and the Dilithium Crystals are on the verge of disintegrating."

Kirk:  "Scottie, compensate Crystal stability with the Quantum Easing of the Flux."

Scottie:  "But captain, she can't hold it together much longer, no matter how much "easing" I do.  Soon we'll all be totally fluxed, if we don't back off or eject the Warped Core in time!"

Tue, 02/19/2013 - 13:08 | Link to Comment Catch-22
Catch-22's picture

Nothing IS what it IS…

 

For instance, we are told that the GOTUS (golfer of the united states) was playing a round with Tiger Woods on Sunday…

Well Sunday, here in Fort Lauderdale, temperature was 50F with up to 20 MPH gusts. That usually means that inland or farther north (where they are) it had to be around 40F to 50F all day…

That was the most miserable day in the past year. To bad for the blackout, I would have loved to see the only two guys out of 18 million Floridians play golf that day.

 

 

Tue, 02/19/2013 - 13:02 | Link to Comment Mr Lennon Hendrix
Mr Lennon Hendrix's picture

Where's Reggie to tell us how his short AAPL long GOOG trade worked over the markets?

Tue, 02/19/2013 - 13:03 | Link to Comment SheepDog-One
SheepDog-One's picture

Looks like a bubble/crash triple-top to me!

Tue, 02/19/2013 - 13:09 | Link to Comment Mr Lennon Hendrix
Mr Lennon Hendrix's picture

The market obviously decoupled from GDP around 1980.  It would be quite a crash if it would revert back to the mean.

Tue, 02/19/2013 - 15:23 | Link to Comment Lucius Corneliu...
Lucius Cornelius Sulla's picture

It will revert.  The piper will be paid.  You cannot change the basic laws of the universe.  Trees don't grow to the sky and neither do debt bubbles.

Tue, 02/19/2013 - 13:04 | Link to Comment SheepDog-One
SheepDog-One's picture

It's now just heating up? Looks more like a pressure cooker that for years has just been wrapped in more rolls of duct tape.

Tue, 02/19/2013 - 13:06 | Link to Comment buzzsaw99
buzzsaw99's picture

Could someone please do a spot silver/ facebook ipo comparison? thank you. bree hee hee

Tue, 02/19/2013 - 13:06 | Link to Comment SheepDog-One
SheepDog-One's picture

Well, at least we know 'all is well' our Dear Leader says so as long as Wash D.C. Corporation is not hindered from it's insane criminal actions at all. Pay raises or all congresscritters! YAY!

Tue, 02/19/2013 - 13:13 | Link to Comment insanelysane
insanelysane's picture

mmmmm, pie.  Global Pie is sooo tasty.

Tue, 02/19/2013 - 13:19 | Link to Comment Yen Cross
Yen Cross's picture

 The batshit crazy algos are smoking skynets pole today!   http://www.investing.com/indices/indices-cfds

Tue, 02/19/2013 - 13:19 | Link to Comment disabledvet
disabledvet's picture

Nice title but major misses. "debt servicing" is not an issue for the Big Guy's...BENEFITS MANAGEMENT is tho. Second "yet again an article which never mentions the word." this is not "game over" but "game over AT THAT PRICE." this is why JAPAN is "the problem" not China. Japan will fight for price points...and WIN. Other than that "this article does not suffer from not making sense." just needs details to make it "prove-able."

Tue, 02/19/2013 - 13:21 | Link to Comment busted by the b...
busted by the bailout's picture

Who needs globalization?  Here's the new driver of our economy: surveillance. 

Welcome to the Surveillance Nation.

 http://www.bloomberg.com/news/2013-02-19/ohio-plans-drones-to-hunt-lost-kids-as-they-bring-jobs.html

"Big Brother is Watching" has never been more prescient.

Tue, 02/19/2013 - 13:29 | Link to Comment dark pools of soros
dark pools of soros's picture

unless there is a cap on the future  (year 7013?) the easiest place to mine are future tax deposits

we are just beginning folks...  tax Eternity and Beyond!!!!!

Tue, 02/19/2013 - 14:34 | Link to Comment falak pema
falak pema's picture

Oligarchy cartels, aka NWO under Pax Amercana FIRE/ industry outsourced model, worked fine, as long as FIRE grew first world cake and outsourcing grew the Chindia take via Ricardo's principle; cheap labour on one side and supply side risk asset pump on the other, all fueled by circulatory flowing first world borrowed money from Oil/Chindia creditors, with $ reserve as petroguzzling God of never ending abundance as arbitrator. But this model was supposed to perpetuate itself under the NWO based on Fire asset tech type innovation, decreed Internet web cum Copernician Job's revolution model, on which  the sun would never set, as built on three solid global strategic pillars of  cheap oil, reserve C and the big Arms stick. 

What they forgot was hubris and cheap money printing were the sins of the west. 

Now that FIRE has set fire to the money pump and true growth has disappeared in first world drowning in debt, those very Oligarchs are no longer COMPLEMENTARY but Rivals. This is NOTHING new in history...cartels like triumvirates always fall.

Without growth; thats when a cartel becomes a hornet's nest; ask Habsburg Prince in Sarajevo, ask Pompei of old. Thieves in purple and silk, emperors' crowns on their heads have this habit of falling out, and biting the dust either together or one by one.

Will paper printing be enuff to create virtuous circle of concerted growth in an asymmetric world, on different socio cultural agendas, to avoid an Oligarchy free for all Apocalypse?

At ZH there are no universal solutions... there are only good questions. 

Tue, 02/19/2013 - 15:18 | Link to Comment Dan Conway
Dan Conway's picture

What's the big deal?  Obummer says all of this debt was an investment in our future.  Unless he is lying, it should be one hell of return on our investment.  Hey obummer, when are those returns going to start happening?  Just wondering.

Tue, 02/19/2013 - 15:48 | Link to Comment michigan independant
michigan independant's picture

Colony collapse disorder is a phenomenon in which worker bees from a beehive or European bee colony abruptly disappear. If not they deserved it and we survived. http://www.time.com/time/magazine/article/0,9171,878372,00.html

 

Tue, 02/19/2013 - 16:29 | Link to Comment michael_engineer
michael_engineer's picture

"Either way, the game of depending on ever-expanding debt and exports for growth is over"

At least "real" growth is over. It would seem possible to coin new terminology such as shadow growth or phantom growth.

Tue, 02/19/2013 - 19:12 | Link to Comment socalbeach
socalbeach's picture

The Severing The Link chart looks like it's overlaying real (inflation adjusted) GDP with the nominal Dow Jones. 

CHS is in over his head talking about economics and finance.

Comparing apples to apples it looks like this:

nominal GDP vs Dow

Fri, 02/22/2013 - 09:49 | Link to Comment matrix2012
matrix2012's picture

Fiat Currency Witches Brew, Collapse of the Keynesian Ponzi Economic Model | By Ty Andros | The Market Oracle 

"Throughout history Fiat currency and credit systems have failed upon the greed and avarice of those who controlled them and this episode will be no different. The currency and bomb...er...bond markets are GROUND ZERO of the unfolding Societal and financial system destruction. The money printed to date will be dwarfed by what is to come. 

The greatest transfer of wealth from those that hold/store it in paper to those that don't is underway!

Notice how debt is up 300% since just 2002. In 2012 this measure EXCEEDED $220 TRILLION DOLLARS. This pile is compounding at approximately 11% per year. This is income brought forward from the future and requires economic growth to be repaid. Do you think the global economy can repay interest and principle over the next 30 or 100 years? NO. How can a global $60 trillion dollar economy growing 3 to 3.5% service this debt? It can't. Some of it will default and the rest will be printed out of THIN air." - 2013.02.16

Do NOT follow this link or you will be banned from the site!