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Weak links in the circle of imbalance

China’s inefficient economy is under threat because its capital costs are set to rise, but it is as likely to falter because US consumerism hits the wall. And there are signs that American profligacy cannot be sustained much longer

The financial world is locked into a circle of imbalance. It is imbalanced because the US is booming while running a huge external deficit. Meanwhile, Europe and Japan struggle and run external surpluses; Asia and the Opec members boom by selling to the US. It’s a circle because Japan and Asia and Opec recycle their surpluses back into dollars. And thus the financial world goes round – after a fashion.

So, despite relatively modest growth in the OECD, the share of profits is at or near its historical peak and the cost of capital is near historical lows.

All this is made possible because China and other emerging markets hold down global labour rates as effectively as their own through the threat and reality of job losses in areas where labour costs are high.

World inflation

China is keeping world inflation down because it is not a profit maximizer – the result of its long history as a centrally planned economy. Its economic model is characterized by maximizing volume and size at low margins. China is also able to underpay its workers because its labour supply is so large. And capital is underpriced in China because it is still directed by the state towards huge investment projects of doubtful economic viability.

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