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Is the western world reaching to the end of it's wealth?

I'm seeing currently a big deficit in western world economies. As I see it, western worlds are slowly beginning to decay in terms of standard of living as well as unemployment generally. I believe that personally, it's China that's becoming the essential problem. Yes, it might be due to the working conditions, but it's not something we can directly control. One even might argue for the sake of China, that their wealth is growing to a point where their middle-class is becoming bigger and their education might bring them even help with humanitarian problems.

The fact is, China is currently making products for fairly cheap price that everybody buys because of their price and in some cases, because there's no other option. For example, I don't know a TV brand that isn't manufactured in China. Whereas people, who are getting poorer in Western World, can't necessarily even buy an alternative option to Chinese products. Back in the days, "Made in China" meant "Cheap & Low-grade", nowadays it's more a "Clone". Like their cloned cars for example, which have structural problems that can mean death in a crash. On the other hand, if you really want a BMW X5-esque car, why would you care for a crash that's unlikely because you're getting a BMW X5 and confidence!

I feel that we're facing a problem here that China is getting their wealth out of western production & consumers. Basically, China is doing what's actually best for China and largely, this might help their humanitarian issues, while bringing couple others on the table though. But this wealth is strictly out of our pockets - production is either outsourced to China or it doesn't pay that much. Also, if country has social security employed, it's also taxing itself heavily and getting a larger debt figure, which is why it can't afford the growth of China.

So, what happens next? Monopolies or will Western World become the new Africa? How to solve the problem, if it even is a problem?

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    Jul 31 2013: Wealth is created by producing things people are willing to pay for.

    The way this gets skewed is by government meddling which props up entities that should fail. This does not allow the natural process where the assets of the failed entities are redistributed to newer companies that produce something that consumers are willing to pay for. The longer this goes on the bigger the consequences of the adjustment. If it goes on too long than the entire country fails as it did with Argentina or the USSR.

    The only true monopolies come from the government via cronyism.

    One way or another there will be a reckoning and it will not be pleasant.
    • Jul 31 2013: Could you specify, what kind of entities are we talking about exactly? An example would be nice.
  • Aug 2 2013: My definition of wealth is less involved with money. Rather, wealth should be considered as the sum of natural resources, productivity in manufacturing, research & development and better educated mampower. Especially, the nominal money is almost irrelvant, because, in some countries such as Argentina, the VALUE of their currency is dropping almost from week to week, therefore their economic influence is very small compared with other developing countries.
    As for the developed countries, the deteriorating influnce of Japan should give us a model of how the rise of a fast rising economy could fade in a matter of few decades. Japan's economic development depended on its technological advancement, but without open its own market for free trade. In this aspect, China is different. It not only opened its market and industrial production to foreign investment, it also opened its consumer market which is vastly bigger than that of Japan. In that respect, China also attracted manufacturers to establish factories and sell the manufactred goods right there. So, China is probably less vunerable to the declining economic conditions compared with what happened in Japan.
    There is, however, a new factor popping up during the past 50 years or so. It is the automation and robotics in manu- facturing. This development will minimize the labor cost differentials among the industrial countries. However, my projection is that, even the U. S. and the Northern European countries would improve their trade balance somewhat, there will still be a vast consumer market in Africa, Asia and the middle East for all the producing countries anyway.
    But, our problems are probalby due more to the deficit spending, in addition the outsourcing of industrial production. Do you notice that the Chinese is buying up mining assets and businesses all over the world using their money from their trade surplus.
    • Aug 3 2013: You actually do have an interesting point about Japan. I wouldn't say Japan has decayed, but rather, their highly consumerism oriented society allows them to have a strong internal economy. I could be wrong here, since I haven't read all that much about Japan in terms of economy. But when you look at Japan culture, they sure know how to work & how to party. Slight edit: I do have read about how international economy did allow Japan & German economy to shine and take a strong position, thus I'm not completely unaware.

      On the automatizing part, I'm personally a skeptic about that. We're still far off from significant automating and even when that would happen, we would have issues regarding current 8-hour model. I find it hard to imagine and innovate enough jobs for the people who were left unemployed by the age of automation. I think that's the time to stop giving CPR with methodological solutions and instead start to look for more creative solutions.
  • Aug 3 2013: Ted Blair, The answer is simple --

    The current or future Wealthy of the Western World (the USA), after paying off the loans from
    World Bank Cartels, who since WW2, financed the last 73 years of making pre-emptive Wars
    upon other nation's shores, would be broke.

    To forestall such a heinous crime as insolvency, The current or future Wealthy of the Western World
    (the USA) will instead, stay the course, and continue to "roll the loans" , now rolling every 90 days,
    until forever comes.

    The World Bank Cartels, cannot eat dirt. And to be "Owed", is their life. They chose it.
    That is why they call themselves Bankers, instead of the Criminally Insane.
    Besides, the Wealthy and the Bankers get to eat Steaks, Lobsters, and Fine Wines.

    Their only enemy, Gout !!!
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    Aug 2 2013: The rich countries don't get poorer, it's the notion of the poor countries catching up that make you see the rich moves extremely slow by contrast .
    • Aug 3 2013: Except, the debt's are becoming more dramatic as we speak. Or is it just an imaginative figure that represents no real value?
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        Aug 3 2013: A government debt is very different from a normal people debt. We still have to have the money for education to secure our future, keep our noble intention for universal healthcare, maintain a war that's destroying our country image, and keep the economy running smoothly. There was thing like this before in history. Which of those thing above that you would abandon? This is the later effect of the 2008 depression, it's a lose lose situation, we couldn't expect great thing come out of it, could we?
        • Aug 3 2013: Well, it's again a point where we have our habitual differences. I don't live in America, I live in Scandinavia, Finland. Thus said, we don't have a war to attend, our healthcare and education bodies are paid by tax payers. Economy? Well, it's running slowly into debt.

          And unfortunately, it's these things that do concern me. Our country could become more like America in terms of education and healthcare privatization. It kind of proves a point when we had high tax rates and still can't lose our debt, even during times where we were doing good.
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        Aug 3 2013: ok, do you have any suggestion?
  • Aug 1 2013: Dear Ted,

    Here is my take: wealth is resources measured in terms of money. If you have money, you have wealth. However, this does not explain why deficits occur.

    Banking creates additional money by taking deposits of money and lending out 90% or more of that money to others, which is then spent. The depositor thinks they have $1 million in the bank and the borrower borrows and spends $900,000, which means someone else in the economy thinks they have $900,000. The banking system just created $900,000 out of thin air.

    For several decades, everything was fine and the banking system created more and more money. Most of the new money was "credit" money and a lot of it was used to purchase property and shares, which increased the value of these assets greatly.

    One day the system hit its natural limits and no new credit could be created by the banking system. There was a sudden shortage of money, which led to huge falls in asset prices. People panicked because they had high debts and low asset values, which caused them to stop spending and the economy fell into recession.

    Governments and central banks know this, so they drop interest rates to reduce the burden of debt and governments step in to spend money to move the economy out of recession. This is why deficits occur.

    Several such cycles have taken place since WW2. Each time the credit economy collapsed, governments and central banks intervened to help the economy recover. For example, after the tech bubble collapse of 2000, low interest rates helped push up house prices which then caused the 2007 financial crisis.

    Now we are in the third cycle of recovery and a new asset bubble is being created to fix the last one but everytime an asset bubble collapses, the country ends up with more debt and it gets harder to recover.

    China has less debts because it is a young economy and it is still growing its asset bubble. Right now it is creating a lot of paper wealth but could be near its natural limits.
    • Aug 3 2013: That's a nice take. Ultimately, it leads to question - where's the limit of debt and what happens once we reach it? Or does debt simply move the economy from socialistic economy towards capitalistic economy? And overall, what are the effects?
      • Aug 3 2013: The limits of debt are dependent on the ability of a country to service its debts. The IMF thinks it is somewhere around 120% of GDP. Other economists measure a country's debt servicing ratio and how quickly debt has built up.

        My best guess is that the US has quite a bit of room to go but will need to change laws to reduce healthcare costs and pension obligations. In the meantime congress may prevent the US from borrowing excessively, which is probably a good thing because incurring more debts over the long term is ultimately unsustainable.

        China is interesting because they are attempting to transition from a high GDP growth-high debt growth economy to a lower GDP growth-lower debt growth economy. Of major concern is their ability to service existing debts during this transition process. Their economy appears to be heavily skewed towards manufacturing and construction activities, which must shrink as a percentage of GDP in a low GDP growth environment because there are already too many workers in these industries. People worry whether a smooth transition is possible in a low debt growth environment because existing industries will suffer losses.

        The economy tends to be very capitalistic during the debt growth phase and socialistic during the asset price deflation phase. Over several debt inflation and deflation cycles, it appears that the wealth gap between the rich and poor is worsened each time. Those holding assets behave in a very capitalistic manner once they have been bailed out but during the bailout itself they are highly dependent on government and central bank backstops.

        Overall, I would say that social inequities are worsened by each credit cycle and the eventual outcome is likely to be a change in policy triggering a financial system reset. In other words, a Great Depression will happen eventually once the wealth gap has gotten too big. This has happened to many great civilisations in history.
  • Aug 1 2013: After reading Origins of the Political Order I I can't help but think of dry rot or a decline in leadership in the countries having problems.
    • Aug 3 2013: Honestly, I should probably read myself those books as well.
      • Aug 3 2013: There are so many books, while I am impressed with Oswald Spangler's work I am not sure that the cycles are like he thought.
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    • Aug 3 2013: Hi, Deepak. I'm not the owner of TED.com and I don't have any affiliations with TED.com.

      And well, the race of time... I'm guessing you're talking about the inevitable death? I'm not sure how is it exactly related to the topic?
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    Aug 1 2013: What is the source of wealth of western world ? How that wealth was developed in western world ?About China
    Which companies are outsourcing manufacturing to China ? How many of them are from western world ? Where the profit due to low manufacturing cost is accumulated finally ?
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      Aug 2 2013: Brother Salim, those are very uncomfortable questions. When western world grabbed wealth from the east, most of it by plain plunder, there was neither internet to ask that question nor so much understanding of economics.
      Not 100 years ago, British Imperialist Economy banned making salt from sea water in India, an age old custom, and outsourced salt trade to England.
      A question like this is blind to history.
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        Aug 3 2013: Dada, question that hurts most of the time unveils bare truth. Are we really ready to face such truth as a GLOBAL community that we aspire to be ?
    • Aug 3 2013: I find it ultimately impossible to try and answer if someone asks me how western world got it's wealth. There's simply too many loose ends to give any kind of answer, even abstract answer.

      And if you want a list of companies that have outsourced to China, well, I'll just list the companies behind pretty much every electronic equipment I have. Sony, LG, Native Instruments, M-Audio, KRK, Apple. Also, my custom built computer probably has most of it's electronics manufactured in China - couldn't instantly google the information nor can I check the components right now. But still, that's definitively a nice list, considering that I just described most of electronical equipment in my house that caught my eye right now.
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        Aug 3 2013: That's fine if you find those questions are such.

        I would say almost all western companies outsourced either to China or other countries of East including my country where global garment giants outsourced tailoring part of garments. Is it also too difficult answer why these companies are into outsourcing ? Where the profit due to such outsourcing are being acculturated ?

        Yes int the list of companies those outsourced part or whole of its manufacturing there are companies of eastern origin as you rightly included in your list above.
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    Aug 1 2013: Historically, great civilizations ebb and flow, so is the western civilization maturing? Maybe so. Will China be the next great civilization, I would add south and west Asia in the mix. China is large, but I think it will need India and some of the smaller nations to fully replace the western countries. That is if China does not implode. they are making remarkable economic advances but the political situation is so 1910. If the situation bends fine, but it could snap.
  • Jul 31 2013: Its not so much the west declining, its more along the lines of the rest of the world catching up.

    Standards of living in most of the world have gone down in the past few years due to the global financial crisis. China is one of the exceptions to the rule because its still rapidly developing, not because the west is about to kick the bucket. If you'll look, you'll find that standards of living across most of the world have gone down as a whole, not only in the west.

    Power and wealth are not zero sum gains. One can gather them without directly taking them from others.
    The west had its head start, and because catching up is easier than plowing forward into uncharted territory, that lead is shrinking every year.

    The Soviets once did the same as China is doing now, modernizing in the span of a decade or two, doing what the west had taken a hundred years to accomplish. It didn't diminish from the west all that much really; it was a competitor for power and influence certainly, but in terms of real damage, there wasn't much to be had (except perhaps for the over-inflated defense budgets during the cold war period).
    Unlike the Soviets though, China has a sustainable economic model, so it may very well be here to stay. Time will tell, but either way, it'll lead to China and the west being on equal grounds more so than one surpassing the other (globalization sees to that, as the two have become mutually dependent).