Thinking straight through economic turmoil - Embedded.com

Thinking straight through economic turmoil

Stock market sell-offs. Bond rating downgrades. Turmoil in Europe. Does all this mean anything for chip designers? Emboldened by the certainty of being wrong when projecting the future, let’s explore that question.

First, we should separate symptoms from processes. The financial headlines mentioned above are symptoms. They are the public manifestations of the world’s enormous excess liquidity sloshing around, trying to find optimal risk-vs.-reward. They are important at a human level because individuals and small to medium businesses cannot manage their risks adequately during such volatility, and tend to get hurt by big movements in financial markets. Also, our in deeply networked financial world, inadequately modeled even when it is staying in its linear region, big changes tend to break things in unexpected places.

The underlying processes are different and perhaps less obvious. Most influential in the short term is the redistribution of losses. In 2009-9 the world erased probably several trillion dollars in wealth. Gone. Naturally, people who suffered part of this loss don’t want to accept it, so they pass it on to someone else if they can. For example, big banks passed their losses on to national governments, who split it up and are passing it on to states and municipalities, employees, contractors, bond-holders, taxpayers, and, ultimately, the recipients of social services. Those who can pass the loss on further do so, and those who can’t attempt to fight back. Bond-holders refuse to exchange their bonds for less valuable ones. Taxpayers vote for Republicans. Powerless people riot in the streets.

Another process is under way as well, equally powerful but slower to mature. Since about 1980, the US, many other Western governments and many individuals have been running up debts, trying to borrow their way out of the reality of declining earning power. Most are now at a point where they fear their debt more than their loss of affluence, and want to reduce the debt: to deleverage. But because for both governments and individuals discretionary spending is usually a small portion of their total spending, making the change from borrowing to saving requires a huge change in lifestyle. So in the West, we are seeing a sharp reduction in consumption in both the public and private sectors. It’s a reactive system, so there are peaks and troughs, but the trend is monotonic.

Finally, there is an even slower-moving but more pervasive trend in Asia. Across China, India, and some smaller countries a combination of liberal world trade policies with comparatively stable governments that invest in education and development has begot a rapidly-growing middle class. And this new class is starting to consume. Estimates suggest that by 2020 China and India, with Brazil and perhaps Russia, will have added to their gross domestic products more than twice what the US and Europe—combined—will have added.

In planning it is important not to be washed ashore by the sloshing about of global liquidity. That is one reason corporations, from banks to EDA companies, are hanging onto cash rather than hiring or investing. But it is equally important to recognize the underling processes: losses flowing downhill, the West deleveraging, the East rising.

This is a landscape strewn with land mines. But there are gold mines as well. The rise of a new Asian middle class can be the greatest wealth-producing process in history—more than strong enough to revitalize the US and Europe, if we choose to participate in it, rather than trying to dominate, subvert, or fear it. This is the beginning of a strategy. Understand where the growth will be, and that opportunities in the US and European markets will be idiosyncratic, not trends. Sooner or later even Apple will misfire. Our future now depends on our own good decisions, but fundamentally it is in the hands of the developing world.

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