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Thread: weekend commentary - 'American Consumers are losing their Crown'

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    Default weekend commentary - 'American Consumers are losing their Crown'

    the world of financials looks entirely different if one takes a step back and stops viewing incomes / costs from a US dollar centric point of view !!!!



    (snip)"For years America has convinced the emerging market countries that their prosperity is a function of our consumption. It is argued that their export oriented economies would falter if not for the insatiable American willingness to consume (a “virtue” that is assumed to be uniquely American). As the dollar falls into the abyss, this myth will be shattered.

    My forecast is that over the next two to three years the U.S. Dollar index will fall to 40; half of its current value. As this happens, much of America’s economic power will be transferred abroad. The chart below approximates current per capita U.S. dollar GDP for thirty nations, including the United States, listed in descending order.

    Luxembourg 91,926.63

    Norway 76,447.78

    Ireland 57,163.07

    Switzerland 54,466.77

    Iceland 53,532.47

    United States 46,085.15

    Sweden 44,454.36

    Netherlands 42,762.96

    United Kingdom 41,959.85

    Canada 41,347.87

    Australia 37,981.52

    France 37,416.55

    Germany 36,779.14

    United Arab Emirates 36,180.87

    Japan 36,021.22

    Singapore 32,082.02

    Spain 31,726.55

    New Zealand 24,511.95

    Greece 24,030.41

    Israel 20,510.55

    Portugal 19,287.51

    Saudi Arabia 16,612.16

    Poland 9,214.27

    Chile 8,335.70

    Russia 8,183.02

    Mexico 7,755.69

    Argentina 6,548.80

    Venezuela 6,393.99

    Brazil 5,518.21

    Peru 3,328.55

    A 50% decline in the value of the dollar will simultaneously increase interest rates, consumer prices and unemployment in the United States, while causing stock and real estate prices to fall. Consumption, which accounts for better than 70% of U.S. GDP, should collapse as a result, producing a significant recession. My forecast is that U.S. GDP will contract by at least 20%. (The Fed may seek to mitigate the nominal decline with expansive monetary policy, but such moves will only result in an even greater contraction in real GDP.)

    Assuming a 50% decline in the value of the dollar and a 20% fall in U.S. GDP, the above chart would look something like this:

    Luxembourg 183,853.25

    Norway 152,895.56

    Ireland 114,326.14

    Switzerland 108,933.54

    Iceland 107,064.94

    Sweden 88,908.73

    Netherlands 85,525.93

    United Kingdom 83,919.70

    Canada 82,695.74

    Australia 75,963.04

    France 74,833.10

    Germany 73,558.27

    United Arab Emirates 72,361.73

    Japan 72,042.44

    Singapore 64,164.05

    Spain 63,453.11

    New Zealand 49,023.91

    Greece 48,060.83

    Israel 41,021.10

    Portugal 38,575.02

    United States 36,868.12

    Saudi Arabia 33,224.32

    Chile 16,671.40

    Russia 16,366.03

    Mexico 15,511.38

    Argentina 13,097.61

    Venezuela 12,787.97

    Brazil 11,036.41

    Peru 6,657.09

    Obviously, these projections are very rough. Not all foreign currencies will rise in step and not all foreign GDPs will remain constant at today’s levels in local currencies. However it is the concept that is important. Notice how America falls from 6th place to 21st. America’s per capita GDP falls from 58% of Luxemburg’s, the top nation on the list, to a mere 20%. America’s per capita GDP falls from 14 times that of Peru, the lowest nation on the list, to only 5.6 times."(snip)

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    Default Re: weekend commentary - 'American Consumers are losing their Crown'

    Wouldn't a decline in the value of the U.S. dollar decrease unemployment since it would make U.S. labor and products cheaper?

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    Default Re: weekend commentary - 'American Consumers are losing their Crown'

    ^^^ in theory, yes it would. However, in today's global economy, there are two problems that shoot this theory in the foot. #1 is that even if the US dollar declined 50% in exchange rate making US dollar denominated labor rates appear 1/2 as expensive to Europeans, Japanese, Canadians etc. the labor rates available in Mexico, China and other Asian countries are still far lower ... and that difference doesn't reflect the US costs of environmental compliance and worker safety compliance, mandatory worker benefits, retirement benefits etc. which don't exist in Mexico, China etc.

    #2 is that many US industries that formerly exported products have now been permanently shut down, with the business being conceded to offshore competitors or outsourced to low cost foreign producers or replaced by US owned production facilities in those low cost foreign countries. It would be extremely cost ineffective to attempt to restart these industries, given that construction costs would rise by the same amount that the US dollar falls (i.e. concrete / lumber / steel / copper etc. are world priced commodities), given the necessity of complying with current vs grandfathered environmental standards, etc.

    So yes certain companies like Caterpillar or Proctor & Gamble or Coca-Cola who have maintained and operated US facilities making products for export the entire time would probably add jobs. But there is little chance that companies like Levi Strauss or Amana or Black & Decker would attempt to resurrect closed down US manufacturing facilities as these would still be more expensive than continuing to source from Mexico or Asia even with the US dollar falling to 'half the price'.

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    Default Re: weekend commentary - 'American Consumers are losing their Crown'

    And more fundamentally, why build in countries that are no longer a relevant part of the marketplace? If one can build production facilities - whether material or intellectual in nature - for nearly the same price or cheaper in countries with a purchasing market - why wouldn't one?

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    Default Re: weekend commentary - 'American Consumers are losing their Crown'

    ^^^ yes, exactly. Increasingly, for companies that produce a product that isn't directly for sale to the general public, but which instead is a component of some other larger product (i.e. auto parts, computer chips, appliance parts), the manufacturing facilities which assemble those components into complete cars, computers, or appliances are located in low labor / regulatory cost countries like Mexico, India, Eastern Europe or China. Continuing to manufacture components in the USA and then shipping them a long distance to these assembly facilities only ADDS to the already higher production cost.

    Also agreed that, increasingly, it is newly 'affluent' consumers in Mexico, China, India, Eastern Europe etc. that are the target market for exported products. Thus a US company stands to achieve a much higher profit margin by simply setting up a facility right next to those Chinese, Indian and Eastern European customers. Not only does this cut out shipping costs, but it also cuts out US regulatory compliance costs, US labor rates, US mandatory employee benefit costs, and some measure of US corporate taxes.

    A 'bridge was burned' some 10 years ago when the rising US regulatory costs, rising US labor costs, rising US mandatory benefit costs, rising US state and local taxes etc. pushed US corporations to seriously consider changing their business paradigm. It was at that point that many many corporation boards of directors decided that the financial incentive was definitely strong enough to be worth risking investing in / outsourcing from foreign countries where the costs of doing business were far lower than in the USA. Prior to that time, fears involving language, instability of foreign govt's, worker quality / productivity, different business vs gov't business rules etc. basically prevented corporations from taking the 'big risk' of staking their future on operations in foreign countries. However, from that time forward, the financial incentives just became too strong.

    What most Americans don't realize is that while these fundamental corporate decisions were made some 5-10 years ago, it took many years to draw up plans for new offshore facilities and/or sources, it took many years to figure out effective business models and effective operations under different gov't vs business rules etc. As a result it has only been within the last 2-3-5 years that the offshore facilities and/or sources have finally 'come online' and proven themselves reliable to the point where those corporate decisionmakers felt comfortable pulling the plug on their US manufacturing / service operations. Even if there were some huge and overriding reason to re-establish those US based manufacturing / service operations (which there isn't), it would take just as many years between the time such a decision was made and the time it translated into working facilities / additional jobs in the USA.
    Last edited by Melonie; 09-17-2007 at 03:05 PM.

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