Should-Read: Izabella Kaminska: Dollar Shortage Alert
Should-Read: Very smart musings from Izabella Kaminska on the potential for tail risk from an adverse Hayekian business-cycle shock when and if the global savings glut comes to an end, and the value of a lengthy and geographically distributed process of production–what we now call a “value chain”–gets repriced downward:
Izabella Kaminska: Dollar Shortage Alert: “Who funds the working capital that keeps globalised trade lubricated and in flow? Answer: hard currency investors…
…And what justifies the funding of all that suspended-in-motion value that rests upon the seas of international supply chains? Answer: the fact that even after all the additional mileage, administration and energy costs that come with running irrationally complex supply chains, a profit can be derived from the arrangements. So what ensures these bizarre global arrangements… are profitable?… Unfeasibly low wages and low living standards in manufacturing hub countries…. We begin to understand a few key points:
- Globalisation is a highly capital intensive economic set-up due to the sheer amount of working capital needed to make it work. It’s not necessarily optimum in a more equal world….
States… with the capacity to create hard currencies to fund the working capital… provide the rest of the world with the hard currency credit they need to source the global commodities and resources required to fabricate the end-products they themselves mostly end up consuming.
This credit is squared off with repayments in hard currencies once the manufactured goods arrive at location….
So what happens… if and when beneficiary countries decide the capital… can be put to better use domestically?… Supply chains shrink, but the underlying credit arrangements live on…. Manufacturing hubs… [see] their hard-currency credit deteriorate…. The global hard currency shortage–which let’s face it amounts to a global dollar shortage–stands to become the the most significant destabilising force in recent times and the most unanticipated global tail-risk…