It's a common theme in the financial media these days. Danger!!! China's gonna implode, they're growing too fast, they have to slow down, they're overheating, commodity prices are going to crash. It's basically wishful thinking from the leveraged Wall Street money and their media mouthpieces, hoping that the Chinese will return to being good little peasants, squatting over their turnips on a half acre of land and leaving the oil, iron and copper for the big boys. This is also Ben Bernanke's grand vision, that we can successfully channel all of his free money into paper assets and home prices, without shooting ourselves in the foot with inflation on the stuff we buy from the rest of the world. The wealth effect cures all ills in Ben and Alan's world.
Unfortunately, we've played this hand one time too many. For decades, citizens of developing countries have dutifully toiled for pennies a day, providing America with the fruits of their labor in return for IOU's. As we were the world's economic dynamo, they figured we were good for our debts. Every time our economy slowed, our central bankers just lowered the interest rate and provided easier credit so Americans could borrow more. It had the nice corollary effect of driving stock and home prices higher, which buttressed the illusion of a strong household balance sheet. But then a strange thing happened. Ordinary Americans who didn't own a printing press started defaulting on their obligations because, just like our government, they had overextended their balance sheets. And not by a little, more like historic proportions of household debt.
Even worse, there is very little that America can make and sell to the rest of the world at competitive prices, so in addition to having too much debt and no national savings, we will have great difficulty repairing our trade deficit to pay down our foreign debts. While we were living the good life on borrowed money, those foreign peasants became the dynamo of world production as our manufacturing muscles atrophied. Regulation, environmental restrictions, taxes and the tort lottery would have driven our inflation higher long ago, if not for the fact we bought an increasing amount of our goods and materials from somewhere else. For the last couple of decades financial engineering has been our growing national plum, but global respect for Wall Street's product is withering on the vine. Our GDP is a fiction based on easy money, liar loans and inflated asset values. Understated inflation and overstated productivity have shielded these facts for a long time. Now, the story has been fully elaborated for public viewing and the details can't be hidden behind a veil of Federal Reserve secrecy and government deficit spending.
So, our IOU's, our US dollars, are losing their purchasing power for the output of other countries' labor. This can't be easily measured by the exchange rate vs other currencies, since many of them are fighting dollar devaluation by devaluing their own currency. Other governments have adopted the same Keynesian myth that free money equals prosperity. Or at least they profess to believe that, because it enables their ability to distribute national wealth as they see fit. Either way, dilution of value is the end result and that is definitely showing in the cost of hard assets.
The Chinese are buying up natural resources at a phenomenal pace, and not simply to sell them to the US on the cheap. The Indians are doing the same to a lesser degree. Other Asian economies are also growing, and their populations want to live like we do. They want more than just basic food and necessities. They want to own cars and big screen TV's. What they don't want, is to work hard, make all these things, and then sell them to Americans who have nothing to offer in return except IOU's of dubious value.
Is China overheating? It's possible. But, the reality is that they are starting to claim an increasing piece of the global resource pie for their own use, and that's not going to change. Which means our costs will continue to rise. What's more, they are not going to extend credit to the US on the same terms as before now that we've proven to be a deadbeat borrower. And with the onset of Ben Bernanke's money printing experiment with no national earnings power to back it up, our US dollar IOU's are losing their global luster. Buying hard assets with monopoly money will become increasingly expensive no matter what happens short term in China.