China enters unfamiliar economic territory with rising inventory – Contraction in China’s manufacturing sector now inching closer to one year. What does this say about the global recovery?
China is feeling the deep impact of the global slowdown. The country has seen unprecedented growth for the last few decades and is now entering into a very unfamiliar territory. Slowing demand. Data is reflecting that the slowdown on exports from places like the US and especially Europe is having an impact in their very important manufacturing sector. China also has hundreds of thousands of empty apartment units as the country has been heavily reliant on real estate building to support growth. This economic contraction is not a surprise as global demand has fallen largely because of the massive levels of debt in a variety of countries and the process of deleveraging that is occurring. We rarely see the word “decouple†from the economic corners of the world because that is largely a myth. The global economy is more interconnected than many would want to think. The slowdown in China will have an impact in many places including the US.
Do not be lulled by the siren call of inflation – The slow decline in living standards. Gas is up 100 percent over last 8 years while income has fallen.
Inflation has a slow methodical way of eroding the purchasing power of what sits in your bank account. The Federal Reserve is doing all it can to create asset inflation to allow banks to offload inflated assets onto the market so they can repent for the financial sins created during the credit bubble. Unfortunately there are unintended consequences for this. The first consequence is the fact that most Americans have seen their income drop in the last decade. So even if prices stayed the same, their purchasing power has fallen. Yet prices in many key items have actually gone up. By going into full debt mode, the Fed is trying to weaken the US dollar and because of this, the price of goods sold on global markets has gone up. The end result is that many working and middle class Americans find that they are purchasing less for more.
Debt bubble amnesia – 40 percent increase of Americans with accounts in collection in the last decade. System still heavily reliant on extreme consumption.
The debt hangover is still giving the nation a deep headache. For example, in 2003 10 percent of Americans had an account in collections. Today, it is more than 14 percent. The addiction to debt is both troubling but what is more surprising is how little was learned from the financial crisis. The stock market is pretending as if the European debt crisis was solved, that emerging markets had no growth challenges ahead, and that somehow we have solved the fiscal cliff with no actual work. Or can it be that those on the economic margins are simply not able to articulate their voice in a media that is largely controlled by those who can afford the largest microphone? In the last year, you would have been lucky to hear about the 1 out of 7 Americans on food stamps to count on one hand on network television. The bill is coming due and it is going to get harder to simply ignore.
Healthcare jobs expand servicing many older Americans with little to no savings – Since the recession started top employment fields related to healthcare. Over 10 million Americans no longer in the labor force.
Get used to sluggish growth. Although the political season is in full force and every candidate is promising you unicorns and roads to utopia if you vote for them, the reality is we have some built in challenges that neither party can easily fix. The unemployment rate has trickled lower thanks to lower wage jobs being added but also, a gain in the number of those not counted as part of the labor force. The number of Americans deemed “not in the labor force†has surged by 10,000,000+ since the recession started. As a consumption based system, what happens when the middle class begins to thin out? At the core you need a good number of people with disposable income to fuel industry. The ultra-rich are not going to buy 1,000 Ford’s just because they can and the 46 million on food stamps are not going to add any hidden boosters. The stock market’s lack of volatility is basically betting on the Fed and European Central Bank bringing out a monetary bazooka. The problem of course is that they’ve been throwing monetary RPGs at the system for years now and look at the results.