“Soft despotism is a term coined by Alexis de Tocqueville describing the state into which a country overrun by "a network of small complicated rules" might degrade. Soft despotism is different from despotism (also called 'hard despotism') in the sense that it is not obvious to the people."

Monday, July 07, 2008

Globalisation has Passed its High-Water Mark

Oil price shock means China is at risk of blowing up

By Ambrose Evans-Pritchard Telegraph
Last Updated: 12:33am BST 07/07/2008

The great oil shock of 2008 is bad enough for us. It poses a mortal threat to the whole economic strategy of emerging Asia.

The manufacturing revolution of China and her satellites has been built on cheap transport over the past decade. At a stroke, the trade model looks obsolete.

No surprise that Shanghai's bourse is down 56pc since October, one of the world's most spectacular bear markets in half a century.

Asia's intra-trade model is a Ricardian network where goods are shipped in a criss-cross pattern to exploit comparative advantage. Profit margins are wafer-thin.

Products are sent to China for final assembly, then shipped again to Western markets. The snag is obvious. The cost of a 40ft container from Shanghai to Rotterdam has risen threefold since the price of oil exploded.

"The monumental energy price increases will be a 'game-changer' for Asia," said Stephen Jen, currency chief at Morgan Stanley. The region's trade model is about to be "stress-tested".

Energy subsidies have disguised the damage. China has held down electricity prices, though global coal costs have tripled since early 2007. Loss-making industries are being propped up. This merely delays trouble.

"The true impact of the shock will only be revealed over time, as subsidies are gradually rolled back," he said. Last week, China raised internal rail freight rates by 17pc.

BP 's Statistical Review says China's use of energy per unit of gross domestic product is three times that of the US, five times Japan's, and eight times Britain's.

China's factories "were not built with current energy levels in mind", said Mr Jen. The outcome will be "non-linear". My translation: China is at risk of blowing up.

Any low-tech product shipped in bulk - furniture, say, or shoes - is facing the ever-rising tariff of high freight costs. The Asian outsourcing game is over, says CIBC World Markets. "It's not just about labour costs any more: distance costs money," says chief economist Jeff Rubin.

Xinhua says that 2,331 shoe factories in Guangdong have shut down this year, half the total.

North Carolina's furniture industry is coming back from the dead as companies shut plant in China. "We're getting hit with increases up and down the system. It's changing the whole equation of where we produce," said Craftsmaster Furniture.

China is being crunched by the triple effects of commodity costs, 20pc wage inflation, and sagging import demand in the US, Canada, Britain, Spain, Italy, and France.

Critics warn that Beijing has repeated the errors of Tokyo in the 1980s by over-investing in marginal plant. A Communist Party banking system has let rip with cheap credit - steeply negative real interest rates - to buy political time for the regime.

Whether or not this is fair, it is clear that Beijing's mercantilist policy of holding down the yuan to boost exports share has now hit the buffers.

Foreign reserves have reached $1.8 trillion, playing havoc with the money supply. Declared inflation is just 7.7pc, but that does not begin to capture the scale of repressed prices, from fuel to fertilisers. "There is a lot more bottled-up inflation in this economy than meets they eye," says Stephen Green, from Standard Chartered.

Inflation merely steals growth from the future. It defers monetary tightening until matters get out of hand, which is where we are now. Vietnam has already blown up at 30pc. India is on the cusp at 11pc, so is Indonesia (11pc), the Philippines (11pc), Thailand (9pc) - leaving aside the double-digit Gulf.

Of course, oil prices may fall again. They plunged to $50 a barrel in early 2007 after the Saudis raised production. The scissor effect of slowing global growth and extra crude later this year from Brazil, Azerbaijan, Africa, and the Gulf of Mexico may chill the super-boom.

The US Commodities Futures Trading Commission is on an "emergency" footing, under orders from the Democrats on Capitol Hill to smash speculators. If it is really true that investment funds have run amok, we will soon find out.

I suspect that the energy markets have fallen prey to their own version of the "shadow banking system" that so astonished regulators when the credit bubble burst.

I also suspect that Hank Paulson and his EU colleagues have a surprise up their sleeve for the late-cycle ├╝ber-bulls. Those who claim that derivatives (crude futures) cannot drive spot prices have overlooked a key point. The Saudis and others use the IPE Brent Weighted Average of futures contracts as their pricing mechanism. Futures now set the spot price.

But even if oil comes down for a year or two, the mid-term outlook of the International Energy Agency warns that crude markets will be tighter than ever by 2012. Call it Peak Oil, or just Peak Non-Cooperation by the dictatorships that control most of the world's remaining 5 or 6 trillion barrels (Mankind has used one trillion so far).

Come what may, globalisation has passed its high-water mark. The pendulum will now swing back from China to America. The mercantilists will have to reinvent themselves.


  1. China Also Has the Carbon Blues!

  2. "Globalisation has Passed its High-Water Mark"

    Perhaps civilization has also.

  3. excellent....

    i see china, with their yuan attached to the dollar, added with oil costs, and slumping usa demand for their defective shit... to take on on the chin...

    faulty construction in 10's of 1000's of buildings, overpopulation, shortages of food and WOMEN are about to show the world that china is fragile JUST LIKE CHINA... lol

  4. Crude Hypochondria
    Oil Hysteria Driving Price More Than OPEC Supply, Global Demand
    - Steve Schippert

  5. "BP 's Statistical Review says China's use of energy per unit of gross domestic product is three times that of the US, five times Japan's, and eight times Britain's."
    Anybody know any details on how/why Britain is more than twice as energy efficient as the USA?
    Kinda hard to believe.

  6. guess is a lot of it is transportation.
    Read somewhere yesterday that 70 percent of our Oil Consumption goes to that.

    A lot higher than I would have guessed.

    USA kind of a mini-example of the Asia effect when compared to smaller countries:

    ie: with history of cheap energy and vast distances, some of our present internal modes of commerce/transport may no longer be optimal, that is, too dependent on "free" transportation.

    Fed Ex comes to mind, but just one example of thousands.

  7. An interesting and potentially promising aspect of high energy prices and post US manufacturing is a condition similar to German and Japanese industry after WWII. It was decimated. They were not burdened with old factories and capital goods. In many US industries, the last ten years of industrial capitalization was negative.

    With changed energy costs, new efficient plant can and will be created offsetting the advantages of far-off-shore manufacturing.

  8. the reason the USA uses more fuel than any other place on the planet?

    the US Armed Forces.........

    We spend more on FUEL than most countries COMBINED spend on their total military budget...

    Hence plans for the USAF to start producing coal to Jet fuel technology.

    Our military is in fact Foreign Aid.

    We protect the shipping lanes for MANY OTHER NATIONS who don't pay a dime for our dedication to free and safe trade.

    We classify only certain things as "FA" but in reality we spend BILLIONS a month on off budget things that keep so many europeans, arabs & asians living far beyond their means, without having to PAY the costs...

    on the upside? the fact that every time the euro's, arabs and asians had a strong military? they attempted to take over the world thus COSTING us much much more...

  9. Declared inflation is just 7.7pc, but that does not begin to capture the scale of repressed prices, from fuel to fertilisers.

    We do that here too. The official CPI is 3.98%, but using the same rules to calculate it that preceded the Clinton Administration (ie. the assumption that people also buy food and drive), it is 11.58%.

  10. This comment has been removed by the author.

  11. "(ie. the assumption that people also buy food and drive), "
    Only ignorant plebes in flyover country do that.

  12. Some people--like Ash, for instance--like to point out how big our military budget is. Others, like WiO, point out, we've always been protecting one heck of a lot of people. I side with WiO on that argument.

  13. Where did you get that 11.58%, T?

  14. ...but we all miss Ash.
    Will he be forever before the mast?

  15. Tied to the mast like Odysseus, fighting off the temptations of the world, is Ash.

    I don't see how oil can go much higher. Even in this little hick Idaho town here, driving habits have really changed. Boating habits have changed. E
    verybody is staying home.

  16. A sailor's story
    The term "before the mast" refers to the quarters of the common sailors — in the forecastle, in the front of the ship. His writing evidences his later social feeling for the oppressed; he later became a prominent anti-slavery activist and helped found the Free Soil Party.
    It is of note that he did not set out to write Two Years Before the Mast as a sea adventure, but to highlight how poorly common sailors were treated on ships.
    It quickly became a best seller.
    Maybe the EB could start a
    "Night Soil Party"

  17. How did Ash become wealthy by fighting off the temptations of the World?

  18. Strapped to the mast, sirens pecking his liver, is Ash, poor liberal, undergoing purgation for all of us, on our behalf.

    He inherited it Doug, of course, second generation liberal.

  19. Good to know our purgation is being taken care of, however.

  20. I'd have other plans for them Sireens.

  21. This comment has been removed by the author.

  22. Damn deuce, I'm not even awake yet...

  23. We ought to all read more about slavery, so we can talk about it in the larger perspective. Back in Sweden for instance, my land, there was slavery, white on white, back in the older days.

    Today, in Sweden, you can hardly get anybody to do anything, according to the recent reports.

  24. from Doug's article above--

    We're entering a new era when geography will be destiny, manufacturing in the developed world will enjoy a resurgence, and Mexico looks a better bet than China as the workshop of the world.

  25. It may be time to look at all the Americas again.

  26. This comment has been removed by the author.

  27. Don't bet the farm on any of this. Shipping rates are dropping like a stone, due, probably, to more ships coming online. Also, that 1.7 Trillion will buy a lot of bunker oil. Manufacturing is all about "labor" costs; and, they're dirt cheap in China.

    Mexico? No way. They just don't like to work; and, their government is completely bonkers. The worst possible mixture of "Robber Baron," and "Communist."

  28. I said that poorly. They are NOT lazy; they just don't do "Manufacturing," well. Or, something.

  29. Siesta, Rufus, Siesta, is the word.

  30. This comment has been removed by the author.

  31. si·es·ta (s-st)
    A rest or nap after the midday meal.

    [Spanish, from Latin sexta (hra), sixth (hour), midday, feminine of sextus, sixth; see sext.]

  32. I'm told Siesta's are cultural practices not unique to Mexico. Travelers to India have mentioned its normal to nap in some areas - I'm wary of making any generalization about so large a human terrain on anecdotal evidence. After turning to Wikipedia, it's alleged:

    -Napping is associated with high-calorie food intake that induces drowsiness
    -Napping is associated with very hot climates (an excuse to seek shelter from the most brutal part of the day)

    Let's not forget the Western "nap" - scientifically researched and published in peer-reviewed journals in the form of the power nap. If you're radical enough, you can try the napping equivalent of drunken boxing:

    "A caffeine nap is a cat-nap that is preceded by the intake of a caffeinated beverage or a caffeine pill. The reasoning is that it takes about 15-20 minutes for the caffeine to take effect, so one should awaken doubly energized."

  33. Vicente Fox confirms long-term deal worked out with President Bush

    "Mr. Fox, I would like to know how you feel about the possibility of having a Latin America united with one currency?"

    Fox answered in the affirmative, indicating it was a long-term plan. He admitted he and President Bush had agreed to pursue the Free Trade Agreement of the Americas – a free-trade zone extending throughout the Western Hemisphere, suggesting part of the plan was to institute eventually a regional currency.

    "Long term, very long term," he said. "What we proposed together, President Bush and myself, it's ALCA, which is a trade union for all the Americas."

  34. I saw that interview, with Mr Fox, he was not in doubt of what he was saying, not at all.

    But that whole subject is outside the lines of accepted political debate.

  35. The subject now has my attention.

    On the one hand is Bush, Skull and Bones, Russell Company.

    On the other hand is the Democratic-dominated CA legislature that paved the way for much of the official Welcome Wagon.

    Little wonder about that wall.

  36. Starting of course with NAFTA under Bill "two million new and better jobs" Clinton.

    Earlier along dRat's timeline.

    The rise of the new Economic State over the old Nation State.

  37. Convert $1.7 trillion to oil at $140 and you have 12 billion barrels. There are 1.3 billion Chinese. That converts to 9.3 barrels of oil per each Chinese. They may be short of cash.

  38. This comment has been removed by the author.

  39. This comment has been removed by the author.

  40. This comment has been removed by the author.

  41. That converts to 9.3 barrels of oil per each Chinese. They may be short of cash.

    But, they only use 2 barrels/person/year. That gives them money for a four year supply; and, they're still working.

  42. Ah, this just ain't my day. Two barrel/year/person can't be right. Four could be. Maybe the two refers to gasoline. That would be closer. I'm gonna take a nap. later.

  43. The subject now has my attention.

    In the sense of a bridge too far.

    The capitalist free market engine that powers the road to posperity and all that. Fine by me.

    The bigger is better and biggest is best. Not fine by me.

    And true it is. This subject will never be debated.

  44. Rufus is right, I saw 1.7 to 1.9 barrels per capita, and I was about to post on it.

  45. Mexico vs China

    -Is your intellectual property safer in Mexico than in China?

    -Is there better legal recourse for resolving IP issues?

    Also, re: the 6/30 SPP meeting in New Orleans:

    "The goal of these arrangements is to link the various international industry partnership programs, so that together they create a unified and sustainable security standard that can assist in securing and facilitating global cargo trade."

    The wiki mentions other groups to follow:

    The North American Competitiveness Council

    Ford, Merck, GE, Chevron, LCM, Wal-Mart etc are on there.

    Is it fair to say "regional integration" is an effort to create a larger public trough? Or could it actually serve the country populations by implementing better policies?

  46. Spread the Word
    The Obama campaign promises the American people a new level of transparency.
    So why won't he show the public his birth certificate?
    Barack Obama birth certificate Now petition

  47. Only on the assumption that what's good for Mexico is good for USA.

    So now USA has to babysit the development of the socio-cultural, economic and judicial infrastructure in Mexico that supports business practice in USA?

    I won't argue this subject with too much vigor because I'm not fully qualified to go deep, but I will say this. My radar just tingles when I feel the velvet glove of "better policies" leading the way for the iron fist of subsidized institutional development.

    Pretty tough trying to implement policy if you don't speak the language.

    As usual, who is paying for the foundation at the base of the pyramid? It's not the corporation.

    But it's a great graduate thesis.

    Flys high it does.

  48. Here is how it was done in Italy, slade.

    A different version of the same program

    It's that IBEC story, in PDF format, doug

  49. But then again, the thought of Ford and GM on a Competiveness Council is amusing.

  50. Nelson A. Rockefeller created IBEC in 1946 with the aim of promoting economic development in Latin America after he had observed the poor living conditions in those countries during his service in the U.S. government. The new company was special insofar as it sought to combine philanthropic goals in developing the basic sectors of local economies with an adequate profit on the investment. Philanthropic organizations had all too often failed in their final aims, without in the least changing the situation of underdeveloped countries. And private corporations had often simply exploited local resources with little or no advantage to the local people. Rockefeller's idea was to find a reasonable compromise by creating a company that could be useful for the host country in the long term while at the same time operating profitably.

    This eternal tango between philanthropy and capitalism. Explosive brew I think. Bill Gates, Warren Buffett et al are reinvigorating the idea as "Creative Capitalism."

  51. In the case of both GM and Ford, it's not their lack of competitive ability. Ford does quite well overseas where they are more than competitive.

    Here in the US it is the current and to an even greater degree, retiree health care costs that are bankrupting the old school auto makers.

    As exemplifed at Delphi, an earlier GM attempt to cut grandfathered payroll expenses.

  52. Add Wal-Mart to the list, slade.
    Their retail chain is the largest in Mexico, they are opening branches of their own consumer bank in their stores.

    US banking standards are so consumer friendly, as compared to Mexican banks, that Wal-Mart will be modifying Mexican culture and its' private economy.

    But you are correct in thinking that it is a multi-player, multi-generational game.
    110 million folk in Mexico, maybe 40+ million self identifying Mexican nationals in the US, legally or not.

    So perhaps a third of the Mexican population, a quarter anyway, already live in the US and are happier here, than there, because of it.

    As American Revolutionaries, extending the inalienable rights of man to another 100 million or so folks, that's sweet music in the air.

  53. This comment has been removed by the author.