Monetary Realism

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Made in the USA is back

This might sound incredible, but we are at the beginning of a secular change in our economy which will be absolutely gigantic. It’s going to impact everything we do, everything we buy.

I pointed out a few months back a gigantic change for the Aluminum industry. China lost their price advantage against the United States in Q3 of 2011. From my work in the Aluminum industry, I know aluminum diecasters are booming. Everyone I speak with is talking about record years in 2012.

It’s easy to imagine why – after decades of losing business to the Chinese, the same companies, making the same parts, are taking business away from the Chinese because of price.

The secular trend has been picked up by Jason Kottke, who writes one of the most interesting blogs on the web. Jason K wrote the exact piece I thought of writing when I saw the American Giant clothing piece in Slate:

‘”Earlier this morning in a post about Apple manufacturing their products in the US, I wrote “look for this “made in the USA” thing to turn into a trend”. Well, Made in the USA is already emerging as a trend in the media. On Tuesday, Farhad Manjoo wroteabout American Giant, a company who makes the world’s best hoodie entirely in the US for a decent price.

I wanted to link this piece to the recent piece in the Atlantic about “inshoring”, and James Fallow’s piece about China, and that’s exactly what Kottke did. Since Kotke wrote his article, Business Insider picked up the Atlantic piece and featured it.

Charles Fishman’s piece identifies five reasons this insourcing boom is happening:

  • Oil prices are three times what they were in 2000, making cargo-ship fuel much more expensive now than it was then.
  • The natural-gas boom in the U.S. has dramatically lowered the cost for running something as energy-intensive as a factory here at home. (Natural gas now costs four times as much in Asia as it does in the U.S.)
  • In dollars, wages in China are some five times what they were in 2000—and they are expected to keep rising 18 percent a year.
  • American unions are changing their priorities. Appliance Park’s union was so fractious in the ’70s and ’80s that the place was known as “Strike City.” That same union agreed to a two-tier wage scale in 2005—and today, 70 percent of the jobs there are on the lower tier, which starts at just over $13.50 an hour, almost $8 less than what the starting wage used to be.
  • U.S. labor productivity has continued its long march upward, meaning that labor costs have become a smaller and smaller proportion of the total cost of finished goods. You simply can’t save much money chasing wages anymore.

But I think there is something more to this. China no longer is able to keep it’s currency massively undervalued compared to it’s “fair value” level, so Chinese goods no longer have a cost advantage.

Here is a chart from a MR post a few months back. We can see the cost of delivered aluminum parts closely tracks the Yuan/USD level in these two charts. There is a massive correlation between currency levels and the cost of Chinese goods.

As long as China was able to manipulate its currency to keep it undervalued enough, China wins, and manufacturing facilities get closed in the United States and open in China.

We would have seen the in-shoring boom happen sometime in 2009, but the global financial crisis caused China to fix the price of the Yuan for several years. As a result, the U.S. didn’t start beating China in price until July 2011.

China is once again letting the Yuan appreciate in value (a lower price means a stronger Yuan in this chart), and so now the U.S. is clearly beating China on the price of Aluminum goods. My sources in Steel and other manufacturing are telling similar stories – they have excellent demand for their product right now, because they are beating China on price.

But this manipulation does have a price for China – inflation. Keeping your currency undervalued results in imported goods – think oil, coal, copper, and other commodities – going up in price far faster than they should. This is why China was forced to let the Yuan begin to appreciate in value again in late 2010.

Since China allowed the Yuan to rise again, Chinese inflation has fallen dramatically. Holding the Yuan in place caused inflation pressures to increase until they allowed the Yuan to appreciate in value once again.

Inflation had not mattered much for China until the late 2000’s, because China was killing us on labor costs. Labor in China was so cheap, Chinese companies could “overpay” for commodities because they were “under paying” for labor. Think back to 2003, when every commodity on the planet was 50-90% less expensive than today. Paying an extra 10-20% for something which was only a fraction of input costs didn’t matter – because China was still killing us on labor costs.

Yes, this boom won’t take hold and just skyrocket. There will be bumps in the road. According Alan Tonelson, last year wasn’t so great for manufacturing. Well, it wasn’t that bad either. Here is a chart of US manufacturing jobs. Note the U.S. is not loosing jobs! Thats an important first step!

There is a setup for a huge secular trend – a boom in U.S. manufacturing.  China can’t reverse the clock and reset their wages to lower levels, so we can expect a much more level playing field in the next decade. The manufacturing sector has been beat up so badly that just staying level will feel like “good times” to the sector.




Expert in business development, product development, and direct marketing. Developed strategic sales plans, product innovations, and business plans for multiple companies. Conceived the patent pending Spot Equivalent Futures (SEF) mechanism, which allows true replication of spot and swap like products in the futures space.

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19 Responses

  1. jt26 says

    OK, time to shake things up and break up the Christmas cheer. If China stops exporting deflation, then inflation must be coming (since I don’t see a robot on Amazon that will pick up my 3-week-old underwear under the bed and make me Martinis, shaken, not stirred). Time to sell those Tsys before the bubble bursts … that means you Cullen. The inflation reckoning is around the corner; the earth will parch, crack and gigantic flames will come shooting out! The bell tolls for thee.

  2. Michael Sankowski says
  3. jt26 says

    Mostly agree except for Charles’ 1 & 2:
    (1) oil costs of sea transport may have increased, but shipping rates are lower because of the GFC and shipping overcapacity (see e.g. Baltic Dry). As well, other “outsourcing transport” has actually gotten massively cheaper, like undersea internet, which are being upgraded to the latest 40-100 Gbit/sec technology (started about 2 years ago)(although one wouldn’t have guessed this from WIT&INFY price action, but maybe that says more about the poor infrastructure in India!)
    (2) lower natural gas may benefit some manufacturers (petrochemicals), but electricity prices have actually increased (

    • Michael Sankowski says

      Great points – how did I miss Baltic Dry? I am losing a step…

      On the natural gas side, heavy industry is a huge direct consumer of natural gas. The aluminum and steel industries have gigantic flames just shooting into their furnaces which are all natural gas. Lower Nat gas prices mean lower fuel costs for these mills – to the point where they don’t even worry about saving energy. it’s all about production time now.

      • jt26 says

        Agreed. I was just hopping on the robots meme by looking at electricity prices in Detroit. PS Love the image of “gigantic flames just shooting …”!

  4. Michael Sankowski says

    Hey Kris! Hope all is well.

    Great questions. I wrestled with putting those into the piece but thought it was getting long already.

    The manufacturing cannot go to some place like vietnam- it’s not large enough to seriously supply the U.S.. plust it’s too low on the dev curve. Same with both Africa and India. India has 7-10 more years – plus some major infrastructure upgrades – before it can do manufacturing for the U.S.

    Mexico has such quality control problems and the wages in the north aren’t much cheaper than U.S., plus it also suffers from size and infrastructure problems.

    These are more structural problems rather than “it can’t happen”, and they could be solved sooner than I think. But probably the U.S has a decade of growing manufacturing, and this means more product, slightly more employment, and a huge push to robots.

    As long as China could absorb work with it’s massive labor force, there was no need to improve robots. low labor costs for china are not happening any more, so robots become more attractive.. At least that’s how it looks to me.

  5. Kris Smith says

    Good piece, Mike. I liked the Atlantic articles too. I can’t make it work for me though… If the issue is unit labor costs, why wouldn’t manufacturing move to Vietnam, or Africa? If the issue is labor and energy costs, why not Mexico? All of these markets have been performing well. If the dollar is to remain the reserve currency, and I don’t see a lot of alternatives, this means there must be a U.S. trade deficit and the U.S. must bear the related drag on GDP, no? It seems to me that if the U.S. tries to balance trade this is an overall drag on global GDP and at best the U.S. may wind up increasing its share of a declining global GDP, which isn’t a very sunny outlook. However, I don’t know how MMR views these issues.

    • beowulf says

      “If the dollar is to remain the reserve currency, and I don’t see a lot of alternatives, this means there must be a U.S. trade deficit and the U.S. must bear the related drag on GDP, no?”
      That was the point of “Triffin’s Dilemma” and probably was true before Nixon closed the gold window. Today, the Fed could avoid the dilemma with currency swaps.

      “Triffin’s conclusion does not follow from his premise: You can use the capital account rather than the current account to balance the reserve currency requirements.
      All that this requires is that the central bank that issues the reserve currency accumulates foreign currency reserves commensurate to the desire of foreigners to stuff its currency into their pillows.”

  6. Steve Roth says

    Very nice. This is something I’ve been thinking as well. But to add one other I think key piece, directly related to labor productivity and the whole robots-replacing-humans thing: robots are becoming ever better replacements for human labor. cf Foxconn’s plans to add a million robots to their production facilities.

    A German-built robot costs just as much in China as it does in the U.S.

    And: the skilled labor to maintain and operate it isn’t that much cheaper in China (U.S.-China differential in that wage range is smaller than in the bottom-range differential).

    Which brings us directly to Beo’s point, and to my constant rant: we need to massively expand the EITC (and other redistribution) to maintain and stimulate domestic demand. Here’s why:

    Funding that expansion would require us to institute a local/state/federal tax system that actually *is* progressive above about $60 or 80K, which is where things flatten out now.

    • Michael Sankowski says

      That post of yours is great in pointing out there should be some way to figure out what income distribution promotes the highest growth.

      I haven’t had time to address the robots talk thats been going on around the internet. Izabella Kiminska is the one to watch on that front.

      • beowulf says

        “I haven’t had time to address the robots talk thats been going on around the internet….”
        I haven’t even bothered reading any of the robots talk. On the topic of robots and income distribution, Marshall Brain (as they say in the cavalry) got there fastest with the mostest.

        We are standing right now on the threshold of the robotic era. Once robots start arriving in the job market in significant numbers — something that we will see happening within a decade or so — they have the potential to dramatically change the world economy… With the rank and file employees gone, all of the money in the corporation flows upward to the executives and shareholders. The concentration of wealth will accelerate dramatically because robots allow real automation in the service sector for the first time in history. The amount of money paid to executives and shareholders will be remarkable… The following suggestion at first seems impractical because it is so simple: What if we, as a society, simply give consumers money to spend in the economy? In other words: What if the way to achieve the strongest possible economy is to give every citizen more money to spend”

        He wrote that in August… of 2003.

  7. JKH says

    good summary of moving pieces, Mike

  8. JP Koning says

    I’m definitely on board with this theme. In addition to your point on nat gas, I’d point out that oil prices (in most part of North America) are twenty to thirty dollars below the world price.

    I’ve got a small investment in a diecaster maker. I seem to remember them telling me that the US had imposed duties on Chinese aluminum producers last year, which would have helped too. I think this is it.

    • Michael Sankowski says

      JP – that diecaster is going to make you a fortune over the next decade.

      I mostly do analysis like this because I never want to be caught flatfooted again. I saw Greenspan in 2001 openly say he was going to use housing to prop up the economy and did not make the trade.

      This is a huge secular shift for U.S manufacturing.

    • beowulf says

      The lower domestic oil prices are due to an unusual market inefficiency.

      WTI has traded $15 to $25 a barrel below Brent prices for much of the past five years as crude oil production in Oklahoma, Texas, North Dakota and other central-U.S. oil fields has outpaced pipeline capacity.
      Because of the flood of new oil, millions of barrels of storage capacity has been built throughout Cushing [OK] to hold the crude as it waits in line before heading to Gulf Coast refineries.

  9. beowulf says

    “U.S. labor productivity has continued its long march upward, meaning that labor costs have become a smaller and smaller proportion of the total cost of finished goods.”

    That part isn’t really a a good thing. Its great to see US manufacturing pull out of its flat spin, but we want compensation to to get back to tracking productivity– there’s about 30 years of lag that has to has catch up somehow (I imagine by some combination of universal healthcare, higher minimum wage and supersized EITC). I’m dubious we’ll see sustainable growth of manufacturing (and wages) without trade protection.

  10. binve says

    Great post. Thanks Mike