Will the money markets eventually follow manufacturing?

[Purple]

Every second economic commentator has been spreading the mantra that manufacturing in dead in Ireland and the future is financial services and software. It may well be the case that manufacturing is dead, or at least the sort where labour is the major cost input, but why should we thing we have a future as a financial services hub?

The City of London became a financial services hub because it was a trading hub, importing raw materials from around the world and exporting manufactured products. Rotterdam was (and is) also a major trading hub. The same goes for Hong Kong, New York, Tokyo, Frankfurt etc.
As trade (production and consumption) moved East over the coming decades will the tide go out on the Western money markets, leaving places just inside the high water mark, places like the IFSC, to wither and die?

Whatever was you look at it the financial markets are, at their core, a reflection of economic activity, usually primary and secondary activities such as mining, agriculture and manufacturing . We cannot expect to have one without the other.

 

[ringledman]

Every second economic commentator has been spreading the mantra that manufacturing in dead in Ireland and the future is financial services and software. It may well be the case that manufacturing is dead, or at least the sort where labour is the major cost input, but why should we thing we have a future as a financial services hub?

The City of London became a financial services hub because it was a trading hub, importing raw materials from around the world and exporting manufactured products. Rotterdam was (and is) also a major trading hub. The same goes for Hong Kong, New York, Tokyo, Frankfurt etc.
As trade (production and consumption) moved East over the coming decades will the tide go out on the Western money markets, leaving places just inside the high water mark, places like the IFSC, to wither and die?

Whatever was you look at it the financial markets are, at their core, a reflection of economic activity, usually primary and secondary activities such as mining, agriculture and manufacturing . We cannot expect to have one without the other.

I wouldn't say it is just an Irish problem. The whole West recently has been built on a false economy of finance and easy credit.

Real wealth is created by manufacturing and by running a trade surplus; i.e. offering the world more than you consume.

Peter Schiff spells it out well and simply. if you havent seen it, the first 10min of this explains it perfectly (apologies for ramping this video but I think it really is excellent)- http://www.youtube.com/watch?v=jj8rMwdQf6k

Good economies - production & savings

Bad economies - consumption and debt

It is no wonder the East is rising so much. They produce more than they consume, with a net effect of drawing money into their country.

They also save. Savings are the only mechanism for paying for tomorrow's capital investments or consumption. Debt is stealing from tomorrow's investments and consumption in order to pay for today's.

Its simple really. The West has simply got it all so wrong this past 15 years. To re-adjust back will take a long time.

We need less financial engineering and more real engineering.

The next financial centre will be Shanghai. Within 15 years it will rival NY and London. As you say; the secondary financial markets follow 'real' primary markets.

At the moment and for the next 40 years; the primary market are and will remain in Asia.

 

[darag]

Real wealth is created by manufacturing and by running a trade surplus; i.e. offering the world more than you consume.

This is not true; the wealth created purely by trading is just as real and measurable as Ricardo proved over 200 years ago. Your economic model (mercantilism) is a couple of centuries out of date. As a country, it is no more possible to indefinitely run a trade surplus than it is to run a deficit indefinitely.

The next financial centre will be Shanghai. Within 15 years it will rival NY and London. As you say; the secondary financial markets follow 'real' primary markets.

At the moment and for the next 40 years; the primary market are and will remain in Asia.

We've been hearing variants of this for the best part of 30 years and I simply don't believe it.

In the 1970s, it was Japan which was going to take over the world. They were running a huge trade surplus. By the mid 80s the level of hysteria had reached levels similar to those concerning China today. Doom mongers were flogging books, writing columns and giving lectures explaining how the west was finished and that the future economic centre of world was going to be in Asia. The hysteria was increased as the Japanese used their massive reserves to buy up western assets like factories in the states (and famously the Empire State building).

And like now with the Chinese, there were plenty of popular commentators and economists explaining why a world run by the Japanese was inevitable. In fact the Japanese story was far more plausible that the Chinese one is now - they were genuinely innovative (much of the Chinese GDP growth is a result of a huge boom in construction), were better educated and had what seemed like a far better political system.

One thing I am pretty sure of is that anyone who bases their theories on expecting growth trends (e.g. in Chinese GDP, Irish property prices, the Dow-Jones index, Japanese levels of innovation, etc.) to continue at the same rate for the foreseeable future (even 10 years) generally end up looking very foolish indeed. Nothing involving vast and complex human interaction continues in a predictable trend for very long.

And all these doom models assume China can sustain 10-15% GDP and export growth for the next 10 or 20 years which is absolutely laughable. The same kind of naive analysis led to a particular professional economist in this country predicting that the average house price in Ireland would reach 1 million euro by 2016 or something just 3 short years ago.

If you look at a breakdown of who get what from the $299 dollars that an Ipod retails for in the US, you will find that less than $3 accrues to the factory in China where it is manufactured. Apple is an intellectual property/services company not a manufacturer and I'd rather work for Apple in the West than in the Chinese factory that puts the Ipods together and I know (given how the $299 pie is shared out) that I'll earn a hell of lot more dreaming up new products than manufacturing them. Even the guy working in the shop in the West earning little over minimum wage operating the till gets a bigger share of the pie that the Chinese who've manufactured them.

I really don't know why people revel in predictions of doom but it seems to be something innate in humans. Some go for religious prophesies (end of the world theories) and some like social hysteria (crime is going to hell, kids are out of control, immigrants will overrun us, etc.). For those who fancy something a little more sophisticate, you can go for predictons of environmental doom (we'll be wiped out by disease, lack of water, global warming, etc.) or for theories of economic Armageddon. All end up looking foolish eventually.

 

[Purple]

Very interesting post Darag. From my perspective I can’t see why Ireland has a future in relatively low value-add financial services.
To use your example of the iPod, we don’t, with a few notable exceptions, have the innovation culture that other countries have. Even if we did our second rate universities are unable to help it grow. I work closely with a number of innovation/incubation centres in third level institutions and the primary aim of the young companies in them is to line themselves up to be sold to a US multinational. This is the case with both telecoms and medical device. From talking to friends and colleagues the same seems to be the case in IT and finance.

For trade in goods we have the disadvantage of being an Island so we’ll never do what Holland did. For trade in financial services... I don’t know, are we good enough to compete with London or Frankfurt?

For most of the last 2000 years people have equalled power (admittedly with some notable exceptions). For the last 200 the technological superiority of the West has given it supremacy. I just don’t see how that is sustainable over the next 50-100 years. Japan, for all its technological advancement, was still a small overpopulated island. China has a vast land area, an aggressive and increasingly advanced army and controls vast mineral resources from Africa to Australia. India also has a billion people and a growing middleclass that is obsessed with education. I don’t see the correlation between Japan of the 80’s and China/India (or Chindia as it’s being called) of today.

 

[csirl]

The City of London became a financial services hub because it was a trading hub, importing raw materials from around the world and exporting manufactured products. Rotterdam was (and is) also a major trading hub. The same goes for Hong Kong, New York, Tokyo, Frankfurt etc.

This all happened in the days before true globalisation - when proximity was necessary for efficient business. We are now in a more diffuse era whereby even small individual components of an industry cam be spread across the world e.g., manufactured in china, HQ in US, finance unit in Ireland, HR in Poland, customer serivice in India, raw materials from South Africa, assembly in Czech Republic. As location is not really an issue nowdays - its more about costs and efficiency - you cannot say that financial services will follow manufacturing.

 

[darag]

Purple, I was more responding to ringledman's claim (a popular one these days) that Shanghai would rival London and New York within 10 years based on the assumption that China is destined to dominate the world economically than addressing your point. I don't buy it for the reasons state above (and for that matter, I don't by the population argument either).

But to address your original point I (like csirl) do not believe that physical proximity to industry confers much benefit for the development of a financial industry these days. London boomed in the 80s despite a relative implosion in British manufacturing. Practically everything in finance is done with computers these days; admittedly there are a few niche areas where old-style face-to-face business is still practiced but this is dwindling. Where I work, being "close to the markets" means paying for collocation facilities and good network connectivity.

A big disadvantage for Ireland/Dublin is the income tax system; it is not a low-tax country for people earning over 80k a year who don't want to muck about with section 23 properties and that sort of messing. Low corporation taxes are good for multi-nationals but in finance and associated professional services much of the profits are distributed to the workers so low income taxes are more important. Switzerland, for example, is cleaning up here.

 

[Purple]

I take your point and agree with you re income tax.
I also agree about London in the 80's but when I say "eventually" I'm talking about 20-50 years, or longer.

 

[ringledman]

The only successful economic model for the West over the next 10-20 years will be one built off the back of science and engineering.

The days of running an economy 60%-70% GDP based on finance, property and consumption are over.

Sending credit between financial institutions and every firm creaming off a fee is not the route to long term and sustainable wealth creation. It's a negative sum game in the end, or a very low 'real' contributor to an economy over the long term. Greenspan and the central banks allowed this flawed model to work the past 15 years. The markets won't let it continue for very much longer.

Consumption is a one off addition to an economy. Once consumed, no further benefit is derived from this form of economy. Production creates an ever lasting cash generator for a country. Constantly drawing in foreign capital reserves that can then be used to purchase foreign assets (but not worthless US treasuries) or for building up capital reserves to deal with future downturns (how we in the West should have done this rather than print our way to economic ruin).

Western countries that grasp this new engineering and science lead model will prosper. We don't need to compete with the low end manufacturing of Asia (we couldn't) but we do need to learn to offer the world more 'high end' products and services rather than merely offering bling financial engineering.

Selling to the world and running a trade surplus is the only route to financial prosperity. America was built off the back of running a huge trade surplus, although they are making a great job of destroying this now.

Japan likewise rose from the ashes of WWII to become the world's second largest economy off the back of selling the world something useful. Their woes were as a result of the BoJ lowering rates during the boom and by awful stimulus measures post the crash. This had nothing to do with their trade surplus which has helped them build up huge cash reserves even to this day.

West Germany successfully took in the East and is now financing the bust med states off the back of offering the world something.

Whether Shanghai becomes a financial rival within 15 years or 40 I don't really know. 15 may be optimistic but it will happen sometime. The 'secondary' financial industries always follows the main industrial might of successful nations - production, engineering, science. On this basis it is only a matter of time for Shanghai to become a global Alpha city.

It is a fallacy to believe that we in the West have created a sustainable and new economic paradigm based on finance as a 'long term' wealth creator.

As for the rise of the East - It is interesting to note the disbanding of the old G8 to be replaced by the G20. Indonesia, Russia, Brazil, India and China have rightly earned their place on the top table of geo-political decision making.

We live in a bi-polar world now. The West won't sink to 3rd world status but the East is quickly catching up. It is not about predicting doom but rather appreciating that there is a 'bull market somewhere in the world' as Peter Schiff would say.

It should be clear to all that the West will suffer 10-15 years of stagnation before realising the errors of our ways and finally re-adjusting our flawed economic models to something more sustainable.

I am hugely optimistic about future global growth and advancement. This will be lead from the East.

5 mega trends that will dominate the markets -

[broken link removed]

'Big multinationals are the preserve of the existing major economies. But in the 2010s, that will change. Big new firms will come roaring out of the Brics, providing intense competition for Western giants. The reason is simple. The next decade will see incomes under severe pressure in the old economies. There are debts, public and private, to be paid for, and ageing populations to cope with. Only low-cost producers will prosper – and Brics firms have the most experience of making things cheaply. Expect a double boost for Brics stockmarkets as their domestic economies grow and their local companies conquer the rest of the world.'

.........................

'The dollar's special status acted as a kind of tax on the rest of the world. It allowed the US to run a far larger trade deficit than would otherwise have been possible. In effect, everyone else had to subsidise the over-consumption of the Americans. When that ends – as it will if countries don't need to hold dollars any more – it will act as a kind of tax cut. Like any tax cut, it will be good for the economy. Americans will have to tighten their belts, but the rest of us, notably countries such as Germany who've been running big trade surpluses, will be able to loosen theirs. That will let them grow faster.'

 

[csirl]

Western countries that grasp this new engineering and science lead model will prosper. We don't need to compete with the low end manufacturing of Asia (we couldn't) but we do need to learn to offer the world more 'high end' products and services rather than merely offering bling financial engineering.

The big flaw in this argument is that it assumes that Asian countries cant manufacture "high end" products. Even with the most sophisticated high end products, the vast majority of the manufacturing can be carried out by semi-skilled operatives. In the science and technology sector, the only way Western Europe can compete longterm is through generating intellectual property, not manufacturing.

The only successful economic model for the West over the next 10-20 years will be one built off the back of science and engineering.

It is also possible to generate wealth and run a trade surplus through the services sector. Any added value service can generate income that is independent from physical manufacturing.

 

[Purple]

The big flaw in this argument is that it assumes that Asian countries cant manufacture "high end" products. Even with the most sophisticated high end products, the vast majority of the manufacturing can be carried out by semi-skilled operatives. In the science and technology sector, the only way Western Europe can compete longterm is through generating intellectual property, not manufacturing.

Of course Asian countries can manufacture high-end products. They can also design them and hold the IP. On top of that they can also provide financial services. In the long run they will keep winning business from the West 'till we are competing on the same cost base. They'll get more expensive and we'll get cheaper. That's the great thing about capitalism; it levels out incomes between the rich and the poor over time as long as governmental corruption is not excessive.

 

[ringledman]

The big flaw in this argument is that it assumes that Asian countries cant manufacture "high end" products. Even with the most sophisticated high end products, the vast majority of the manufacturing can be carried out by semi-skilled operatives. In the science and technology sector, the only way Western Europe can compete longterm is through generating intellectual property, not manufacturing.



It is also possible to generate wealth and run a trade surplus through the services sector. Any added value service can generate income that is independent from physical manufacturing.

Services or manufacturing it doesn't really matter which, the West needs to offer the world something again!

We need a much more balanced economy, with the largest share of GDP coming from the private sector entrepreneurs involved in 'primary' and 'secondary' industries. We need big government to get out of the way and allow the free market to grow again.

Science, engineering, infrastructure, agriculture, education are the future for the West. Offering services and products to the new emerging markets. Offering them things they need to develop.

Finance needs to become the 'tertiary' sector again. There to support the capital required for the 'real' industries to thrive. Finance should not be the central driving sector again. I am as capitalistic as they come but running your country on the basis of the financial sector alone is a flawed system, guaranteed to fail.

In the tounge in cheek words of the legend Jim Rogers:

'But I really think agriculture is going to be the best place to be. Agriculture's been a horrible business for 30 years. For decades the money shufflers, the paper shufflers, have been the captains of the universe. That is now changing. The people who produce real things [will be on top]. You're going to see stockbrokers driving taxis. The smart ones will learn to drive tractors, because they'll be working for the farmers. It's going to be the 29-year-old farmers who have the Lamborghinis. So you should find yourself a nice farmer and hook up with him or her, because that's where the money's going to be in the next couple of decades'

With regards to the East, yes of course Asia can and are producing world class products and services. The problem is we have let them take the lead due to our obsession with finance as the be all and end all of the economy.

As an example, how many civil engineers are wasted to the city every year due to the lack of an engineering/intellectual/service lead econony? Far too many. It is endemic in our society.

We need to produce, design, engineer, grow, educate and provide to the world again. I don't buy the argument that because the East are producing, we can't. The world will have countless infrastructure, energy, population, consumer demand issues in the future to satisfy plenty of newer industries in the West. We are going from 6 billion to 9 billion people on the planet over the next 30 years. The global 'middle class' is growing massively each year. There are 300 million in the middle class alone in China, near on the total poplation of the USA.

Once the dollar is dropped as the world's reserve currency and if the governments get out of the way of controlling the industrious private sector through taxation and regulation, then there will be plenty of scope for the West to thrive once again. The countries in the 'developed' West which grasp this will thrive, those that don't will suffer massively.

You don't build a whole economy off the back of tertiary industries. Required in a developed economy? of course. The main contributor to GDP? no chance...

http://www.investopedia.com/terms/t/tertiaryindustry.asp


Tertiary Industry

What Does Tertiary Industry Mean?
The segment of the economy that provides services to its consumers. This includes a wide range of businesses including financial institutions, schools, transports and restaurants.

Also known as "tertiary sector of industry," or "service industry/sector".

Investopedia explains Tertiary Industry
The tertiary industry is one of three industry types in a developed economy, the other two being the primary (raw materials) and secondary (goods production) industries. As an economy becomes more developed, it will shift its focus from primary to secondary and tertiary industries.

The tertiary industry is split into two main categories. The first is made up of companies that are in the business of making money, such as those in the financial industry. The second comprises the non-profit segment, wich includes services such as state education.

 

[ringledman]

The only way to build an economy long term is to save and invest while building infrastructure and productivity. Nothing else has ever worked, Rogers said, adding that the idea of economies built on consumerism has been discredited many times.

The future has always belonged to the people who’ve got the assets — the people who’ve built up savings and investing.

Jim Rogers

[broken link removed]

 

[tyoung]

It depends on what they "invest" in. Germany has a trade surplus for a long time. It looks like they used their savings to make a lot of dodgy loans to Greece and the like which have now gone bad. Hardly the best use of their savings.
China has a lot of "savings" tied up in US treasuries. So they have exchanged the products of their hard work for pieces of paper with pictures of dead US presidents. It's not obvious that they have made a good trade.
Some people have a fetish about exports. Exports are part of production that is sent abroad so that you can buy imports. They are not an end in themselves! An trade surplus should not be an end in it's self. Certainly not if the resulting capital is badly invested.
Finally the "purpose" of an economy is to maximal sustainable consumption by its' citizens. A chronic trade surplus means chronic under consumption which is hardly a good thing.

 

[mainasia]

Some good points made here, still others over looked.

Shanghai is destined to be a major financial hub shortly simply because the Chinese government will make it so. What they decree will happen. They have the financial and legislatory total power to create it, from thin air if needed. The fact is they don't though need to go to such extreme measures as there is already a huge industrial and service base in the region and large amounts of liquid rich investors. Once the property bust hits they will go back to investing in the stock market there.

The other reason China will have it's international financial centre? The other financial service centers speak a foreign language, who wants to work/trade with people in a foreign language? They are also outside the country...looks it's a no-brainer!

In the long run I see China and India being very strong simply down to their excellent education systems. China is already very well developed in its infrastructure, now it must catch up with labor law, health system and education reform and ultimately political reform. They have hardly put a foot wrong so far so I would predict, even with a hiccup of a property bust in the middle, that they will continue on a lower but stable growth path.

India is the country for the most economic growth potential, simply because of its dreadful poverty and infrastructure deficit. It has more space to grow than China. China already has high speed trains linking all major cities. India has the Bombay express with passengers hanging onto door and roofs. As somebody who has travelled and worked with companies from both countries, I couldn't emphasise this difference enough. For these counter intuitive reasons countries like India, Cambodia and Vietnam have a big future. Other unstable countries like Thailand probably do not.

Finally, the US and Europe still possess that most crucial ingredient, highly educated, flexible and productive work forces. Who would ever write off Finland or Germany? I would say the US is not ready to be written off yet (look at the tremendous innovation and companies in America) but it will probably have a double dip recession and dollar dip in between. Nobody invests in R&D like the US! The future for US and Europe is more income disparity and fractioning of society. It's not about nations, it's about individuals, what you can contribute, what is your worth. There is a great leavening going on through the forces of globalisation,the easy credit boom was an attempt to postpone this force, to mask it. It was temporary and didn't work. In economic terms what is your individual added value, is it worth something outside your own little country or state?

Even in that situation (US/EURO crash) globalised companies will operate outside of national schemes...the point being here I guess is that if you work in an internationally traded service or have your own internationally traded company you will do well no matter what happens, as another poster said, there is always a bull market in the world.

 

[mainasia]

@ Darag

You touched on an interesting point about 'doom theories'. It does seem to be something ingrained. But it we look at mankinds history we can see they were often right. Black death killed 30% to 60% of the European population in 3 years. http://en.wikipedia.org/wiki/Black_Death. Almost all native Americans North and South (advanced civilisations with millions of people) were wiped out within a 100-200 years of European arriving

Natural disasters do occur, global warming could run away. There was and is an ozone hole, luckily it is slowly ameliorating, if the ozone had completely disappeared we'd probably all be dead. Maybe that was just luck? At one time in human history there were perhaps only 10,000 humans. What happened to all the other human species that used to exist?

Oceans are acidifying and our ability to affect the natural environment is increasing exponentially. People sense the rapid change and the potential for great disaster aswell as progress. They see the rapid population growth and resource use, they are not stupid.

I wouldn't lump criticsm of environmental doom scenarios with financial ones. One is childs play compared to the other.

 

[csirl]

Shanghai is destined to be a major financial hub shortly simply because the Chinese government will make it so. What they decree will happen. They have the financial and legislatory total power to create it, from thin air if needed. The fact is they don't though need to go to such extreme measures as there is already a huge industrial and service base in the region and large amounts of liquid rich investors. Once the property bust hits they will go back to investing in the stock market there.

The other reason China will have it's international financial centre? The other financial service centers speak a foreign language, who wants to work/trade with people in a foreign language? They are also outside the country...looks it's a no-brainer!

China can only go so far before it reaches a glass ceiling. Totalitarian regimes are very inefficient users and generators of wealth. China has simply replaced the USSR as the totalitarian system trying to take on the west. I regard the current wow factor developments in China as been akin to the USSR out doing the USA in the early years of the space race. In time, China will collapse ala USSR.

 

[Sunny]

Yeah I agree, China has the look of an economic time bomb

 

[Purple]

Totalitarian regimes are very inefficient users and generators of wealth.

What about Singapore or, to lesser extent, Hong Kong? It's a genuine question; I don't know what makes them different.

 

[Bluebells]

I wouldn't say it is just an Irish problem. The whole West recently has been built on a false economy of finance and easy credit.

Real wealth is created by manufacturing and by running a trade surplus; i.e. offering the world more than you consume.

Peter Schiff spells it out well and simply. if you havent seen it, the first 10min of this explains it perfectly (apologies for ramping this video but I think it really is excellent)- http://www.youtube.com/watch?v=jj8rMwdQf6k

Good economies - production & savings

Bad economies - consumption and debt

It is no wonder the East is rising so much. They produce more than they consume, with a net effect of drawing money into their country.

They also save. Savings are the only mechanism for paying for tomorrow's capital investments or consumption. Debt is stealing from tomorrow's investments and consumption in order to pay for today's.

Its simple really. The West has simply got it all so wrong this past 15 years. To re-adjust back will take a long time.

We need less financial engineering and more real engineering.

The next financial centre will be Shanghai. Within 15 years it will rival NY and London. As you say; the secondary financial markets follow 'real' primary markets.

At the moment and for the next 40 years; the primary market are and will remain in Asia.

You could be right. A bank is currently running an ad in Manhattan with the message " There are more people learning English in China today than there are people in England "

 

[mainasia]

China can only go so far before it reaches a glass ceiling. Totalitarian regimes are very inefficient users and generators of wealth. China has simply replaced the USSR as the totalitarian system trying to take on the west. I regard the current wow factor developments in China as been akin to the USSR out doing the USA in the early years of the space race. In time, China will collapse ala USSR.

I wonder have you ever even visited China. China and the old USSR are NOTHING alike. From education level, vision, changes in society, market leaning, openness to investments, culture. Just visit China and look at is infrastructure, already in advance of most European and American countries. The point is not the system, the point is the people's core characteristics. The average Chinese or Russian- which one works harder, who loves money more. Which one values education more? Forget the 'totalitarian' bs, it's not important. China existed for 1000s of years as a totalitarian regime, so did the Roman empire, both were incredibly rich. That wipes out the ridiculous comment above about totalitarian regimes somehow not creating wealth.
When you talk to individual Chinese they know themselves that the government is not ideal, but they are patient to wait for change. They want progress first.

China's economy is built on exporting to the world (apart from the current real estate boom). The USSR economy was built on launching expensive rockets into space and making crappy cars and tractors to sell to each other.

A lot of people have a problem with China, almost fear of it, and they use this to predict it's downfall, that is not logical. The logical conclusion is China will go through ups and downs but will continue to prosper. Shanghai is 99% guaranteed to be a major financial centre, perhaps the world's biggest within the next two decades.