A New Model of Economic Growth

Front page headline on Friday’s Wall Street Journal proclaimed a big up-tick worldwide in the manufacturing sector.

According to the paper, everybody is making more and more stuff. This helps assure that the recovery “has legs.”
Auto sales, too, came in stronger than expected in March. So it sounds like the recovery has wheels too.
What we want to know: does it have a brain? Who’s buying this stuff and where are they getting the money?

At least the economic model of the bubble era made sense. The producers produced. The consumers consumed. That worked great until the consumers ran out of money. Then, they had to borrow from the producers. And eventually, the whole thing blew up when it became clear that the spenders had borrowed and spent too much, while the producers had expanded and produced too much.

So far, so good. But now, the world economy needs a new model, right?

The consumers can’t really go back to borrowing, can they? Nope. Not without digging themselves deeper in the hole…or actually earning more money. So, the producers can’t exactly go back to producing either, can they? Nope. Not without customers.

Well, who the heck are all these manufacturers making stuff for?

Darned if we know. In theory, there are billions of ready consumers in Asia and Africa. Except they don’t have much money. And don’t have much credit. And don’t have shopping malls. And don’t have any way to get to the malls if they existed.

In India, for example, half the population lives on less than $3 per day. You can do the math yourself…even if they spent every cent on “stuff,” it would mean total spending of $500 billion, more or less – which is less than the US trade deficit in 2007. Of course, they can’t spend their money on ‘stuff’ – they need it just to eat.

On the other hand, India’s middle class is already as big as the middle class in America – and it’s growing fast. But how does it make its money? By producing, we assume. So as it gets wealthier, doesn’t it add to the world’s supply of stuff…as well as consuming it? And since Asia is more of a producer, in general, than a consumer…isn’t it adding to the world’s supply of stuff faster than it consumes stuff? And since labor costs are so low, doesn’t it add more cheap stuff?

The point we are making is that it takes time for one group of consumers to get out of the way and for another group to take its place. Even if you believe that Asian consumers will replace buying from the US and the UK, you still have to admit that this ain’t gonna happen overnight.

First, because Asian would-be consumers need to earn more money. Second, because they need to change their habits – from saving to consumption. Third, because the factories need to switch from making things US consumers want to making things that Asian consumers want. Fourth, because they also need to set up new channels of distribution and sales.

In the meantime, who’s consuming more than he is producing? We don’t know. But someone must be doing so…otherwise all this extra manufacturing just adds to the world’s inventory of unsold merchandise.

This is just a reminder about the way an economy actually works. The meddlers in China think they can stimulate production. The meddlers in America think they can stimulate consumption. Then they accuse each of “manipulation.”

We’ve seen at least four or five different arguments about what the value of the yuan ‘should’ be. One hundred and thirty Congressmen think they know. Paul Krugman thinks he knows. Everyone seems to think he knows. But the truth is – none of them knows. Nobody can know. Only the market knows. And it isn’t talking. It can’t talk. Its lips have been sealed by government order.

The yuan is supposed to be too low because it is linked to the dollar. There is no logical reason to say that the yuan is too low at all. You might just as well say the dollar is too high. But once you allow yourself the fantasy of silencing the markets and reorganizing the world’s commerce, the sky’s the limit.

Source: conservatives.com