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Audio: On Outsourcing, The Economy and the US

If you’ve missed the economic disaster that’s gripped the world over the last few months, you’re probably capable of forgetting to breathe. Then again, if you’ve been following the free fall of the US stock market you’ve probably stopped breathing all together. The economy is on everyone’s mind and a popular blogging subject. As such, I was a little hesitant to write on it. However, I’ve yet to see anyone discuss the big picture and very few American news outlets are taking a realistic look at what’s really going on.

The Global Environment

Simply put, you can’t understand the economy until you understand recent world history. The collapse of the USSR in 1990 set off a series of dramatic changes. With the death of the Soviet Union the US lost its major competitor and the world saw one of its largest and most powerful economies vanish. This provided a fantastic opportunity for the US to solidify its presence on the global stage.

In 1993 the European Union was formed and began to fill the void that the USSR’s collapse had created. By 1999 the Euro was introduced and by 2002 most of the member countries had switched to it as their exclusive currency. As intended, the EU and its currency created a new world economic superpower able to face off with and stand side-by-side with the US dollar. Meanwhile, the widespread adoption of the internet, and decreases in the cost of shipping/phone communication and the like made it economically beneficial to outsource to places like India and China.

Russia’s collapse offered a valuable opportunity for China. By devaluing their currency China was able to establish and maintain itself as one of the world’s greatest exporters – fueling an industrial revolution unlike any the world had seen for over 40 years. With a wealth of natural resources, nearly endless population, and government able to undertake massive/risky projects, China catapulted itself onto the world stage. By the late ’90s China had truly come into its own as an economic power.

A fourth historical factor essential to an understanding of the current economic crisis is the concept of world currency. In 1945 international currencies were pegged to the US dollar which helped secure US dominance and established the dollar as the world currency. With the collapse of the gold standard in 1971 most of the world currencies were un-pegged from the dollar. Despite this, most international transactions were still carried out in dollars due to our position as the world’s economic superpower.

The Power of Currency

As the dollar has been the world’s unofficial currency, the United States has been able to operate as the central economic node through which most international business is carried out. This poured money into the US and helped fuel our economy. The difficult trade off is that it also provided for a strong dollar which slowly made a lot of our industry unprofitable. As a result, our exports began to drop and our imports began to rise. A brutal and difficult transition. These decreases were, however, balanced by the thriving tech industry in the US. Our creativity, drive and forward-reaching thought provided the internet and new technologies which we were able to export and sell while re-tooling our economy to the early stages of the next wave: The digital revolution which replaced the industrial revolution.

As our exports continued to diminish, outsourcing thrived and the debate – which had picked up steam in the early 2000s – eventually came to a head around the time of the last presidential election. Outsourcing became a dirty word, unpatriotic and an affront to the American public. The administration decided something needed to be done to bring American manufacturing jobs back to the US and by George they did it. They began a series of actions which resulted in the gradual suppression of the US dollar. A practice which is similar to what China has done to keep the value of their currency low and exports high. The idea was to de-value the dollar to increase the price of imported goods while creating incentives to fuel American industry. Ironically, this has worked. Companies like Toyota, BMW and others have opened a number of plants in the US over the last year and a half, and industry has poured back into the US. Unfortunately, not as fast as necessary. There are a few catches.

Our standard of life has been based on living in a post-industrial nation. Our consumption rates, wages, etc. are all vastly different than those of the factory worker who fueled America’s 2nd industrial revolution and exponentially different than those of the Indian and Chinese workers fueling their country’s current industrial revolutions. Technology and automation have drastically changed the way manufacturing and assembly jobs are executed, streamlining the process and reducing the demand for manpower.

Unhappily, both of these factors pale in comparison to the real catch. Our role in the global economy. Unlike China, Japan, India, Mexico or any other foreign nation, the US is not truly an independent currency. As the de-facto world currency, the US dollar is the central quay to which all of the world’s other currencies are tied. When we began artificially deflating our currency we began destabilizing the world economy. Instead of offering a quay that the world economies could tie to, we quickly became a lead weight pulling them down. We can’t have it both ways. We can’t be the world’s economic super power/global currency of choice AND at the same time be de-valuing our dollar to drive up exports. This process began destabilizing the world economies and has, in my opinion, resulted in a lot of the credit and economic issues we’re currently facing. It also helps explain why the US is suffering, but stock markets around the world are in equally – if not worse – shape.

The Stock Market & Housing

The common perception and discussion within the US paints the current stock market turmoil and economic trouble as being largely limited to/caused by the US. While it’s obviously hitting us hard and in many ways started with US, it’s not only a US problem. Further, the political dialogue has attempted to imply that the difficulties essentially stem from legislation established to put poor people in houses. Poor people who are now defaulting on their loans and going into foreclosure. While this is, in part, true, it’s a small portion/side effect of the real issue. It’s not the somewhat limited cross section of lower income Americans who were able to realize the American dream by purchasing a home that created the housing bubble.

In reality it is the fault of middle and upper class Americans who took out home equity loans and ARM loans to purchase 2nd and 3rd properties. Properties which were purchased as investments in the rush to cash-in on the soaring real estate market. These were properties purchased with the expectation that they could be re-sold for profit in months or at the most a few years – all this to be done before the ARM’s interest rate kicked in and the price skyrocketed. These are the individuals who threw the dice and took a gamble every bit as risky as any stock market investment … and lost. These are the individuals, many of whom are now faced with paying 2 or 3 mortgages in this bad economy who stand to lose both their speculative investment and their primary home. Many in the the middle class made the mistake. They jumped on the bandwagon and now we’re paying the price.

Back to Currency

I talked earlier about how suppressing the dollar doesn’t make sense/work. Consider that since July the Dollar has turned around its downward march and rebounded forcefully. To illustrate this point, consider the gains made by the dollar against the following international currencies:

July: 1.04 October: 1.44 – Australian dollars 28%

July: .63 October: .73 – Euros 16%

July: .50 October: .57 – British Pound 14%

July: 1048 October: 1390 – South Korea Won 33%

July: 79 October: 110 – Icelandic Krona 39%

July: 1.49 October: 1.79 – Fijian Dollar 20%

July: 10 October: 12 – Mexican Peso 20%

July: 1.59 October: 2.36 – Brazilian Real 48%

July: 1.01 October: 1.12 – Canadian Dollar 11%

July: 516 October: 611 – Chilean Peso 18%

July: 1924 October: 2281 – Colombian Peso 19%

July: 149 October: 187 – Hungarian Florin 26%

July: 1.31 October: 1.67 – New Zealand Dollar 27%

July: 5.07 October: 6.12 – Norwegian Kroner 21%

*Credit goes to Cody Paris for pulling this data/doing the calculations.

So, the question begs – what’s the macro message we should take away from this? In the modern global economy nothing is quite what it seams. For my part, I’ll be watching the international markets every bit as closely as I watch the markets here in the states.

As always, I value your thoughts and feedback! Please, keep in mind that these thoughts are a summary of my observations and nothing more. I’m not an economist – only a curious mind trying to make sense of things.