Global Power Shift

This is just a series of observations that support my idea that we are living in what, in a few decades, will be seen as tumultous times.

Recently, there was a news item that stated that by 2020, China will become a larger economy than the US; and by 2050, India will top even China, leaving the US a distant third. This is not someone's wishful thinking, but just the magic of compounding – of economic growth, rather than of your money in a bank.

Today, we are all living at the crossroads of history. A subtle power shift, significantly visible in time frames of decades, but barely perceptible at the time frame level of a day or a week, is happening all the time. Witness the following:

• The Arab Spring happened over a period of months and still seems dramatic. I doubt if the spring has completely spent itself. It is not yet all cool in Syria and Egypt, and it may yet erupt again in some other nation(s).
• Technology laughs at national and geographic borders. Accountability and clean governance pressures were earlier driven within each nation's power centres, laterally. However, now there are vertical pressures that cross national borders earily – thanks to telecom, internet, satellite broadcasting and global moneychangers (both, traders and speculators).
• Unregulated or unpoliced space soon becomes populated with groups that thrive on chaos and absence of regulation. Witness Somalia, Sudan, South Sudan, etc. to see the truth of this.
• Unregulated pockets in otherwise regulated economies also give birth to chaos. While this is not to be taken as an approval of the concept of a police state, it is sobering to hear Paddy Ashdown cite a fact that 60% of the $4M that funded the 9/11 bombings passed through the WTC itself!
• Now, the enemy is within each country. Thus, for properly defending a country, the defence ministry may need to speak to the Health ministry (to protect against pandemics); Ministry of Commerce and Industry (the hi-tech infrastructure of the country is sensitive and vulnerable to attack), Home Affairs (to track infiltrators), and Transportation (Air/ ship/ road security). Defending our borders is just not enough.
• The maximum vulnerability is at all “interconnection points” (airports, docks, bus and train terminals). So defending at such points necessarily means overlap in responsibilities and powers. Hence, working with others efficiently is a capability all need to develop.
• Defence co-operation is not enough. Nations and people living in them need to realize that war is an immensely expensive zero-sum game that can go on infintely to their collective detriment. Only then can long-festering disputes cool down sufficiently to permit normal life.
• In 1945, when WW-II ended, there were about 100 countries. Today, there are nearly 200. We are adding almost 1.5 new  countries a year on an average over the last 67 years.  At the same, time, we have witnessed European countries lowering the borders and becoming a single currency area (that initiative is arguably in the endgame stage already).
• Siberia has such inclement weather that in the Far East province of Russia (area double of India) less than 60 Lakh people live. Greater Mumbai has double that population! However, it is a source of power for Russia – most of its natural gas and oil is sourced from this vast area. Surprisingly, this is a source of power for China too! Global warming has given rise to vast wheat fields in Siberia – but there is no one in Russia to feed. Russia's population is shrinking. But we see that some 600,000 Chinese migrate to Siberia, cultivate wheat during the summer on vast leased farm tracts, and come back home every year. This wheat feeds a good proportion of the Chinese population.
• China is controlling a larger and larger part of the world – without firing a shot. They are, quite literally, either buying them up, or colonizing through sheer numbers of immigrants. They are “partnering for prosperity” with several poorer countries, notably in Africa. Thereby, it is creating a China-centric circle of influence that rivals that of the US already. China has trade relationships with Korea, Japan and other countries in the neighborhood, and lower tariffs for poorer countries. In Singapore, Vietnam and Malaysia, the ethnic Chinese population is a significant, loosely united power bloc. In BRICS and in the Asian Free Trade Zone, China is assuming an increasingly dominant role. For example, on Iran, both China and Russia have vetoed UN Resolutions sponsored by the US for increased sanctions. China is still the largest customer of Iranian oil, with India being second.
• Chinese yuan is threatens to emerge as an alternative reserve currency in addition to the dollar and euro, which (when, not if, China can get away with it) will deflate the US balloon much faster than one can imagine. When that happens, the US will be awash (not overnight, but over a finite period of, say, 3 years) with inflation of  the trillion dollars of bonds that China won't need. Thus, the US seems poised to deteriorate as a global power. Inflation robs from the poor, and shifts even more economic power to the rich, so it will exacerbate social tensions in the US, as the feeling is already rife that the US bends backwards to accommodate the rich, at the cost of the poor. The recent BRICS meet discussed this concept, but shied away from pushing immediately for it. If, and when, yuan gets adopted as an alternative reserve currency, the power shift will accelerate.

I intend to develop this line of thinking further in coming days and weeks. I welcome inputs in the form of comments from anyone who has more to contribute to this line of thinking.

Dysprosium

No, it is not something bad, like dysfunctional or dyslexia. It is not a medicine either. A few of us, barring chemistry freaks, may know this from the Periodic Table of Elements, part of a group called Lanthanides. It is an element, like Iron, or Copper. Except that the world manufactures (from natural ores) only about 100 tonnes per annum of this substance. So it is rarer than gold, literally speaking. But strangely, currently worth much less than its weight in gold, at close to $2,500 per kg. Gold is many, many times costlier. So what?

China makes 99 tonnes out of that 100 tonnes. So what? China has restricted its export, along with a clutch of similar improbably named elements collectively called as rare earth metals. China has only 12 years' worth of output (estimated) left in the clay mines that are the source of the ore. Naturally, China wants to conserve its reserves for its own use, and have clamped export limits. The United States, as always, wants China to ease these export restrictions, going to the extent of filing a WTO complaint against China.

Strangely, China has 35% of world reserves but accounts for 97% of current world production of rare earth metal oxides! And guess what, USA has significant rare earth reserves (1/3^rd of China's according to the figures put out by the US Geological Survey's Mineral Commodity Summaries, January 2010 ) that it is currently not exploiting at all. Indeed, the report notes that “Bastnäsite deposits in China and the United States constitute the largest percentage of the world’s rare-earth economic resources ”. Molycorp Minerals, a mining company, is even as I write this, engaged in a fight with the US Government to get one of its mines re-opened, lying closed since 2002. Australia and the CIS countries also have significant reserves that are currently almost not utilised at all. Why so? The answer may lie in the genesis of the name: Dysprosium is derived from the Greek “dysprositos” that means hard-to-get-at!

Toyota requires 100 grammes per car of this substance to make the drive motors for its hybrid car, Prius. The entire world's current output would be sufficient for only a million hybrid cars. But then, they are not the only guys vying for the substance.

It is used in almost all mobile phones, flat screen TVs and computer monitors, nuclear reactor fuel rods, magnetomechanical sensors, actuators, automotive catalytic converters, high-precision liquid fuel injectors and acoustic and ultrasonic transducers (don't worry about what some of these things are or do – suffice it to say that they generate demand for Dysprosium). Wind power generators require it, as do hard disks. High-intensity commercial lighting and lasers use an alloy including this.

Can we manufacture it synthetically? Not yet! So the world has no alternative to focus on commercializing the existing reserves, and ore-processing capacity.

What if the world runs out of Dysprosium? We can still make do, but any substitutes will most likely be heavier and more inefficient with respect to magnetic properties. So no more sleek iPhones, tablets, netbooks. Non-renewable (nuclear, wind) energy will become costlier. No Prius. Unless we learn to make it synthetically, or find much more efficient magnets not using Dysprosium. 

Is China a currency manipulator?

Once upon a time, there were two countries, one named the US of A and the other named China. US of A bought Chinese goods cheaply for several years, by simply printing more of their money. China scrounged and worked hard, to be able to provide acceptable quality at very, very cheap dollar prices. US of A benefited hugely from a low priced yuan - it gave them more goods and value per dollar of spending. In the meanwhile, China saved, and saved, and saved. In US of A's dollars. So the US of A was the grasshopper that danced all summer, and China was the ant that saved up for the winter, from Aesop's fable.

China's thriftiness allowed the US of A to spend in excess of their incomes, and not bear the consequences, because, by buying up US of A's treasury bonds, China in effect sequestered the extra dollars printed in the US of A that could have led to inflation at home.

Now, US of A finds that they have reached the limit of deficit financing, and its cupboards are as empty as Old Mother Hubbard's was. They have suddenly realised that they have to repay all the Treasury Bonds that China has accumulated. They want to pay back the debts after China has appreciated the yuan, so that they will pay less dollars to pay off their debts. So they decide that China has to allow the yuan to appreciate against the dollar.

But China now has new-found confidence - the confidence of the rich ant, with a granary replete and bulging on all sides with dollar debts issued by the US of A. So it looks the US of A in the eye and says, "Please manage your own currency, we will manage ours." When pressed, the Chinese will point out that they have never lectured the US of A on what to do with their currency even when they were buying Chinese manufactured goods at a small fraction of what it would cost them to manufacture and sell, so why should China listen to lectures now?

So now, the US of A is doing the equivalent of the grasshopper in W Somerset Maugham's version - marry a rich widow and escape the consequences of past profligacy, by alleging that China is a currency manipulator, and forcing China to value its currency upwards. If China gives in, then they have been hit twice - once by being forced to sell goods cheaply with an undervalued currency; and once again when it is time for them to reap the benefits of investing their savings in US of A's Treasury bonds.  

Which version of "The Ant and the Grasshopper" will triumph - Aesop's, or Maugham's? The jury is out. I certainly hope that Maugham's cynical and dishonest grasshopper does not triumph. In this case, currently, it is worse: China's currency has risen, and yet they are being branded currency manipulators.