Earlier, Spiegel reported that Chinese car maker, Great Wall, has opened its car factory in Bulgaria.
Economically, it has two significant implications, and a much bigger issue behind it that I would like to share with readers here.
First is the economy of China. Of course there must be many reasons why Great Wall decided to make cars in EU instead of in China. But I think a very probable reason is to reduce cost. We all heard about rising production cost in China, but we just don't know the degree of it. Great Wall just told us. If the cost of making cars in China is at a level comparable to an EU country, does it imply that China's edge of providing cheap labour over the last 20 years is no longer there? What's left to drive the economy now? Technology? Resources? Consumption? It seems that China has hit a wall.
The second is inflation. Back on 21 November 21, 2002, Ben Bernanke made the following statement*:
" The US government has a technology ,called a printing press (or today, its electronic equivalent), that allows it to produce as many US dollars as it wishes at essentially no cost. By increasing the number of US dollars in circulation, or even by credibly threatening to do so, the US government can also reduce the value of a dollar in terms of goods and services, which is equivalent to raising the prices in dollars of those goods and services. We concluded that, under a paper-money system, a determined government can always generate higher spending and hence positive inflation. "
Under this paper-money system (i.e. the money is not backed by commodities like gold or silver), The US has been printing money in the form of US federal debts since 1971, when the US dollar was unpegged to gold in 1971 out of necessity by Nixon to fund the war in Vietnam. But we have not had runaway inflation that history – Germany in the 1920s comes to mind, has repeatedly shown. Why?
I remember Alan Greenspan said that one of the reasons that world inflation was 'not severe' for the past 20 years was due to the cheap labour and goods provided from emerging markets like China and India. And he briefed this in his Monetary Policy Report to the Congress on 16 February, 2005.
Now, if the cost of making cars in Bulgaria is at a level comparable to China, what is the implication to inflation worldwide?
Earlier I mentioned that the US has been printing money. So, just how much money has been printed? One major indicator is the federal debt held by foreign investors of the US. If you look at the data from the Federal Reserve Bank of St. Louis, federal debt of US held by foreign and international investors increased from US 12.4 billion in 1970 to US 4,660 billion, an increase of nearly 400 times.
And the US has actually been printing money in economic downturn since well before the establishment of the Federal Reserve. But we shall skip the history today, and just focus at the rate of increase from 2007 onward. From 1970, it took the US about 37 years to expand its debt to foreigners from US 12.4 billion to the range of US 2,300 billion in 2007. But right after 2007, it only took them 5 years, yes, 5 years, to add another US 2,300 billion. This rate of increase is scary.
With China now having troubles to provide cheap goods and labour, and the US increasing its rate of money printing, when will runaway inflation come to haunt us as history has repeatedly shown? Now there is an argument that we will have deflation instead , due to the balance sheet recession of the developed world that Richard Koo of Nomura has been explaining for the last few years. But re-read the statement made by Bernanke above:
"The US government has a technology , called a printing press (or today, its electronic equivalent), that allows it to produce as many US dollars as it wishes at essentially no cost. "
He is Helicopter Ben after all. And remember, he has vowed not to allow deflation to happen again. That's his took from the 1929 Depression. (According to Austrian economists, he is wrong on this, but that's another topic.)
When a nation starts diluting its currency, using the printing press as in the case of the US, it is actually the beginning of this currency's destruction. And diluting never end up nicely but nasty. Runaway inflation and the down fall of the US dollar is just right at the door step. Exactly when will this happen? I have no idea. We'll find out, very soon.
*Remarks by Ben Bernanke before the National Economists Club, Washington, D.C., November 21, 2002
(Published on vjmedia.com.hk)