Here's a new economic theory to ponder: Economic bubbles can occur in two directions. One you can see, the other you can't. But the impact of both can be devastating.

We're all familiar with the classic bubble. It works something like a pyramid scheme. The first ones to invest in a new technology or a new idea get rich. That attracts others to invest, but they never reap the same kinds of rewards. They get caught, in effect, propping up a pyramid that becomes nothing but a shell for bad investments.

This is exactly what happened in the dot-com era, even though most people who got caught in the collapse were forewarned that it was coming. It was simply a question of when it would finally go pop, and pop it did. Those who got hurt simply hung on too long.

What transpired after that created the seeds for an entirely different kind of bubble, however. Instead of rebuilding the domestic tech industry, companies began looking for ways to cut costs as the digital consumer market began taking root. But our reliance on cheap manufacturing has created an unrealistic cost structure -- in effect, a negative depression. If you were to turn the pyramid upside down, that's what happened to costs. They went below ground, hidden from public view.

Companies that were first to cut costs with cheap labor in China and India were the first to benefit. But while costs in both countries are beginning to creep up, the real costs in China are being artificially clamped down because the yuan is pegged to the dollar. Now, with the U.S. government pressuring China to float the yuan on the international market, those costs could come screaming upward like some shrieking demon in a horror movie.

Initial estimates are that the yuan has to rise about 27 percent. In fact, there's pressure in Congress to impose 27 percent duties on all goods from China. While this may be good for some companies -- it might even reverse the trade imbalance between the U.S. and China -- the impact of a 27 percent hike in manufacturing would be disastrous for the electronics industry and the U.S. economy as a whole.

To begin with, inflation would skyrocket. There are a bunch of factors that could impact inflation in the United States and Europe already, many of them tied up in a sort of global Gordian knot. Untying this knot quickly and without extreme caution can cause all sorts of havoc. Housing costs and many commodities already are increasing based upon demand from places like China and India. If the yuan gains 27 percent against U.S. currency, consumers there could buy even more of these commodities. That would further boost prices around the globe. Imagine gasoline, for example, at $4 or even $5 a gallon.

A higher-valued yuan also would raise the cost of doing business for companies that have invested there to cut costs. While it's true they can close up factories and move to places like Thailand or Vietnam, where labor is actually less expensive than in China -- or even Eastern Europe or Mexico, where prices are higher but not nearly as high as in Europe or the United States -- none of this will happen overnight. A global supply chain is a complex thing. It took years to build. It will take years to shift.

What we are looking at is a bid to pop a hidden bubble, which is what government intervention has created --namely an artificially low cost of labor -- for those who willingly took advantage of it. When that bubble pops, it will create a giant sinkhole that will swallow up a lot of companies.

By: DocMemory
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