Living in a World of Unintended Consequences – Part 2

Our last post introduced the story of living in a world of unintended consequences as a reflection of our time presenting at this year’s Arizona-Mexico Commission Summer Plenary help June 13-14 at the Montelucia Resort & Spa in Paradise Valley, AZ.

Our story left off as our neighbor nation to the south was beginning to explore relationships with other global partners in the wake of the financial crisis that has begun to cripple our global economy in 2008.

The central bankers throughout the developed nations at that point were promoting a monetary policy aimed at lowering interest rates to 0%.  When that didn’t work, they followed it up with even more stimulus in the form of radical quantitative easing (QE) policies. While printing money had been tried before, it had never been attempted with such a magnitude or by so many central banks all at the same time. To illustrate that point, major central banks have increased their balance sheets by over $9T (USD) since 2008! But we digress…

China enters this scene like an 800 lb gorilla, ready to leverage its cheap labor force and ability to export at an unparalleled clip. For context, back in 2000 both China & Mexico used to compete for the US export market, each held about 11%. By 2010, China had risen to over 30% while Mexico remained about the same. As Chinese businesses collect revenues in USD they coverted them to Yuan, leading to a surge in the money supply of Yuan. As this happened, China began to pay the hidden price of doing so much business with America – the Chinese imported inflation.  This is a textbook example of what former US Treasury Secretary John Conally meant when he made the famous statement, “the dollar is our currency… but it’s your problem.”  China, in a bid to maintain their competitive advantage as their low wages began to compete with Mexico for the American market, had a plan.

What developed is China & Mexico decided to work together rather than compete, leveraging strategies like this: steel manufactured in China could be be shipped to Mexico where automobiles are then made, and later shipped to America to be sold. There are dozens – if not hundreds of examples like this that quickly shifted the balance of power away from the American-Mexican relationship.

With that stage set, America was then forced to recognize the shifting tide, and today we must look at the future of the new and improving China-Mexico relationship in order to understand many aspects of our future economy in the United States.

Our next post will explore more from our presentation about the future relationships between China, Mexico, and the United States – all in light of the unintended consequences of the present monetary policies of all three national governments.

As always, we welcome your comments and your questions, and we value any alternative views.

Categorized in: Blog

This post was written by Conscient Capital