Decoupling

This article from Bloomberg prompted me to tirade against the pop econ notion of "decoupling." As the article points out, Asian financial markets have never been more tied to American markets. Rather than decoupling, Asian markets are more closely tied to American and European demand and economies than ever before. As the article quotes Citigroup's Markus Rosgen " 'The ratio of consumption in Asian nations' gross domestic product,' he says, 'has declined over the last five years.' " This is absolute proof, in my opinion, that Asia is more dependent on Western demand than ever before in history. In fact, I expect that when the U.S. plunges into recession in the first quarter of next year, the rest of the world will not be more than six months behind. Not only that, but I think they will fall harder as well.

It may look like we have a bigger problem with our trade deficit. However, what is not often considered is what the nature of our imports and exports is. China imports raw materials and exports manufactured (mostly) low-tech goods. America imports cheap manufacturing and exports technology, pharmaceuticals, software, high tech manufacturing assembly, and food. When it comes right down to it, we can feed ourselves, and China can't. The Soviet Union started to fall from the moment it couldn't feed itself. I believe that China is dependent on us to feed them. As long as this remains the case, there will be no decoupling. We can do without the cheap goods from China. If our economy goes south, we can call capital back home by placing tariffs on imports and creating jobs at home. If we stop buying Chinese products, what will they do? They can't lower their prices enough to generate their own demand. They will be forced to revalue their currency upwards to afford imports of necessities (like food) which will further pressure their manufacturing industry just when it's under pressure from slackening demand. This is not a good combination. Sometime towards the end of next year, their whole economy will be exposed as just as much a bubble (and just as fake) an industry as housing was in America. Here's my prediction: sometime between now and the middle of 2009, the Shanghai Index will rewind its value to what it was five years ago. FXI will drop to about $60 (from a high of $220). Time to keep watching those FXI puts.