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Why The Surprise At Slowing Trade?

August 3, 2015
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By: Charles Gave of GaveKal Research – Reprinted with Permission

I am afraid I am rapidly turning into Gavekal’s resident bear—asleep half the time, grumpy the rest. In particular, I am amazed how some people have suddenly discovered that world trade is going nowhere, and that they are so bamboozled by this strange pattern. Where exactly have they been for the last 15 years?

• The US Federal Reserve has been following a policy of negative real interest rates—pursuing the “euthanasia of the rentier”—for longer now than the duration of World War II. And the results are visible for all to see: there has been a near-negligible increase in GDP per capita; the Gini coefficient has gone through the roof, and the labor force participation rate has slumped to a 30 year low. As a secondary benefit, the ultra-low rates implemented by this noble institution led to a false price for the US dollar, and from there to massive misallocations of capital all over the world. These misallocations helped artificially to inflate exchange rate valuations for many emerging markets, undermining their export sectors and leading to subsequent currency collapses.

• The European Union managed to build a monetary system which rewarded member economies that followed mercantilist policies at the expense of the rest of the currency zone. Consequently, since 2000 Europe has “lost” half of its potential demand for imports. Meanwhile the other half is increasingly aged and has started to retire in droves, reducing consumer demand.

• Japan, which ever since 1992 has faithfully followed a policy of low rates and increased government spending in order to “stimulate growth”, found it had reached a dead end (why am I not surprised?) and had no choice but to take the competitive devaluation route, which—as everyone acknowledges—was such a roaring success in the 1930s.

• All these developments have hit a world in which China has now more or less reached the end of its infrastructure build-out, a completion which of course marked the end of the (not so long) commodity “super cycle”. From now on China will sell less abroad, which is fine, but in all likelihood it will buy a lot less from abroad too (think fewer German and Japanese machine tools).

To summarize: For years governments around the world have been suppressing interest rates, manipulating exchange rates, adding to regulation, increasing taxation and jacking up government spending. And suddenly everybody is surprised that economic growth is going nowhere and that world trade is disappointing? As the Bible tells us: “Be not deceived; God is not mocked: for whatsoever a man soweth, that shall he also reap”.

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