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Articles written after 2014
The looming world crisis
Articles written before 2014

    TM, ®, Copyright © 2010 Piero Scaruffi All rights reserved.

  • (december 2014) The looming world crisis.
    The beginning of the 21st century was characterized by a lengthy economic boom in the developing world, largely the by-product of the fall of communism. The "tigers" of East Asia led the way already in the 1990s, then followed by Turkey, most of Latin America and sub-Saharan Africa, with four of them in particular, the BRIC (Brazil, Russia, India, China), being singled out as the next generation of regional powers. Most of these countries don't seem to realize that their economic boom has been a peripheral consequence of tectonic shifts in the largest economy of the world. The USA adjusted to the fall of communism by rapidly exploiting the opportunities provided by globalization. On one hand there was a net export of jobs and capitals to the developing world, and on the other hand there was a net import of goods and minerals from the developing world. Both flows benefited the developing world. Both flows were guaranteed by the "pax americana", by the largest navy ever built that happens to protect the trading routes of all oceans. Very few of these developing countries have developed a real economy that could stand on its own. Russia is the perfect example: it got relatively rich under Putin by selling oil and gas (i.e., thanks to the commodity boom) but it has de facto "devolved" into a less industrial country than it was during communist times, when the Soviet Union ranked as the second largest manufacturing economy in the world.
    Change is coming to these economies due to change in the US economy. To start with, the USA is now growing again at a faster pace than most of these economies, resulting in a more competitive stock market. Secondly, there are expectations of a raise in interest rates, that will make the USA more appealing for capital flows. Thirdly, automation is bringing back jobs to the USA because it gets cheaper to make things with machines than to make things with Chinese or Bangladeshi humanpower. Fourth, thanks to new technologies, the USA has become again one of the world's leading producers of oil (in fact, it passed Saudi Arabia in 2014), and therefore less dependent on imports. In the end this means that three of the four parameters that triggered the economic boom in the developing world (job outsourcing, capital flows, commodity imports) will not be as prominent in the near future as they were in the near past. The very digital economy that made it easier to export jobs is now giving new impulse to manufacturing in the USA (wearable and intelligent devices) and making Silicon Valley companies much more attractive than investment in African mines or Bengladeshi textile shops. The digital economy does not need mineral resources: it needs energy and bandwidth. Manufacturing jobs are returning to North America in what the Economist has dubbed the "North American industrial renaissance": Mexico is now competing with China in attracting US plants and manufacturing in the USA itself is increasing almost as rapidly (10% within a decade). As interest rates go up, a stronger dollar is probable, and that will make cheap goods from Asia, Latin America and Africa even cheaper, but at the same time it will make the USA more appealing for world money. The flow of money may reverse dramatically towards the USA.
    Another engine of growth for the developing world has been China, which in turn largely benefited from US demand. China is slowing down and will probably revise downwards its own predictions for economic growth. Since China is the second biggest consumer of commodities in the world, this will compound the slow-down in developing countries that thrive on commodity exports. Total indebtedness in China (public plus private) has reached 250%.
    The third biggest economy, Japan, remains mired in stagnation; and the fourth one, Germany, is beginning to get sucked into the general malaise of the eurozone.
    No surprise than that Brazil is entering a recession and that the Russian government announced its economy will fall into recession in 2015, partly because of Western sanctions in response to the annexation of Crimea but partly also because of falling oil prices. Government borrowing in Africa, mostly from private investors, has created government deficits of up to 10% of GDP (Ghana) that sooner or later will come to haunt those countries. Household disposable income is forecast to decline in many developing countries.
    Developing countries and BRIC countries have been living in a dream, thinking that they had suddenly become full-fledged economies when in reality they were merely selling cheap goods, cheap minerals and cheap labor to the developing world and to China. A 2014 Economist ranking of best countries for business (see this page) listed India at 48th place, China 50th and Russia 64th. There is nothing inherently great about their economies and legislation that would attract the world's businesses other than their temporary status as emerging markets.
    The economy of the USA is growing at a decent pace (3%) and it is creating more jobs than at any time in the last decade. Unfortunately, this time the rest of the world might not benefit much from it, and learn a tough lesson: that its wealth was really just a blip in a long-term process of optimization which is mostly about maximizing the profits of US multinationals and investors, and which only briefly found it convenient to invest abroad.
    Meanwhile, the USA will be largely untouched by the world's slowdown because its economy is mainly an import (not export) economy. Investment money will flow to the USA when Europe, China and Japan cut their interest rates to spur growth at home. The dollar will go up making imports cheaper. Cheap goods from abroad will boost purchasing power in the USA and trigger a consumption boom just like in the 1990s.
    TM, ®, Copyright © 2014 Piero Scaruffi All rights reserved.
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