If one looks into the abyss of conspiracy theory, the "New World Order" refers to one-world government, but as far as economics is concerned, it's a reshuffle of economic power. Certainly we've heard that China will surpass the U.S.A. in GDP terms, but the accomplishment is not very tantalizing because all it takes is for the 1.3 billion Chinese citizens to become just a little wealthier. Then again, and using the simplistic formula, Sri Lanka will surpass Switzerland in due time. But there are political consequences that the Chinese government is not willing to accept, and I've covered the subject extensively. The latest broad economic warning came from "a small island linked to the Pacific port of Vladivostok" in Russia.
"It's important to build bridges, not walls. We must continue striving for greater integration," Putin told APEC leaders seated at a round table in a room with a view of the $1 billion cable-stayed bridge, the largest of its kind. "The global economic recovery is faltering. We can overcome the negative trends only by increasing the volume of trade in goods and services and enhancing the flow of capital." China's Hu told business leaders before the summit the world economy was being hampered by "destabilizing factors and uncertainties" and the crisis that hit in 2008-09 was far from over. Beijing would play its role, he said, in strengthening the recovery.
Ah, the endless love for the export model that shall resolve all ills, yet there's no mention of what actually propelled the BRICs to a higher economic level: Western job outsourcing and consumption. Yes, we can get lost with foggy details while examining every facet of capital flows, industrial production, and end user consumption, and the arguments can be fiercely made to support every opinion, feeding into an infinite discussion. On the other hand, we can take that proverbial step back and look at the forest in lieu of the trees, and the macro economic mechanism is well defined.
Less than one year ago, Jim O'Neil, Managing Director at Goldman Sachs and the individual that coined the term "BRIC," offered his opinion in an article that he wrote for The Telegraph. It just occurred to me that Australia was never included and the country had an impressive run, with GDP more than tripling since 2000.
Investors need to grasp the opportunities afforded by rapid growth in Brazil, Russia, India and China, says economist Jim O'Neill in the second extract from his new book 'The Growth Map: Economic Opportunity in the BRICs and Beyond'
Since then the reports covering everything from manufacturing contraction to lower interest rates throughout the BRIC world in an attempt to avoid the inevitable, have sufficed to paint a picture that depicts an increasing frustration with declining growth. Thus, in the spirit of simplicity, I created the graphic below to save a few thousand words.
Until the formula is changed and the blue and red circles become green, all the talk in the world about emerging and new economic powerhouses is meaningless. However, the red circles are in a better economic position because while wage increases in the blue circles erase the economic benefit of outsourcing, raw materials can be redirected to other markets. The consumer market is the definition of an economic powerhouse, and the country must be self-sufficient from a domestic consumption perspective, while not relying on the export model, otherwise Japan would be out of the woods by now. Although the focus in China, for example, has been directed to stimulate the domestic consumer, or so we're told, it cannot be done with a simple flip of a switch.
Yes, we can refer to the "China Miracle" but here's a picture - U.S. Trade Balance 1992-Present -- that needs no explanation and allows us to see the wizard behind the curtain. I still remember the outrage that many expressed when the U.S trade deficit continued to catapult forward during the 1990s, while the "strong dollar policy" provided the fuel.
The recent rant by Brazil's finance minister over QE3 provides plenty of truth, especially the last paragraph, although the underlying message wasn't as apparent.
Guido Mantega, Brazil's finance minister, has warned that the US Federal Reserve's "protectionist" move to roll out more quantitative easing will reignite the currency wars with potentially drastic consequences for the rest of the world. "It has to be understood that there are consequences," Mr Mantega told the Financial Times in an interview on Thursday. The Fed's QE3 programme would "only have a marginal benefit [in the US] as there is already no lack of liquidity... and that liquidity is not going into production."
As yet another example of the dire conditions in the BRIC world, India "faces the prospect of being the first BRICS country to lose its investment-grade credit rating," although one can look at the glass half-full because "at 16 percent of GDP, Moody's Investors Services says India's total private-sector external debt is 'relatively low'." But it is not so much "what is," but rather "what will be," and that is what the markets are stating.
Credit default swaps suggest India is already a bigger investment risk than emerging markets such as Vietnam and more than double the risk of fellow BRICS Brazil, Russia, China, and South Africa.
As I pointed out that a Bull Market Is Bernanke's Only Focus And Last Tool, while there's no protectionism only because exports are not America's bread and butter, Mantega's focus is on exports because Brazil is not self sufficient from a domestic consumption perspective. While plenty of BRIC chest thumping was taking place just a few years ago, the reality of a global economic blueprint that cannot be dismissed or easily modified will continue to hinder economic growth and further undermine and discredit opinions that a new world economic order is afoot.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.