#65 The De-industrialization of the West

Economics is not zero sum. However, there are certain push and pull effects in global economies which are driven by government policy making. Here are some interesting data points.

Now its no secret that the majority of energy use in an advanced economy comes from industrial demand. We recently added this next chart to our main series…you should be able to immediately see why.

Here we can see the century long trend (red line) was broken by the blue line (actual energy use) roughly starting in the 1970s. Many of our detractors would immediately point to peak oil as the blame here, however, we find this explanation unsatisfying, as oil production today is greater than ever before in history.

To understand what is actually occurring here we must return to a previous lesson. For a quick review, reserve currencies demand trade deficits from the issuing nation, in what is known as the Triffin Dilemma.

This is because trade deficit is a result of the imbalance of cross-border demand for USD (the reserve currency in this case).

As we’ve said, economic activity is not a zero sum game. However, in the process of running the necessary trade deficit to satisfy reserve currency demands, industrial production capacities will tend to move toward foreign sources. Somebody must meet that demand for goods. In this way the nation issuing the reserve currency gets the added benefit of being able to export inflation.

Loose labor regulations in emerging markets historically have driven down the marginal cost of production as more and more goods consumed in the west are bought from emerging markets. This makes US industrial capacities less competitive on the global market and thus, energy use in the west tapers while energy use in emerging markets swells to take its place.

Energy use per capita is inherently linked with quality of life and potential for population growth. A whole number of quality of life factors can be linked with energy consumption (infant mortality, nutrition, literacy, housing sq ft /person) as in a free market economy and on a macro scale, more energy consumption means more productive employment of capital.

Another important point to consider, in the break of trend from the century long growth in energy consumption, is the government restrictions in expansion of more suitable high capacity energy production capacities (nuclear energy). But this topic requires a far more substantial investigation of its own.

Book of the Month:

The Road to Serfdom by F A Hayek

-“Probably it is true enough that the great majority are rarely capable of thinking independently, that on most questions they accept views which they find ready-made, and that they will be equally content if born or coaxed into one set of beliefs or another. In any society freedom of thought will probably be of direct significance only for a small minority. But this does not mean that anyone is competent, or ought to have power, to select those to whom this freedom is to be reserved. It certainly does not justify the presumption of any group of people to claim the right to determine what people ought to think or believe.”

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