I began understanding the mechanism behind the recent world-wide disruption in the industrial supply chain and logistics.
We are witnessing a large backup and backlog of container ships off the US west and east coast. My initial thinking was that it could be intentional, a part of some US-China trade war that Trump started 2 years ago and the current admin is just continuing.
It turns out that as the trade disruption intensified earlier this year, it was reflected by the price of shipping containers shooting through the roof (above 10k$ per container, up from a previous cost of about 3k$). Recently the price of the containers went back down again even though the backlog is still the same if not even greater. What is going on?
We are dealing with a major economic crisis in the centralized government-planned socialist economy of China! This is causing major disruption in the Chinese manufacturing sector that is now being forced to scale down production and delivery of industrial goods due to disruption of internal logistics and the supply chain within China!
Very soon we are about to experience an economic crash of the central-bank controlled corporate-socialist economies of the G7 countries! For the same systemic reason as in China. Let me explain.
Centrally controlled socialist-communist and corporate-socialist economies are inherently prone to crashes. Unlike the capitalist economies experiencing frequent (but localized, rarely global) disruption of trade and business due to fluctuation of consumer demand, the socialist economies are very prone to crashes caused by disruption of production and logistics. The reason is that such economies are dominated by a small number of very large and very powerful (politically) entities that are able to lobby the authorities to allow them grab or acquire whatever resources they want, freezing their smaller competitors out of the supply chain. Large corporations can also get rid of their smaller competitors through mergers and acquisitions that results in an even greater economic centralization, given the lack of any effective anti-trust laws.
This mechanism operates like a positive-feedback loop amplifying even a small trend until it becomes disruptively large. So even a small trade disruption caused by a trade war or epidemics, began growing to a very large scale because the small component producers and small supply chain services have an enormously large role to play in the overall economy. Their role is much bigger than their nominal market cap and the usual valuation methods based on stock and corporate bond values do not reflect this. The small companies are the source of parts and services for the large manufacturing corporations and the rest of the economy, including the agriculture and mining sectors. Once the large companies grab and utilize them internally, they are no longer able to serve other producers and fulfill their role supplying what the market needs. It causes the ripple-effect disrupting the entire economy!
China and the US are now in the same economic death spiral where the large and powerful corporations are cannibalizing the smaller companies in order to survive themselves, compounding the disaster.
I lived through that in the 1970-ties and 80-ties. I remember a socialist economic crisis in the communist-run Poland . It begun in the 1971 by the then new communist chief Edward Gierek ordering the large manufacturing corporations to boost their production of industrial goods. They responded by requesting to take over the local small cooperative manufacturing businesses (so called "przemysł terenowy") from all over the country. They got it - but the result was disastrous! It produced an acute shortages of nails, bolts, small hardware parts including machine spare parts, and worst of all, a shortage of >>> baler twine <<< ["Sznurek do snopowiązałki"]. A lack of locally produced spare parts caused disruption of transportation due to disrepair of buses, small trucks and tractors. The lack of harvester's twine was particularly noticeable because it resulted in harvest failures during the subsequent years and disrupted the entire food market from which the socialist economy has never recovered, until it was entirely abolished in 1989 (abolished together with the large corporations!).
My response to Dav0, on this subject:
ReplyDelete- Socialist countries crash from the side of the manufacturing and raw materials supply chain. Unlike capitalist economies which may suffer recessions caused by disruption in the consumer demand. I saw it in the Eastern Block and the Soviet Union. It began in 1970-ties and last about 25 years. It ended with the political collapse and in the SU case - with the break up.
Socialist collaps is much deeper and last longer. See for example in Cuba and Venezuela. Not sure how long it will take in China. 30-ty years?
China has gone once already through a socialist economic collapse during the "cultural revolution" of 1956 until 1980 (24 years) when Deng reformed the economy, basically saving the country from an even deeper crash by allowing some elements of capitalism.
Deng's revival last from around mid 1980-ties until about 5 years ago.
Let's say 1985-2015, that is about 30 years. The current economic collapse will probably last also between 25 to 30 years mimicking the Chinese "cultural revolution" period.
Incidentally, Taiwan reminds me of Poland. In the old Soviet block Polish People's Republic used to be jokingly called by the Russians "Самый веселый барак в нашем лагере"
("the most merry barrack in our gulag")