Monday, September 27, 2010

Are your flippers in the sand yet?

What if you went to Walmart and the all the shelves were empty? I’ve touched on this very real possibility occasionally but I don’t seem to get much feedback. I suspect that to convince the average American that this could happen is like convincing a whale that the ocean could go dry, but to a whale that’s on the beach the ocean is effectively a desert.

The fact that our pod of big fat American whales has been swimming circles in ever more shallow water is demonstrated by a survey done several years ago that showed 80% of non-food items at Walmart were in fact made in China. It’s doubtless gotten worse by now and don’t kid yourself, Walmart is not the only place where this is true. Even the remaining American manufactured products are heavily dependent on China for parts and materials.

Some time back I mentioned that China has a stranglehold on exotic metals known as rare earths that are essential to all manufacturing from the alloy used in steel to make magnets for motors and generators to a long list of metals needed to make computer chips. Really anything more advanced than blacksmithing absolutely requires one or more of these metals or nothing happens. The US government recently announced that they have found a couple of trillion dollars worth of these metals in Afghanistan. In fact they aren’t all that rare, we have several huge proven deposits in the US but no longer have any facilities to refine them from ore.

So why does China control 95% of the entire world’s production? The answer is pretty simple, they haven’t been allowing their country to be run by idiots for the past 30 years. It was their policy to simultaneously develop their own industry while using China’s immense economic clout to put their competition out of business. It’s not just a matter of reopening production elsewhere in the world, China’s systematic approach was to buy the factories and ship them to China.

This is suddenly coming to head with China’s move last week to cut Japan off from access to any rare earth metals and China is actually blocking the loading of ships. It was assumed they were doing this over the territorial dispute that has been on going between China and its neighbors in the South China Sea. (you see, China claims the whole thing) But, it turns out that China has something bigger in mind than simply getting concessions on some fishing rights. They aren’t just embargoing Japan who consumes 17% of the market (China uses 51%) but in fact China is cutting everybody off from the supply of rare earths and this includes the US.

This embargo doesn’t affect America that much since we don’t make much of anything here anymore but what output is left will go straight to zero right now. Those fancy new battery factories that Obama takes credit for are not going to be around very long. New green manufacturing jobs? Not on this continent. Soon there will be nothing more high-tech than blacksmithing, the days when the US was dominant in technology are gone, third world status is here right now.

So from now on everything high tech comes from China and China can name the price. The Obama Administration is scrambling to react to this national security threat but there are severe limits to what you can do with the remaining 5% of the world’s supply even if you can get your hands on it. It seems that gun sights for tanks, guided missiles and night vision equipment can’t be made by the Amish blacksmith. Say it in a whisper, “we’re screwed”, don’t say it out loud, it will frighten the children. They’ll learn soon enough.

There are a number of ways this could play out depending on what sort of hard ball the Chinese are playing. Maybe they are just throwing close to the batter make him step back from the plate or maybe they are throwing their best fast ball right at his head. Even if China (who denies they are doing anything), even if they were to relent, the damage is done. Invest anywhere in the world outside China at your own peril.

It takes fifteen years or more to develop a rare earth supply chain and this assumes you have the needed resources available to do it. We are either going to submit to draconian demands from China or have a flow blown trade war that will more closely resemble real war depravation than anything else. Want to know what this kind of trade war could look like? Cuba is a perfect example what living under the embargo of manufactured goods looks like or maybe more like Iraq in the nineties or we could become Somalia. Which example fits best depends on whether we allow the same idiots to be in charge that led us into shallow water in the first place. Are your flippers touching the sand yet?


SanMigMike said...

I don't understand why so called "Americans", the patriotic party of America according to their propaganda, and the DINO's all supported and worked for the policies that moved jobs, industrial plants and a good chunk of real wealth to China and other places.

Real wealth for a country comes from people making enough to live on, adding value to real things (not playing games with money by such things as moving your stock brokerage closer to New York to make money from that millisecond less transmission time on a trade and deals that even the players don't understand except for the part of taking other people's money).

We have been taken over by the likes of people that used to run the late night infomercials...using other people's money and Reverend Ike. Forty or so years from now they will be able to look with pride at Third World America and know that their efforts made it happen.

They better pray that the Swiss let them in or they can build a big enough and strong enough house to keep away from the rable.

We are well on our way to becoming a Third World country and the countries like Germany that are working to remain First World countries have the right ideas but how long will they be able to last between our suicidal ideas and China that has a goal and the guts to work for it

Anonymous said...

One of my friends back in 2007 thought their home (which was in a not so nice neighborhood and was not the greatest home) was worth over $750,000.00. I remember saying that if your house is worth that much a loaf of bread should be $10 or more, they thought that was ridiculous, a year an a half later there home took a nose dive. Who thought this could go on forever? Idiots did. I began boycotting china when I woke up 12 years ago, my friends again thought I was to weird. Why 12 years ago, I too was living in the land of Ronny, raising my family, making a good living I fell asleep at the wheel, somehow forgot who I am. Don't have much hope for the future, scary stuff out there...we are being lead by... say it with me by CORPORATIONS. My only sanity is that I listen to my one of my favorite buds, Mike Malloy, he is angry, as I am angry so I don't feel alone.

SanMigMike said...

Along with wondering why Wallyworld shoppers consider themselves to be the real patriotic Americans...I wonder why more people don't try to shop according to their beliefs or at least their interests. A union worker shopping at Wallyworld or another anti-union shop? Worry about the balance of trade with China but keep buying the crap from there?

Funny how they wave the flag and prance around but can't spend a few cents more to actually do something.

I guess I might not be a great example since I really try to buy away from China and a few other countries. I feel if I can't buy American I can look for European made products...or at least non-third world country of manufacture.

My parents viewed home ownership as a long term place to put money. As opposed to renting you got some of your money back plus the tax breaks. It wasn't going to be flipped in a year or so, or milked with was first and foremost a place to live. A home, not some investment that was going to double in a couple of years. To have changed the mindset of Americans toward their homes by making them into a more liquid investment has been a horrible mistake. I have always told my spouse that it is a "home" first and not really an investment. Yeah, we hoped to make a little money but moves were made due to job changes not to flip the house and make some inflated dollars.

Anonymous said...

P2 how did we become a country of sociopaths? When I listened to the tapes of the energy traders laughing at putting old people into the ditch, took California down. Made a secret pact with Arnold. And it destroyed a politician. Now I think someone whispered something in Obamas ear.
I think they said remember JFK.