My son recently took a trip to a large, Gulf Coast City in the southern U.S. on a buying trip with one of my brothers/partners. My son is a recently graduated engineer and is interested in working globally, in general and on the Pacific Rim, in particular. During their trip, they visited two very different importing companies.
The first importing company was run by two brothers from India, who were both engineers and mainly dealt with small metal castings. They had connections with 30 or so small foundries throughout the Pacific Rim. They could have had almost anything copied and cast in a variety of metals. The more technical castings with exotic metals went to Korea, while the simple bronze and cast iron jobs went to India and China. If there were over 3,000 units or pieces a year, they could have the part custom manufactured for you at a substantial savings.
The second company was a large old-line machine shop. This company had slowly moved into the manufacturing business by having semi-complex castings poured in Korea and imported the rough castings. (They were currently working with a foundry in China to improve their quality.) They would then perform the final machining and assembly for large refinery pumps here in the U.S.. By using the Pacific Rim foundries, they were undercutting the domestic pump companies by a large margin. In order to work with the foundry overseas, they had purchased a very detailed three axis tracing machine. This machine had a large three axis arm that literally touched the part and traced out a shape on their computer. After a few hours of tracing a complex part, an exact digital shape was obtained that could be transmitted via the Internet to an overseas foundry and allow work to begin on the part that same day.
It became apparent to me that the overseas import market was opening up to more than just Wal-Mart and Fortune 500 Companies who could afford to visit and forge alliances with Pacific Rim companies. With digital communications and the help of a facilitator, almost any part could be copied and reproduced if there was a reasonable volume needed. Many of our engineered products, developed over the years in the U.S., are now simply copied overseas and shipped back here for final assembly. How much longer until the final machining and assembly is performed overseas as well?
Every time another casting, machining or assembly process is moved overseas a U.S. manufacturing job is lost. We are slowly turning from a nation of producers (that exported our surplus) into a nation of consumers. I see almost no new manufacturing jobs in the U.S., only the slow and steady erosion of the existing ones. (Even though Federal statistics have now re-classified hamburger flipping as a manufacturing job, the stats still look bad.) Perhaps, we can turn the entire U.S. into a service economy, where we do each others dry cleaning and serve each other hamburgers. Somehow, we may make enough money that way to import a few manufactured goods from abroad - I just do not understand how. As the only growth industry (government programs) gets larger and the domestic manufacturing industry gets smaller, I do not see good things ahead for the U.S. economy. The only thing ahead is what I call the "great equalization", where the standard of living gets better for the 3rd World and it gets worse for us.
In the past, the thing that allowed us to live better than the rest of the world was our wonderful U.S. productivity rates. Our high productivity was a result of our capital markets allowing us to accrue capital and invest it in tools that made us more productive. We are now spending everything we make and borrowing more. Our savings rate (remember back two sentences about accruing capital to invest in better tools) is negative! One U.S. worker with his "modern factory" in years past could out-produce dozens of third-world workers using hand tools. Well, the third-world worker, in many instances, now has as good or better tools than the U.S. worker. In many foreign factories, they are as productive, or even more so, as U.S. workers. Why then are we entitled to live better or at a higher standard of living?
The fact that the dollar is the world's reserve currency has a little to do with it. As long as foreigners are willing to accept our dollars in exchange for their finished goods and let them pile up in their central banks as "reserves", then the game can continue. Whenever the foreigners decide they have enough dollar reserves and start to spend our IOUs, then the game is over. There will be a rush for the exits, as central bankers around the world dump dollars and spend their U.S. IOUs, at the same time while trying to exchange them for anything they can, before they devaluate even further.
At that point in time, the U.S. economy will be exposed for what it has become, just another second-rate world economy. In order to trade with the world for goods that we no longer produce, we will have to export something - any ideas?
Trade your dollars for precious metals, while your dollars are still worth something. When all those dollars finally do come home flooding the U.S. economy, they will certainly be worthless. If we are ever to become a powerhouse economy again, we must preserve and accrue capital to reinvest at the right time in the future. No matter how little or how great your income, save something every month and live below your means.
Larry LaBorde
Silver Trading Company
15 September 2004
