weekend commentary - And They Say There's No Inflation
view from a 'global' businessman ... from
(snip)"One the more interesting investments I’ve made over the last few years was buying a sizeable chunk of a successful baby products company; our products sell around the world and in top retailers like Target, Babies R Us, Bed Bath and Beyond, etc.
The managing partner forwarded me a letter yesterday from one of our international manufacturing agents; the letter explained that, over the last two years, prices have risen substantially in the developing world where many of our products are manufactured.
China, for example, has seen wage increases of 44.6% since 2010. Vietnam 39.1%. The polyethylene resin that we use has gone up in price 40.3%. Naturally, the rise in oil prices has also increased transportation costs substantially as well.
The letter pummeled us with this data about rising wages and input costs, and then followed it up with a polite assertion that they would be increasing their prices as a result.
It reminded me of the notices I get every year from my health insurance company– they usually start out with something like “Due to the continually rising cost of health insurance…” punctuated with a price increase on the order of about 20%.
And they say there’s no inflation.
This is a direct consequence of the rapid expansion of the money supply. When you print trillions of dollars, euros, renminbi, etc., there are consequences… namely, rising prices.
At first, it’s the developing world that suffers the most. Central bankers in countries where the entire economy is based on cheap manufacturing feverishly expand their own money supplies in an effort to keep pace with the dollar and euro. If they don’t, the fear is that their currencies will rise, killing the manufacturing industry.
Since these countries have tiny bond markets and lack reserve currency status, all the new money they print goes straight into the local economy. This pushes prices up.
At first, it’s usually raw materials, intermediate goods, and staple commodities. I remember being in Sri Lanka last year where the price of turnips had recently gone up nearly 40%, and people were demanding higher wages.
As wages in the developing world rise, it eats into the manufacturer’s profit margins. Eventually, the manufacturers capitulate and pass the inflation back to their customers in the developed world.
You can probably guess that, since we’re now paying more to have our products manufactured, we have to raise prices for our retailers and end users.
It takes a while for all of this money to make its way through the system… but rest assured, it does come home to roost. No doubt, inflation is very much with us."(snip)
Author Simon Black's point, of course, is that US retail prices for lowest cost imported items which one half of America arguably depends on to maintain their current standard of living, are now coming under intolerable 'margin compression'. On top of rising costs for the globally priced commodities used to manufacture these imported products, and on top of rising trans-oceanic shipping costs being directly driven by rising oil / fuel prices, labor rates for the Asian workers responsible for making these imported products have risen significantly as well. This is now creating a situation where the low cost Asian manufacturers cannot survive economically without passing on their higher costs to American consumers.
The likely near future result will be 'sticker shock' at WalMart, Dollar General, etc. as the prices for lowest cost option necessities like food and clothing increase significantly. Obviously, those Americans who will 'feel' this the most are those with lower incomes, those who are unemployed, etc. With fuel costs already at very high levels, it remains to be seen how those lower income and unemployed Americans will react when the price they must pay for food, clothing and other necessities suddenly increases significantly ( the author mentioned a 20% figure ).
From a more analytical viewpoint, the Author is pointing out that US FED money printing policy conducted in earnest over the past several years was able to delay the onset of US price inflation simply because a significant percentage of the products consumed by Americans are no longer produced in America ! As a result, those newly printed US dollars essentially caused inflation to occur in the foreign countries that now produce those products instead of immediately causing US inflation as has been the case in the past. Over the past year or two, that FED money printing induced matching money printing by foreign countries first resulted in local price inflation, then local wage rate inflation ... which in combination with US FED money printing induced price increases for global commodities has now placed foreign suppliers in a situation where they cannot survive economically without passing on a price increase to the US consumers of their products.
With US price inflation for lowest cost option imported 'necessities' now starting to manifest itself, the next historically based reaction would be for the affected Americans to start demanding wage increases, benefit increases etc. to compensate for the rising prices, thus allowing them to maintain their former standard of living. Arguably, there is no way this is going to happen this time, given the present unemployment rate and the present US federal and state budget deficits !!!
Re: weekend commentary - And They Say There's No Inflation
I would temper this by saying there's a lot of "fat" we can cut from our budgets. If all the Starbucks were closed, if people didn't waste money on everything from recreational driving to going out, if all we spent on now were basics, it might be a probem (yes, I know it's a problem for poor cournties where this is truer), but there's a lot of leeway.
Yes, there will be inflation, just like in the late 1970s, but yes, we will also survive it, just like we did in the 1980s.
Warren Buffet said that we'd always have currency to exchange for labor, even if it might change one day. If he's not concerned, given that a collapsing economy would hurt him the most (class warfare), I'm not willing to panic just yet, but I will raise an eyebrow and watch more closely.
Re: weekend commentary - And They Say There's No Inflation
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Originally Posted by
Melonie
China, for example, has seen wage increases of 44.6% since 2010. Vietnam 39.1%.
Quote:
Originally Posted by
Melonie
At first, it’s the developing world that suffers the most.
I don't think I even need to comment on these two quotes.
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Originally Posted by
Melonie
As wages in the developing world rise, it eats into the manufacturer’s profit margins.
It's just so horrible that billionaire CEO's are seeing their profit margins decreasing so that their sweatshop workers can make enough money to be able to eat decent meals.
Re: weekend commentary - And They Say There's No Inflation
Quote:
Originally Posted by
eagle2
I don't think I even need to comment on these two quotes.
It's just so horrible that billionaire CEO's are seeing their profit margins decreasing so that their sweatshop workers can make enough money to be able to eat decent meals.
This is why, despite leaning conservative, I refuse to support cutting social spending. If companies want to hoard money, let them, but also let them pay for all the benefits that result from their stinginess. Maybe one day the lightbulb will go off and they'll realize that hiring people is a good thing, that spreading the wealth benefits rich and poor alike, and....okay, it'll never happen but maybe we can nudge them in that direction.
What's funny is that it is almost as if no one could foresee that the workers in these developing nations would want living wages, and that the temporary advantages gained by outsourcing would vanish.
In his opposition to NAFTA, Perot noted that at some point in the then-distant future, we would benfit from outsourcing, because eventually we would get a global middle class that would send money and jobs back here, but he also said that this was not something America should have to suffer for to make happen (or something to that effect). It's possible we are at the very beginning of a much longer-term trend that will shed an incredibly different light on the "crisis" we are experiencing today. I think of it more as a financial earthquake, myself.
Re: weekend commentary - And They Say There's No Inflation
Quote:
It's just so horrible that billionaire CEO's are seeing their profit margins decreasing so that their sweatshop workers can make enough money to be able to eat decent meals
I-Phone and I-Pad buyers certainly don't seem to mind !!! And Apple CEO's simply raise the US retail price of new offerings to compensate for the increased costs passed on to them by FoxConn
Quote:
it is almost as if no one could foresee that the workers in these developing nations would want living wages, and that the temporary advantages gained by outsourcing would vanish.
In his opposition to NAFTA, Perot noted that at some point in the then-distant future, we would benfit from outsourcing, because eventually we would get a global middle class that would send money and jobs back here
Basically, this is the Author's veiled point behind both this posting and other Dollar Den postings. By Perot's theory, eventually the standard of living = wages and benefits versus 'living costs' of semi-skilled Asian workers will rise, and the standard of living = wages and benefits versus 'living costs' of semi-skilled American workers will fall, to the point where the net cost differential ( net of shipping costs, currency risk costs etc. ) declines sufficiently to again make American industries competitive on a global basis. This is arguably already true for Western Europe versus the US ( at least non-unionized US ), as evidenced by the proliferation of European auto assembly in southeastern US states.
But a future US 'middle class' based on a $25 an hour income level ( typical of non-unionized US ) = $ 50,000 per year before taxes will not have the same standard of living as the 'middle class' of the recent past. Or stated another way, non-union US workers earning $1000 pre-tax = $ 650 after tax per week are NOT going to be in a position to spend $200 of that $650 in strip clubs !!! And this will be increasingly the case as the $650 faces downward pressure due to potentially rising taxes, while at the same time the prices of necessary items from gasoline to food to health care to 'lowest cost option' imported items are increasing by double digits.