I spend a certain amount of time musing about nested problems — problems where there are a wide number of feedback loops, some amplifying, some dampening.
The big wonder is watching the non-commodity developed markets run hyperloose monetary policies with current account deficits for the most part, while emerging markets run tight monetary policies with (for the most part) current account surpluses.
The simple solution is to let currencies adjust the situation, but that solution is resisted by producers in emerging markets,who gain a disproportionate advantage over consumers in their own country by keeping the currency cheap. And, the exporters have a concentrated economic interest to keep the currency cheap. Consumers who might like a more expensive currency have no way of concentrating their arguments versus the exporters.
The natural pressure is for currencies to realign, but the cabals of emerging country exporters and central banks can resist it for a time. Only for a time. Much as those inflating the real estate bubble thought it would never end, the same is true for those that manipulate currencies. It will come to an end, the only question is when?
And when it happens, will it be violent? Governments, even as a group, do not have absolute control. The legacy of failed currency interventions weighs in favor of markets, and against governments once crises happen.
How can developed country governments have steep positive yield curves, when emerging markets have inverted curves, and there is no effect/change? The change will come, and I think that is in the next two years.
This will feed the necessary change where relative advantage to export/import goes away, and where the value of accumulated debts from developed nations declines to reflect what can truly fund. Also, developed nation investments in the emerging nations will prove to have value in supporting the changes, though the effects will be unevenly distributed. Investments in emerging market non-exporters/importers will do best, as will those of developed market exporters.
Do I know this will happen? No. But that is the way the pressure is currently going now. Governments and Central Banks can resist pressure for a long time in the short run, usually at a cost of increasing the pressure in the long run. In the long run, the differential effects of cultural choices are realized through the power of markets.
To me, that means a relative decrease in living standards in the developed world, and a relative increase in the emerging markets. This is consistent with my views in my controversial piece on Comparable Worth. No one likes that piece, not even me.
But what I would highlight here to investors is what is truly scarce. Unskilled labor is not scarce, skilled labor is scarce. Good ideas are scarce. They always are. Paper capital is not scarce. Real capital, that which makes labor more efficient is scarce. Resources are scarce, including energy. Investors, aim at scarcity, and the rise in prices will aim more paper capital to solve human problems.
I am not trying to posit one single track for which economic change will occur, but more of a baseline scenario. All sorts of things can upset this, including war, plague, etc. A scenario like this allows for more rational investment, assuming realignment takes place, no matter how it takes place.