EKIP– Expert Club for Economics and Politics A Different Opinion
Marc Faber has always been skeptical about the West's ability to successfully address the economic and social problems it faces. This is largely due to his belief that the monetary and fiscal policies pursued by central banks and governments in the "Old World" cannot or simply will not be revised.
In the coming weeks, we will present you with selected charts from the presentation that Mark Faber gave on November 12, 2012 in Hong Kong to the London Bullion Market Association . The charts are accompanied by a short commentary by Yavor Alexiev. Faber's full presentation, consisting of 50 slides, is available here .
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Marc Faber has always been skeptical about the West's ability to successfully address the economic and social problems it faces. This is largely due to his belief that the monetary and fiscal policies pursued by central banks and governments in the "Old World" cannot or simply will not be revised. At least not without leading to a collapse in the standard and lifestyle of citizens of Western European countries, the United States and Japan. This is something that societies themselves do not want to realize and will not voluntarily allow to happen. In other words, central banks will continue to provide unlimited liquidity to the enormously expanded financial system, devaluing the world's leading currencies in the process. The achievable goals of such policies are limited to the possibility of at least temporarily postponing the inevitable collapse of debt-ridden financial institutions, governments, businesses and households.
Faber's presentation is extremely extensive and focuses in detail on many of the factors that determined the development of the world economy in the years before and during the crisis. Leading among them is the shift of "economic power" from the countries of the "Old World" to emerging markets - Marc Faber's "New World". In the first article in the series, we will look at several graphs that show the nature, intensity and depth of this process.
Chart 1: Share of G7 countries in world exports (March 1995-March 2012)
When it was created in 1975, the group of the most developed economies consisted of 6 countries - France, West Germany (until 1991), Italy, Japan, the United Kingdom and the United States. Canada joined in 1976 and Russia in 1997, which is why the graph presented does not include Russian exports.
However, since 2000, there has been a clear shift in industrial activity (and therefore export capacity) from developed to emerging markets. The pace at which this is happening is a consequence of both the rapid economic development of countries such as China and India, and the parallel decline in industrial activity in the G7 countries and their restructuring into service-based economies. The intensification of trade between the BRICS countries (Brazil, Russia, India, China and South Africa) in recent years suggests that this ratio will at least be maintained, if not increased, in the future. The significance of the numerous bilateral trade agreements [1] on which this cooperation is based continues to be overlooked by some Western analysts. At the same time, their further spread and deepening have a real effect on international trade.
Chart 2: Main destinations of Chinese and Korean exports, % (2002-2012)
The trend of strengthening trade relations between developing countries is also evident in Chart 2, which shows the main destinations of Chinese exports. In the period 2010-2012, the share of exports to raw material exporting countries (which includes Canada, Australia, Latin America, the Middle East and Russia) exceeded that to both the EU and the US for the first time. Of course, the European and US markets remain the main destinations for Chinese exports. It is evident, however, that the expansion of the share of trade with the EU is rather at the expense of that with the US (an increase and a corresponding decrease of about 2 percentage points in the period 2002-2012). At the same time, the growth of exports to raw material exporting countries is over 7 percentage points for this period. The situation is similar with South Korean exports, where the trend is even more pronounced.
Chart 3: Average annual demand for crude oil, million barrels per day (May 1987 – May 1912)
The intensive economic growth of developing countries and the strengthening of industrial production in many of them leads to an increase in the demand for crude oil. In 2012, China's imports of oil and petroleum products reached 10.3% of world imports, compared to levels of only 2-3% at the beginning of the 21st century. Conversely, the countries of the "Old World" (the USA, Central Europe and Japan) are reorienting their economies towards the service sector, which, combined with low industrial activity, unfavorable demographic trends and the pursuit of energy efficiency, leads to a decrease in the demand for crude oil.
In 2012, China was also the leading consumer of a number of other raw materials, including cement (53.2%), iron ore (47.7%), coal (46.9%), steel (45.4%), lead (44.6%), zinc (41.3%), aluminum (40.6%), etc. Many of the latter are related to the construction boom in the country and the accompanying huge and often senseless infrastructure projects. As Faber himself points out - the consumption of raw materials cannot grow forever. A good example in this regard is the consumption of crude oil in South Korea, which increased from 0.6 to 2.3 million barrels per day over a period of 10 years (1987-1997), after which it stopped rising. Faber believes that the Chinese economy has not yet achieved such an equilibrium, which is why the country will continue to experience an increasing need for oil imports in the future. One thing that could reverse this trend is the country’s economic slowdown due to falling demand in the “Old World” countries. Other possible reasons, of course, lie in the structure and instability of the Chinese economy itself, both due to its planned nature and the excessive (and largely Beijing-directed) credit boom of the past few years.
Geopolitical consequences of the birth of the “New World”
According to Faber, the concentration of global economic activity in the “New World” and the inability of the “Old World” to cope with the crisis create the prerequisites for an escalation of economic and geopolitical tension. One of the reasons is that the aggressive monetary policies of central banks, and especially the US Federal Reserve, have a strong negative impact on emerging markets, mainly through the petrodollar standard and the opportunities for currency and interest rate arbitrage that they create. [2]
In addition, the traditional attempts of the United States to establish geopolitical control over the Middle East are seen by Beijing as an indirect threat to the security of Chinese oil imports, due to the importance of supplies from Saudi Arabia and Iran. This is one of the factors that necessitated the deepening of energy and trade relations between China and Russia in the past few years. The securing of the supply corridors in the Indian Ocean itself, through which over 80% of China's oil imports and about 60% of all exports of the country pass, is also seen as an equally important problem.
These are, of course, only some of the factors that require the expansion of cooperation between the BRICS countries, which are the main players in Faber's "New World". The economic and demographic power of these countries, as well as their mutual benefit from defending certain common economic and geopolitical interests, is a factor that cannot be ignored by the rest of the world. The shift of "economic power" from the "Old World" to developing countries in itself implies the emergence of a new type of international diplomacy, reflecting the new realities in a world that we may increasingly call "bipolar".
[1] These agreements are based on attempts to circumvent the dollar in trade between the parties to them. In the long run, this can lead to a decline in the demand for dollars and, consequently, to a further depreciation of the US currency.
[2] In search of higher yields, some of the newly created money from the Federal Reserve's quantitative easing is being directed to emerging markets, where deposit rates are significantly higher than in the United States and expectations for returns are better . The phenomenon, known as "hot money", causes local currencies to appreciate against the dollar, which leads to a decrease in the competitiveness of many emerging economies, whose development is strongly dependent on the volume of their exports. In this way, central banks in emerging countries are forced to lower their key interest rates in order to maintain the volume of exports, which leads to additional inflationary pressure. (See Yavor Aleksiev, "Quantitative Easing 3.0 - Solution or Problem?", Zlaten Vestnik, October 2012 )
