A Global Disease Called Deflation

Two weeks ago I wrote a piece entitled THE 5 KEY TRENDS IN GLOBALIZATION THAT ARE CHANGING AMERICA and THE WORLD. On account of on going geo/economic events and the recent action of the Fed, I think it is important to repost two sections of that piece.

Deflation -- Possibly a New Global Economic Contagion

For the first time since the early 1930s, there is a serious threat of global economic disorder from deflation. What makes today's version of deflation truly worrisome is that it has developed concurrently from different strains around the world.

In the US, as in the rest of the industrialized world, we see it as the down side of the oil boom. But America is also being affected by disintermediation -- the technologically induced removal of intermediaries in the supply chain. People used to buy hard copy books for $20 but now can buy them online for $9. The price of a taxi medallion in New York has dropped by 17 percent because of Uber. We can even see disintermediation's footprints in the fact that corporate profits are rising more quickly than sales. Falling prices might seem wonderful in the short-term; in the long run they are extremely detrimental to an economy. The value of assets fall, consumers hold back purchases, wages do not grow and the burden of debt is magnified.

Due to its growth spurt, deflation in the United States is held in check -- for now. The problem for the US is the rest of the world, and the exportability of deflation. China is candidate number one in this regard, with its severely over built manufacturing capacity, that is forcing factories into a fight to the bottom, to cut prices on exports. In the Eurozone, where deflation has begun to flirt with the economy, leadership for various political and cultural reasons has found it difficult to develop a course of action. And of course there is Japan.

Oh Where, Oh Where, Has Manufacturing Gone?

Technologically driven disintermediation and its sidekick, automation and growing new technologies such as 3D printing, are causing a global shift away from the economic value of manufacturing. Since the invention of the spinning jenny in 1764 and Watt's steam engine in 1781, manufacturing and the people it employs have been the underlying basis of modern economies. Now this is changing.

The world is shifting very rapidly from the manufacturing age to the age of human capital. In the United States this phenomenon is today visible in the lack of growth in middle class wages. In China, the nucleus of global manufacturing, the problem is more acute. How does China continue to compete on the bottom end of the manufacturing spectrum against lower wage-based countries and on the upper end in heavy industrial manufacturing against the United States with its automated facilities and cheap energy?