Other Side Quote of the Day: “We’re going to pass it. We have enough votes. It’ll pass. It’s a good bill.”- Kevin McCarthy
Quote of the Day: “I would have gotten out of [the Nation of Islam] a long time ago, but you saw what they did to Malcolm X. . . . I can’t leave the Muslims. They’d shoot me, too.” – Muhammed Ali
Mish Shedlock today posted “Is the World Saved or is the Verdict Still Out?”
There are some very smart people who believe the volatility and counter-intutitive economic data that we constantly observe are indications of the process of a worldwide normalization of price, value and cost and the government resistance to that process particularly in the United States, Europe and Japan.
The United States, Europe and Japan have assumed government, corporate and private debt structures that are mind boggling. These debt structures by and large go toward supporting a standard of living which the citizens of the U.S., Europe and Japan have come to assume is a birthright. The normalization process rests on the notion that great variances in cost, price and value between similar items of similar quality and utility cannot persist indefinitely if the primary reason for the variance is geographic location.The essence of the normalization process thinking is that the United States, Europe and Japan will be brought back into line on cost, price and value structure with the rest of the world. This includes wages, standard of living, welfare state benefits, so on and so forth.
If a worldwide normalization of price, value, and cost is indeed occurring, then how do you plan for it? First off, lose your debt. Second, acquire skills not easily replicated elsewhere in the world. And third, plan for some degree of economic, social, and political upheaval.
We know from both history and economics that price differentiations like those that currently exist in the world cannot last indefinitely. It becomes too cost effective to do things where they are dramatically less expensive. Pressure to take things out of the United States will continue to grow in spite of tariffs and trade intervention. For example, what if a medical procedure cost $100,000 in Louisville, Kentucky, but the same procedure is only $5,000 in Ciudad Juarez, Mexico? At what point does your health insurance company decide that flying you to Ciudad Juarez to have the medical procedure is a much more efficient use of their resources? That notion may sound disturbing and almost absurd at the moment, but it makes complete sense and there is nothing to prevent that from happening. It has already happened extensively with many other industries in the United States.
It is the pressure to reduce costs and increase value that drives normalization.
If prices, cost, and value were to eventually fall in the United States yet rise in places like Mexico and India as a result of normalization, expect considerable social, economic, and political fallout.
For financial management, a basic rule of thumb is to never borrow money for an asset that will depreciate. However, if an economy such as the United States is experiencing this process of normalization then nearly everything might eventually be depreciating, almost all debt is on assets losing value. It gets very ugly very quickly because the debt remains even when the asset depreciates, which was part of the housing meltdown ten years ago that created a global financial crisis. This is the potential lethality of the bubbles currently being experienced in real estate and equities – when the bubbles pop the debt remains. Be very careful what you borrow against.
The United States federal debt is a different story. In theory, because the United States dollar is the world’s reserve currency and our international debts are denominated in dollars, the United States could simply print all the money it needs to pay its debts. This is a major difference in the situation the United States finds itself in and the situation a country like Greece is in. The Federal Reserve can conjure up all the dollars it wishes out of thin air, enabling the United States, for all intents and purposes, to use a currency that it can create on a whim to purchase goods from other countries that are of real value such as energy and food.
There has already been pressure from countries like China to remove the dollar as the worlds’ reserve currency. So far, the efforts haven’t gained much traction. However, the collective pressure from billions of workers in the world willing to do a job, produce a product, or provide a service at a fraction of the cost of a worker in the United States, Europe, or Japan may be something the developed economies cannot resist. Expect more, not less, of normalization going forward, and as a result expect wages, costs, and prices in the United States to be volatile as they reflect that reality and the reality that government will combat this normalization.
Be aware of the big picture…