Global Wealth Shifts as Asians Stock Up On Bad Debt

Yesterday, we promised a new idea. Alert readers may have noticed – we didn’t deliver.

But when you have a new idea you don’t just throw it out like small change. It requires a certain amount of preparation…a bit of fanfare…a drum roll and a countdown.

The subject yesterday was European debt. The bond vigilantes came ashore in Portugal, attacking Portuguese government bonds. They seemed to be heading for the Spanish border.

All over Europe, the cry went up: “Can anyone stop them?”

It was as if the Huns were at the doors of Vienna…or the Moors were massed at the walls of Poitiers. Where is Charles Martel when you need him?

The funny thing about yesterday’s news was that Japan had come to Europe’s aid. Following China’s lead, Japan said it would lend the poor Europeans some money.

What are these strange benefactors up to? Why would Japan – with the highest debt load in the world…and barely able to finance its own deficits – lend to Europeans? But the Asian rescuers are just exchanging bad US-dollar debt for bad European debt. They must figure that they are up to their eyeballs in American paper…might as well diversify into some Euro trash as well.

The other thing it signals is more shift of wealth, from the West to the East. Asians are now creditors to Europeans and Americas. That’s just the way it works. The old world goes into debt to the new world. America is part of the Old World now. The Asians will now be calling the shots.

Which brings us closer to our idea.

But hold on…one second, Dear Reader… Let’s look at yesterday’s financial news.

The Dow rose 34 points. Gold rose $10. Nothing much to talk about.

But check out these headlines from The Wall Street Journal:

“Job openings fall in tough market,” says one.

“Downturn’s ugly trademark,” begins another. “Steep, lasting drop in US wages.”

Now just hold on a cotton-pickin’ minute. What happened to the recovery?

It did just as we said it would do – it vanished. The Great Correction began in 2007. It is now in its 5th year. But it’s not over.

Case-Shiller, the real estate analysts, now report a that the “double- dip” in housing is here. Prices are falling again in many areas.

Prices at the consumer level are not exactly falling…but they’re not rising much either. The official CPI is flat at barely 1% increase per year. This isn’t much comfort to the average household – which has higher food and energy bills (not included in the core CPI reading) to pay. But the low figures show us that we’re still in a Great Correction, not an inflationary recovery.

And, there were fewer job postings in November than the month before. And here’s the bad news: if you lose your job, a pox will be on your house for generations. No kidding. According to a study by a Columbia economist, you are likely to earn less in your next job, if you get one. Not only that, fast forward to 2030 and you’re likely to still be earning less than colleagues who weren’t laid off.

But it gets worse. Your children are likely to earn less too…and heck, maybe even your grandchildren.

The article mentions a manufacturing manager with two masters degrees. He was earning good money until he lost his job. Now he’s sweeping floors. He’s a janitor earning $9 an hour.

What good are those two masters degrees? Apparently, no good at all.

Another of the people spotlighted by the WSJ hopes to beat unemployment by going back to school. More degrees will lead to better job prospects, she thinks.

She should read the article. It doesn’t seem to work that way. More education may not pay off. Why?

Again, we return to our new theme…our new idea.

And now…more of our thoughts…

There are some activities that are positive sum activities. That is, they are productive. They increase the total of real wealth in a society.

There are other activities that are zero sum activities…or even negative sum activities. War, for example. Excess legal wrangling. Paperwork. Too much time spent in schools. Too much support for the unemployed, the malingerers and the loafers. These things decrease the total of real wealth in a society.

Sometimes people are bright, honest and hardworking. Sometimes they are lazy, shiftless and cunning. They always prefer to get wealth and status by the easiest means possible. In some societies, the best way is by working hard. In others, it is by being clever…becoming a lawyer…a banker…or a government hack.

A new society…or a fresh economy (such as one that has just been flattened by war or hyperinflation)…or a new model for an economy…is generally a wealth-creating society.

A free society is also generally a wealth creating society. People do what they want. If they want wealth, they are free to create it.

But as societies (or economies) age, they become decadent, arthritic, and backward-looking. They shift from wealth creating to wealth shuffling…and then to wealth destroying. They evolve into societies that are more concerned with redistributing wealth than with creating it…more focused on the appearance of wealth creation than with the real thing.

People shift with their societies. When hard work and creativity pays off…they become hardworking and creative. When connections and corruption pays, they are up to the job.

That is true in almost all aspects of the society. Education, for example. In a new or free society people turn to education because they want to learn useful skills…or for the pure love of learning and contemplation. In decadent societies they covet degrees and diplomas – often in such drivel as “communications” and “political science,” not to mention “gender studies” – and count on the paper to get them a cushy job where they don’t really have to do anything. Since everyone believes “education” is such a good thing, there is little resistance to further spending by government and parents – even though the threshold of declining marginal utility for this type of education may have been passed long ago.

This is also true of military spending. A little military spending may be a good thing – it protects the society from outside predators. But “defense” spending soon becomes totemic. Eventually, the decadent state is realizing a net negative return. The private entrepreneur switches from producing work boots at a 10% margin to furnishing the Pentagon with combat boots at a 20% margin. Not only is the productive economy squeezed to support the defense establishment, the over-financed military itself increases the odds of attack by foreign powers…and decreases the real defensive position of the society.

Then, of course, there is the government itself. As Jefferson pointed out, a little of it may be a “necessary evil,” but a lot of it is unnecessary, expensive, and a nuisance. Government does not create wealth. Governments shuffle wealth and stymie it. So, the more government you have, the less wealth-creation you have.

Right now, America is beginning a transition. It is an old, decadent society…headed for bankruptcy…and trying to find a new model. One of the elements of that new model is lower wages. People who thought they should earn $100,000 a year because they have a masters degree are finding that their services are really only worth $9 an hour. More generally, people in the advanced, decadent societies – who are accustomed to earning 10 times as much as a person in China, India or Brazil – look over their shoulders and see the foreigners gaining on them. Americans’ real wages, for example, are likely to be stagnant or falling for many years. Meanwhile wages in emerging markets are likely to double every 10 years or so.

The latest figures from the US show national income still increasing at about 1.5% per year. Nominally. Before inflation. Adjust for the increased cost of energy and food (both of which are moving up fast…some setting new record highs) and the real income of the typical family in the US is actually falling.

Tomorrow, we’ll talk about the role of the Federal Reserve…the banks…and the financial industry…

Stay tuned.


Bill Bonner.
for Markets and Money

Bill Bonner

Bill Bonner

Since founding Agora Inc. in 1979, Bill Bonner has found success and garnered camaraderie in numerous communities and industries. A man of many talents, his entrepreneurial savvy, unique writings, philanthropic undertakings, and preservationist activities have all been recognized and awarded by some of America’s most respected authorities. Along with Addison Wiggin, his friend and colleague, Bill has written two New York Times best-selling books, Financial Reckoning Day and Empire of Debt. Both works have been critically acclaimed internationally. With political journalist Lila Rajiva, he wrote his third New York Times best-selling book, Mobs, Messiahs and Markets, which offers concrete advice on how to avoid the public spectacle of modern finance. Since 1999, Bill has been a daily contributor and the driving force behind Markets and Money.
Bill Bonner

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3 Comments on "Global Wealth Shifts as Asians Stock Up On Bad Debt"

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Michael Mabood
Good assessment of the situation. Looking at the history major powers fall maily by failing to respond to the inside affairs. Soviet Union is the last historical even we had in this regard and I am agree that USA seem to be the next best candidate in the same row. Now it’s just a matter of time and also what happens outside USA. The last shot could be a major natural desaster, which seems to look very far and unrealistic by many or a big China, if they can and want to cash their credits in a nasty or even… Read more »

Love it!

Simply cannot get enough reading on the Fed, banks and financial industry!

D Pritchard
Here’s a critique of AUS that I recently wrote.  I studied Economics over 20 years ago at University.  Only recently did I actually learn about Economics. This is what’s really happening in Australia. My opinion is that in Australia, there are no longer any productive industries apart from agriculture.  Mining, while absolutely essential to production should never be considered a productive industry.  It is actually the first step of a logistics chain that involves the extraction and transport of naturally ocurring commodities from the earth to the producer’s factory, rather than the creation of commodities.  The real value-adding occurs in… Read more »
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