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James Hong

Tuesday, June 08, 2010

Is this the great flattening?

The world is flattening, and what that means is that the people who used to live on the mountains are going to lose their beautiful views while the people living in caves underground are going to finally see daylight. In other words, as the world flattens things will get better for those who were doing worse, and worse for those who were doing better. (In the super long run, technology will still make life better for all, but that is a much longer term trend)

Right now in the West we are seeing austerity packages being announced and horrible unemployment figures coming out while we are simultaneously seeing Chinese wages rising. it occurs to me.. perhaps this is all part of the great flattening. can we use the inevitability of flattening to model what is yet to happen?

Yes, China will get hit by the crisis as well since the West is their major customer, but since their starting point in all of this is pretty low, they will still continue to strengthen in the long run as they educate more of their people and move up the value chain. The great flattening in the long run is a stronger force and tells you the longer term trend.

As value shifts from the rich countries to the poorer countries, we in the west will see general deflation.. It is an inevitability as value shifts from West to East.. however as our government leaders try to fight this we will see them spend more and print ever increasing amounts of currency, ultimately leading to massive inflation. On the other flipside countries like China will see their currencies appreciate, and while that may cause some pain for them in the short to medium term, it will become less and less of an issue to them as their domestic consumption rises to replace dropping western demand for their products. This seems to fit well with the fact that their wages are rising.

The main thing I am wondering is where prices land in the US as you have simultaneous deflation of assets vs. inflation from money print. The conclusion I come to is that prices will not come down too much (in nominal terms) because the government hates deflation (it drops tax revenue) so they will keep things at least flat by printing more money. However, as the world eventually settles down, all the money they printed will lead to massive amounts of inflation. They may be able to soak up some of those dollars to reduce this effect, but that would require raising rates and slowing down growth which would be politically very hard to do. My guess is that politicians always do what get them elected in the short term and they won't do as good a job stopping inflation as they have been in stopping deflation. Net result is I see prices fairly flat until the economy starts to pick up again, at which time we are in for some serious inflation.

Anyway, just a bunch of random thoughts forced together, not sure everything I am saying is correct or even makes sense in any way.

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