“How the Global Boom Might End” is the title of a Sean Corrigan essay just out from Mises Institute. Corrigan’s think-pieces are always enlightening, and although this one gets the point across, I found it very heavy going. Moreover, he reveals a degree of optimism about the global economy that is arguably unwarranted. Some readers might have inferred as much from the article’s title, which could be taken to imply that the boom might not end. We of course differ sharply, having have taken pains to explain not only why we are unlikely to see another boom like the one just ended, but why this downturn is leading toward economic catastrophe.

Toward the end of his essay, Corrigan sounds an optimistic note about Asia’s role in the next boom cycle:  “It would take a very severe train of events, rich in protracted and perverse political stupidity, to induce the new Asian city-dweller to hand in the keys of his well-equipped apartment; to leave his shiny new car undisturbed in its parking place; and to pack all his movable possessions back onto a hand cart, ready for the long-weary trundle back to the communal farm and out of modernity.”

Middle Class Zeal

Just so. We do not think the author has misjudged the zeal of China’s emerging middle class for ascending the ladder to greater prosperity. We also agree that it would not be possible to reverse the vast migration that has occurred from China’s rural hinterlands to urban centers and burgeoning factory towns. But where Corrigan sees these as positive factors, we see them as powerful catalysts for a by-now-unavoidable global deflationary bust.

Consider what would happen if the U.S were to slip deeper into recession, as seems likely. America’s demand for foreign goods would plunge, resulting, as it always has, in layoffs at the factories of our major foreign trading partners. However, unlike Europe, Canada and Japan, China has not established an elaborate system of safety nets to cushion against hard times, nor, as far as we are aware, does it have a plan for dealing with excess capacity in times of  sharply falling global demand. Would the ruling elite send factory workers back to their farms if demand for Chinese exports dried up? We think not, since that would risk turning an aspiring middle class into a revolutionary mob, threatening the country’s very stability. In fact, to avoid such a dire outcome, the government could be expected to let workers continue to work, churning out goods even in the face of worldwide recession or depression.

Global 50%-Off Sale

If European and American manufacturers think world markets are stiflingly competitive now, wait until prices for Chinese goods plummet by 50% percent. But that is exactly what we are likely to see in a global downturn. And we are not talking merely about the kind of cheap goods that can be had at Wal-Mart and Target, but about cars, high-end consumer electronics, steel and whatever else China’s growing manufacturing prowess is capable of producing.

China is most surely destined to become the powerful economic force that Corrigan describes, but don’t expect the country to idle its output in the interim just because consumers around the world, particularly in the U.S., are feeling glutted by goods. Hard times are coming, but we cannot afford to take for granted that the Chinese will deal with them in the way that Western economists might predict.

***

London Seminar

I’ve had some requests to give a Hidden Pivot seminar in London, but not quite enough yet to make the trip worthwhile. If you’d be interested in attending a two-day class there, probably sometime in the spring of 2007, please let me know via e-mail, including your contact information.