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5 "Tells" that the Stock Markets Are About to Reverse

The Asian Coal Fired Economic Locomotive

Economics / Asian Economies Jan 17, 2012 - 11:25 AM GMT

By: Andrew_McKillop

Economics

Best Financial Markets Analysis ArticleWhat If Its Thanksgiving But You Are The Turkey?

HOPING FOR GROWTH
Called the only rational strategy, but impossible in the current context, restoring economic growth in the debt-strapped OECD countries remains a religious-type hope for political and corporate leaders.


When or if economic growth became possible, perhaps through divine intervention, the results would be 100% predictable: an explosion of commodity prices even bigger than the explosion of equity numbers printed on share certificates. Taking the leader-symbol for commodities, oil prices, these would rationally or certainly be quickly levered up well beyond $125 or $130 a barrel by economic growth rates as low as 2% a year in Europe or 2.5% a year in USA, sustained for as little as 6 months.

Other commodities would follow suit except for a few special cases, making for a hyper-classic inflation bulge followed by an interest rate spike, and another decline of economic growth. Between times, the trade deficits of many, or most OECD countries would have grown due to higher commodity prices, not compensated by more exports of goods and services where competition from China and India caps price growth for world manufactured goods. Deficit-avoiding strategies such as delocalisation and outplacement would have been accelerated during the ever shortening growth phases or cycles, making for high structural-type trade deficits even when the economy slumps back into recession. Debt would then grow again, despite austerity.

THE ASIAN LOCOMOTIVE
Today, this coal-fired locomotive has a near-divine status for media-friendly prophets of prosperity "just around the corner". The question is: how can Asia contribute to recovery in Western economies while creating a self-propelling and sustainable global growth mechanism to exclude Western economies ?

Only the first part of this question is media-friendly: everybody knows Asians want to save the West by contributing to the West's spontaneous, internal and dynamic recovery - for example Obama style or European and Japanese style economic recovery. Conversely, nobody wants to know that Asian economic growth already slows growth in the West, and will inevitably continue to exclude and diminish Western economic growth.

The politically correct Asian Quest is therefore for governments in Asia to not only seek recovery for the USA, Europe, Japan and a few other high income OECD countries, but also become more self-reliant in their own growth. To do this, the prophets of prosperity around the corner say that Asia must continue to shift economic activity towards domestic demand-based growth, now in the short and medium term, and accelerate ongoing regional economic integration, notably the ASEAN, APEC and ECAFE models, to lever up more and freer intra-regional trade, and more cross-border investment.

This policy shift will theoretically result in two things — greater local growth and self-propelled growth, and the payoff for the West will be more imports from Western economies, especially the United States, but also to a lower degree from Europe and Japan, helping correct chronic trade deficits and trade imbalances between the West and China, and increasingly with India. The US and other Western economies would become more export-oriented, like the rising Asian economies, but net exports from the rest of the world "would inevitably decrease".

In other words this will be a win-win for Asian and Western players or partners, but create either no benefits, or loss for the ROW, rest of the world.

SHAKY LOGIC
The first and biggest logic defect is this theory only looks at manufactured good trade surpluses and deficits, and capital account movements, to come up with an apparent win-win for Asia and the West. Western industrial exporters, for as long as they go on exporting, will compete with Asian industrial producers, whether they are selling inside an expanded, possibly hardened Asian trade sphere, like the European Economic Community at its origins, or whether they are exporting to the West or ROW.

The theory also imagines there is some "infinite pool" of raw materials, but for as long as these producer and exporter industries need raw material commodities, they will lever their up prices on an almost automatic basis, stacked in favour of commodity prices and against manufactured goods export prices. Whether it is pulp and paper consumption per capita, or oil and rare earths consumption per capita, levering up consumption in Asia will soon hit a supply side "tilt" for commodities. To be sure, this is not mainstream media friendly, currently cheering the end of expensive energy - at least shale gas - and ignoring what happens with and for supplies of other fossil energies and minerals, even including the gold needed for a New World (order) Money !

Natural                    Resource

Global production       (metric tons)

     Per capita annual supply                 
(for 7 billion population)

Crude Oil

4 400 000 000

4.5 barrels or 655 kg

Iron & Steel

2 400 000 000

360 kg

Pulp & Paper

278 000 000

39.7 kg

Aluminum

41 500 000

6.3 kg

Rubber (incl synth)

24 500 000

3.6 kg

Copper

16 200 000

2.3 kg

Lead

4 100 000

0.65 kg

Nickel

1 550 000

0.18 kg

Rare Earth Elements

125 000

19 grams

Lithium

25 300

4 grams

Gold

2 475

0.39 grams

Comparing Chinese and Indian per capita consumption for the above, as well as certain key wealth-related foods like coffee, cocoa, fruits and vegetables, with present typical per capita consumption in the Western economies is always a reality shock. Plenty of the numbers show near-instant tilt when or if Chinese or Indian per capita consumption came anywhere near current Western rates - meaning that Asian economic growth will depend on excluding Western demand for strategic and critical raw materials, to prevent their prices becoming exorbitant.

SQUEEZING OUT THE PARASITES
The conventional right-wing one liner on Welfare State handouts to beneficiaries is these are parasites living off the backs of middle class taxpayers: Western de-industrialised or "postindustrial" consumer societies, we can say especially their middle classes, profit from cheap manufactured goods exports from China and cheap software and service exports from India. Getting rid of these Western parasites who are too lazy to produce anything will enable the middle classes of China and India to advance.

The need to dump Western parasites is growing in Asia with every single percentage point growth of average consumption rates of supply-constrained raw materials. This is easiest to understand with the Chinese and Indian Car Bomb paradigm - primarily an oil demand and price bomb, but also a demand bomb for supply constrained raw materials such as rubber, for car tyres, and others as basic as the iron and steel needed to produce their coming car fleets.

WORLD CAR FLEETS 2010


Region or Country

Car numbers (private vehicles below 2500 kgs weight)

Average number of cars per  1000 population

USA

215 million

715

Japan

77 million

605

South Korea

21 million

445

European Union

220 million

440

China

79 million

58

India

22 million

18

Oil dependence: about 97%. CAGR: about 14% net of scrapping in China and India.

Each average car needs about 1.5 barrels of oil to build, for an average 120 - 180 kilograms of plastics per car, and then takes an average of about 9 barrels a year of diesel fuel and gasoline to run. To be sure we can fantasize about electric cars, but in the real world this is how real cars get built and operated. Selecting whatever peak car population for China and India that you want, maybe 750 million each, and multiplying this by car-related oil demand will give the bottom line on Asian oil demand growth due to China and India favouring and accelerating their domestic economy-based growth - - and maybe importing car interior deodorant sticks from Western exporters !

COMPETITION-EXCLUSION
Studies on animal dispersion in relation to social behaviour show for all kinds of species ranging from fish through birds to primates, that beyond certain threshold densities and population numbers social behaviour changes from gregarity and cooperation, to competition and exclusion. This is because survival of the colony or group, or entire species is under threat from depleted ecosystem food and space resource bases. This model increasingly applies to Western-Asian economic cooperation and competition. More basically, when markets can no longer be protected by prices, non-price barriers, appeals to national patriotism or other stratagems the final solution is physical exclusion. One other tactic also exists: plunging the economy into deep recession, strangling consumer purchasing power and necessarily blocking predatory Asian exporters from taking more markets and market share. The Asians have a word for this: hara kiri or kamikaze !

We can logically expect this to start happening - on either side of the equation - with the Asian rivals protected by extreme high domestic economy prices inside Western economies, and massively overvalued Western currencies. Outriders for the process of illusionist "cooperation" turning into outright competition-exclusion will be rising Western calls for China and India to lever up their domestic economies and export less even if they import little from the West, revalue their currencies, and (somehow) consume less oil.

By Andrew McKillop

Contact: xtran9@gmail.com

Former chief policy analyst, Division A Policy, DG XVII Energy, European Commission. Andrew McKillop Biographic Highlights

Andrew McKillop has more than 30 years experience in the energy, economic and finance domains. Trained at London UK’s University College, he has had specially long experience of energy policy, project administration and the development and financing of alternate energy. This included his role of in-house Expert on Policy and Programming at the DG XVII-Energy of the European Commission, Director of Information of the OAPEC technology transfer subsidiary, AREC and researcher for UN agencies including the ILO.

© 2012 Copyright Andrew McKillop - All Rights Reserved Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors.


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