Saturday, December 29, 2007

Creative Destruction vs. Interest Rates

On the back of yesterday's post and spirited comments on the change of the recession cycle, some more ideas along the same lines.
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We are all familiar with Joseph Schumpeter's creative destruction principle, about the ups and downs of the economic cycle forcing businesses to adapt and evolve. I think of it as Darwinism for business (see book on the right).

Here's a question, then, that ties monetary policy with creative destruction: Did the massive interest rate cuts of the Greenspan Fed - and those in the works by Bernanke - prevent the creative transformation of the US economy?

During the last recession rates went to near zero, a level not seen since the 1960's. The response should have been a strong flow of investment in new industries (creation) to replace those damaged by the downturn (destruction). This clearly did not happen and low rates produced instead a capital misallocation of historic proportions. Massive debt pumped up a housing bubble, maintained consumer spending and financed portfolio transactions such as LBOs and share buy-backs.

Observing employment patterns, i.e. the number and type of jobs lost and created during the business cycle, provides excellent insight. Manufacturing jobs, in particular, are key because they add high value at many levels. Modern manufacturing is capital, knowledge and skills intensive.

In the chart below (click to enlarge) we observe that every time the Fed dropped rates in response to a recession (blue line), employment in manufacturing rebounded (red line) - except now. During the last cycle the economy shed 3.3 million manufacturing jobs - one in five - but did not get them back when the economy rebounded, despite record-low interest rates. Losing 20% of manufacturing jobs so fast certainly qualifies as "destruction". But what sort of "creation" occurred as the economy came back?

Fed Funds and Manufacturing Jobs Chart: St. Louis Fed

The rebound did create new jobs to replace industrial workers, but of a very different sort than before. Since the end of 2000, the US private sector created a net 4.5 million new jobs but nearly all (4.4 million) are in leisure, hospitality, health care and social services, i.e. low-skill, low value-added jobs located in the periphery of the service economy. And what replaced the 3.3 million factory jobs lost? Mostly construction, financial services and business services. The table below sets out the numbers.

Data: BLS

Even if we assume that these replacement jobs add as much value as manufacturing (a very big if), we see that on a net basis the latest expansion generated nothing but low-pay employment. This point is further corroborated by a study from the Ecomic Policy Institute which shows that despite the recovery real family median incomes are lower now than in 2000. As the NY Times puts it:

A new study by the Economic Policy Institute uses Census data to trace the dismal trajectory. Economic growth during the Clinton administration peaked in 2000, followed by a brief recession. Growth resumed at the end of 2001, the beginning of the Bush-era expansion, but real family income continued to fall through 2004. It has turned up since then, but as of the end of 2006, it was still about $1,000 below its peak in 2000. Even if that difference is made up this year (and it’s still too early to tell if that will happen) Americans would be merely breaking even. That would be a pathetic outcome after six years of strong labor productivity.

For the United States, therefore, the creative destruction process ran in reverse: it destroyed high-value manufacturing and replaced it with specifically low-value services. The loss of earned income implied by this shift should have been unacceptable to society, but as we know living standards were artificially maintained by increasing debt and by the illusory rise of purchasing power from cheap imports. Instead of going through the painful, but ultimately beneficial process of creative destruction, America took the easiest way out.

Data: FRB St. Louis

Simply put, Greenspan threw a monkey wrench into Schumpeter's creative destruction process and now Bernanke is repeating the mistake. What's worse, we have been led to believe that the Fed can keep the economy going indefinitely by mere adjustments of interest rates and injections of liquidity. However, wealth is not created by monetary policy but by constant innovation and judicious investment. We are clearly not investing as we should and innovation will soon depart, following industry abroad. No one has a lock on knowledge, after all.

We can make one more observation linking the cost of money with the creative destruction process. When capital costs are unusually low, businesses can be less choosy about their investments. For example, if a businessman can borrow at 4% he may be happy with starting a hair salon returning 8%. But if rates are at 10% he has to invest in something that adds more value and is potentially more profitable.

The conclusion is that for a developed economy, at least, unusually low cost of capital - debt and equity - ultimately works against the creative destruction process and leads to a loss of competitiveness. Let me put it another way: artificially low interest rates and high share prices over a prolonged period make America complacent and "dumb", particularly if it has to compete with a dynamic bloc like Asia.

40 comments:

Anonymous said...

What is dynamic about Asia, if their growth is on the back of debt-ridden and dumbed down U.S. Consumers? Watch out below for China.

Independent Accountant said...

I agree with you in part. Low interest rates decrease the capitalization rate and raise stock prices. They also reduce expected returns to capital and encourage investment in places with higher expected returns. Hence we have an investment "shortage". That said, I am not sanguine about China's immediate economic future. Instead of developing its infrastructure, China has accumulated $1.4 trillion in foreign exchange reserves which yield little. Eventually China will stop supporting the US $ and its stock bubble will burst. Just like the US stopped supporting the pound in September 1928.

Anonymous said...

Hi Hellasious

If you look at US economic growth over the past 30 years, the majority of the equity value growth has happened since 1980. I think that this has more to do with the tech revolution (hardware in the 80's, software and the internet in the 90's) and not much to do with great economic policies by the Fed. Tech led to increases in productivity, a whole new market segment in the stock market, motivation for young students to become cerebral skilled workers rather than the typical american jock, and great salaries that led to higher consumption.

What are your opinions on this.

Going by this, I think the US is in terminal decline because
-- There are very few entry level programming jobs in the US outside silicon valley. Without the entry level workers, the next generation of entrepreneurs will not be there
-- The fall in the USD has made many would-be immigrants cancel ideas about moving to the US. Immigrant workers from India, China, Russia and Eastern Europe have formed the cream of talent in most tech firms (Most american kids would rather rap and watch MTV than study science and math)

I am not an American. But I would rather work in American firms. Chinese and Indian firms can be so demotivating, as the majority of the employees are doing the job because its just a job that pays well. There is no passion and joy in what is being done. But the problem with this is not seen in the company performance because growth (from US companies rushing to outsource everything) is so much that any chump can run a division with 100% growth every year.So you have mid-management filled with idiots who are there because of the power of the position, andachieved it due to attrition.

Hellasious said...

The Asian dynamic rests on vast pools of cheap labor that are rapidly moving upscale - relative to their prior condition, of course. The blueprint is there: Japan, Taiwan, Korea, Singapore... China is just following on their steps, 100 times bigger. I agree it is a bubble at the moment, however.

The $1.4 trillion in FX reserves is illusory, in great part. In 1998 they had $140 billion in reserves and that bought ~14 billion barrels of oil. Today they have 10x more and it it buys..(drumroll) 14.6 billion barrels.

And yes, the great brain drain that benefited the US in the past has now fully reversed. I wonder if we will soon see boatloads of skilled Americans emigrating to Asia. Jimmy Rogers as vanguard?

Brian Woods said...

H. A few of questions:

1. The increase in population of US, esp in '60s; impact on MANEMP numbers?

2. Continued increase in US pop post '65 up to present; any change in proportions between non-MANEMP and MANEMP?

3. Increase in household debt (HD) from '53 - '65 is somewhat similar to '85 - '01. HD '65 - '85 seems somewhat 'flat'. HD post '01 is very different. Do you have any data on the number of credit cards issued in these different time spans? How about the credit limits on these CCs?

Observations:

1. The number of MANEMP '65 - '85 varied up-and-down around 18M whilst interest rates varied up-and-down around 7% (as best I can interpolate the graph).

2. Decrease in MANEMP '90 - present seems to parallel (roughly) the decrease in interest rate.

Do you, or any contributor, have any ideas/comments about the above.

Brian P

David Pearson said...

What's startling and unthinkable is that the household debt percentage was due to correct in 2001 from 87%. That is, as a function of "creative destruction", some of the excessive debt that was created during the 90's boom -- a true technological boom -- should have been eliminated during the natural, ensuing recession.

Instead we got a massive further build-up in household debt.

Could this mean that the percentage should now fall below 87%, closer to its post-war norm?

Economists like Bernanke will talk about "more efficient use of the household balance sheet," enabled by "financial innovation" and "savings gluts driving down interest rates", and conclude that higher debt-to-income levels are structural.

No doubt there's some truth in that structural argument -- perhaps 80% rather than 60% is the new norm.

From 135% to 80%. As I said, unthinkable.

don said...

"That would be a pathetic outcome after six years of strong labor productivity."

Perhaps it can be said that . . . it IS pathetic BECAUSE of strong labor productivity. Productivity is at least as much about squeezing more out of each worker through greater means of exploitation (cheaper labor) than it is technological innovation.

And, furthermore, a proper understanding of productivity is myopic unless seen in a global context.

When viewing the destructive process, it is imperative that one's outlook not be contained to any one country. Take China for example, which is experiencing the world's largest internal migration: its fast paced development hinges on the creative destruction . . . of rural life, for the purpose of creating a largely export centric economy (always the entry point for 'Third World' economic development).

Workers migrating from rural to urban comes at the expense of uprooting traditional rural ways, plopping said workers in urban settings where they are then exploited for making things for export at prices that are much cheaper than if produced in a more developed societies. Use of cheap migrate labor is well understood in the Middle East, as it is in California for agricultural production.

The forces of capital accumulation cannot be understood if looked at only from the perspective of one country. Capital flows know no boundaries, and neither do migrating workers.

So . . . I think it a shortcoming to focus too much on the Fed and U.S. interest rates.

The paradox is that an increasingly global economy - with all the attendant complexities and more expanded and deeper interconnections - leads to ripple effects in any crisis formation, and as such, any attempt on the part of CBs or governments to address domestic economic problems cannot succeed unless said problems address global conditions.

Consequence: as economic crisis becomes more global - and also as much social as economic, reflecting capital flows striving to meet the accumulation imperative - the more it requires coordination among private interests and governments to bring resolution, or at the very least offset side effects.

But international governmental cooperation is confronted by competition among public and private interests, which would seem to rule out the success of any such cooperation.

And this brings us back to the Fed; any success it might have in addressing frozen (finance) capital flows (primary banks hoarding cash, reduced lending/borrowing, i.e. insolvency) have no hope of succeeding unless all major CBs cooperate in coordinating their actions, which seems in my eyes to be highly unlikely, due to the aforementioned competition, not only among private interests but among the real politic of nations, faced with their own domestic concerns.

Anonymous said...

The Economic Policy Institute is a democratic funded think tank what do you expect them to say. The BLS numbers are BS so in that respect I agree. Greenspan cut rates to give corporations time to clean up there balance sheets and used the US consumer to do that by giving them free money. The FED can cut the discount rate but it is the bond market that controls interest rates. Most of the money that came into the bond market was due to the Japanese carry trade where their interest rates were even lower then ours making this risk free arbitrage which Greenspan called a conundrum. US corporations have basically done what any good business man would due and moved their production facilities overseas to cut cost and increase returns, that is how businesses adapted and evolved. Americans are simply overpaid when compared to the rest of the world. American companies are seeking the new wealth and consumers of the world in Asia. We are following the Japanese model of devaluing our currency to make us competitive on the world stage. With this model profits increase due to currency differentals alone making our produts and assets cheaper.

Allen C said...

I love your work...

What needs to be explored further is the DTI and debt to assets by the various demographic variables. We need some statistic that reveals what percentage of the population is living at the edge as it were.

Allen C said...

Take a look at this 1990 report...

http://www.epinet.org/studies/deeper-1990.pdf

Allen C said...

"What's startling and unthinkable is that the household debt percentage was due to correct in 2001 from 87%."

Read page 48 of the above referenced report.

"The first is empirical:
has asset growth actually kept up with debt increases? The second is
analytic: do assets necessarily represent a solid base of reserve funds during
periods of economic stress?"

Minsky...

Eva Peron said...

"And yes, the great brain drain that benefited the US in the past has now fully reversed. I wonder if we will soon see boatloads of skilled Americans emigrating to Asia."

Actually right now they are going to the UK. I can't tell you how many Ph.Ds I know of that are all angling for post docs outside the US. None of them want to stay here because there is no funding for people on the cutting edge -- at least not in biology, biochem, molecular, genetics. It's appropos that you bring up Darwin. We live in a country that by and large doesn't even accept evolution. Why would any intelligent and enterprising young person turn down the opportunity to emmigrate to a civilized country? They wouldn't and they don't. As for the foreigners that used to come here to do research, we stopped giving them visas years ago.

I'm wondering how much of the lack of creation in the US is a result of our economic elite becoming "decoupled" from the US as a result of globalization. It changes one's incentives and priorities if one's fate is independent of the nation state that issues one's passport.

The only other thing I would add is that since 2000 we have suffered under a government that has contributed significantly toward incentivising the misallocation of capital that has got us to where we are today.

Anonymous said...

I'm wondering if the problem with "lack of creative destruction" is because of capital mis-allocation, or whether it's really from imagination mis-allocation.

Ever since 2001, the U.S. has been obsessed with punitive and defensive actions vis-a-vis the rest of the world. I live in No. VA. In addition to all the defense work around here, there was a lot of internet and communications innovation here in the 90's. It's come to a standstill; the entire economy here is about dropping bombs on people's head and spying on them. We used to have a really vibrant bottom-up entrepreneurial incubator mindset, and it just completely died with the dot-com bust.

We seem to have lost our mojo, somehow. I think it's mainly a failure of heart and imagination. The money was sloshing around, and it still is.

I recommend you turn your focus onto the subject of "inspiring innovation, business-formation, and risk-taking". That's what's missing. And all this rubbish about no science training is just that...rubbish. Think about your own technical training as a systems guy. How much did you learn on your own .vs. what you were taught in school? The U.S. is awash in a tidal wave of ubiquitously available technical info, and it's available "just in time".

The deficit isn't info, it's not money...it's imagination and focused effort.

Mainly the deficit is of inspired, articulate leaders.

Anonymous said...

Hi, I'm an avid reader of your blog. Since derivatives are contracts between two entities, doesn't a loss of value for one mean a gain for another? If so, who is winning? Also, you mentioned the increase in the debt of the financial sector in the earliest posts of your blog. Why has that debt been intiated and where has it gone?

Anonymous said...

hellasious,

The consequences of the forthcoming deflationary depression will be far more severe in China and other export oriented economies in Asia than anything the US will experience.

Once the demand for manufactured goods, propped up by artificially inflated housing and stock wealth, finally pops the effects on Asia's already overextended manufacturing industries will be absolutely devastating. Ironically, the move of the US away from manufacturing will actually serve to lessen the impact on the US economy relative to the more export dependent economies in Asia.

Not that the US won't experience a massive deflation and recession but certainly not to the degree that China and the rest of Asia will experience.

Remarkably people ignore the fact that China's companies, financial markets and banking industry are still dominated by a communist led government whose priorities are certainly not determined by profit based market incentives. In fact, the underlying premise of neo-Marxist ideology is that the capitalists should be used to build up manufacturing industries until such time as the state can take over on behalf of the workers. I would not want to be a foreign investor in China during a financial crisis. It is unbelievably naive to expect there will be any respect for the private property claims of the entrepreneurial classes once the great crash finally takes place. The govt will not simply sit back and let all the factories dump their employees once the bad times roll. The Chinese govt. will nationalize and require by edict that factories stay open in order to keep the recently migrated rural population employed no matter how unprofitable a company might be. Who would want to be a shareholder or a profit based competitor in such an environment?

Anonymous said...

The assertion seems to be that a collapse of demand in the U.S. will immediately precipitate a severe recession worldwide. This is the "world economy coupled to the U.S. economy" theory.

Others advance the "de-coupled" theory, arguing that trade flows have already substantially shifted from their post-war pattern, and a failure of U.S. demand will simply accelerate the recent (very fast-moving) trend away from U.S.-centric trade.

I include two links here. The first tells the tale of a China that is rapidly moving up the value-add ladder in manufacturing, and doing it much faster than, say, Japan did starting in the sixties. It also shows that not only is the U.S. moving its manufacturing to China, but Japan is, too. Who else is?

The second link is the more important one. It tells a story about rapidly evolving trade links that China is building into highly populous areas in southeast Asia.

If it was your job to steer the Chinese economy, wouldn't you know full well that a reduction in U.S. demand was imminent, and have taken steps to address that problem?

I think the coming recession in the U.S. is more a U.S. problem than it is a world problem. The world has been struggling for decades to release itself from the grip of U.S. economic domination. Don't you think these other countries are eager to forge new trade ties?

The core question remains: what will the U.S.' competitive advantage be based upon in the next edition of the world economy?

The notion of "coupling" may turn out to be yet another quaint anachronism of the Western so-called "investor class".


http://www.manufacturingnews.com/news/06/0905/art1.html
http://news.tootoo.com/Industry_News/Electrical/Imports_Exports/20071228/59577.html

Anonymous said...

No one would be complaining about the massive credit expansion engineered by our "fantastic, world-class financial industry" if that credit had been directed toward productive enterprise. If that capital had been directed at the renewable energy or environmental stabilization problems, either one of them could have been substantially solved.

Instead, we directed the world's savings toward building a few million homes that were obsolete the day they were built, and we filled them with gadgets that will be in the landfill within the decade.

Yet the finance world keeps wringing its hands and lamenting "Oh, we shouldn't have pumped up those bubbles! Oh dear, we shouldn't have borrowed all that money!. Oh, my, the only way out for us is to nuke the world either literally or by declaring bankruptcy".

The deliberate fraud of selling our trash debt, packaged and labeled "AAA" to our trading partners is the last straw. Our international credibility is toast, and remember, we did it to ourselves.

Americans have been dumbed down, fed *(^^% on the TV, and no longer have any idea what personal characteristics are necessary to successfully compete in life.

Our financial problems are directly, solidly and completely based on character problems.

I hope you finance types don't waste too much more time nibbling the edges of the problem, and start directing your great minds to areas that can actually make a difference.

Independent Accountant said...

I largely agree with Anonymous. The US is "Idiocracy", a 2006 movie.

Anonymous said...

hellasious,

Great blog!

Just want to point out one piece. Your inclusion of health care workers as "at the fringes of the service sector" may be accurate if you're including the.. janitors, who are actually a contract service by many hospitals.

Over the next 20 yrs, nurses, nursing assistants, and doctors will be hired and retained at a much higher rate than the past decade because the baby boomer population is hitting the age when they'll make up the large proportion of hospital populations. Nursing is not rocket science - and in fact it's probably the next best career path (lowest starting pay right out of nursing school is above $25/hr) after manufacturing for a non-engineer-type to get a good career. My training? Industrial engineering.. I went into health care to apply engineering rigor to health care process analysis.

Bottom line: We have had a nationwide nursing shortage for years. I fail to see how you can conclude that we won't hire nurses/doctors.. I work in health care administration, literally every plan across the country is to increase hiring and retention of nurses, nursing assistants, and doctors.

Sure, it's a big expense... but arbitrarily saying they're low pay and don't need to be hired is both ignorant and erroneous.

Anonymous said...

"Creative destruction? We ain't got no creative destruction. We don't need no creative destruction. We don't have to show you any stinkin creative destruction!" - Sir Alan and The Professor

Creative destruction is for less responsible parts of the world.

In 2001 and 2002, there were $400B to $500B of junk bonds at risk of default and junk spreads were 11%. This was Sir Alan's rationale for having negative interest rates in real terms. He had learned one lesson from serving as a paid consultant to Charles Keating. The Professor will repeat the procedures followed back in 2002 and 2003 as the impact of junk defaults makes subprime look a walk in the park. Today, the volume of junk bonds is far greater than it was in 2001 and 2002.

There were 4 episodes when real short term rates were negative, the first during the Civil War, the second just after WWI, the third just after WWII, and the fourth just after the Vietnam War. The times of the spikes are from Homer and Sylla's History of Interest Rates (p. 431). The H&S book was pubished in 1996 before Sir Alan's near-ZIRP of 2002 to 2005.

Sir Alan was fond of saying there is no such thing as a free lunch. Now, Sir Alan says there is plenty of cash available to help homeowners with subprime loans. Not stated is whether this is coming from his speaker fees or our pockets.

Meanwhile, The Professor has stopped referring to a global savings glut.

fat_tail_rider said...

"I'm wondering how much of the lack of creation in the US is a result of our economic elite becoming "decoupled" from the US as a result of globalization. It changes one's incentives and priorities if one's fate is independent of the nation state that issues one's passport."

Eva, I think you've nailed it.

Anonymous said...

Re; economic elite becoming "decoupled"

Kevin Phillips and William Greider have been writing about this for a couple of decades ("Secrets of the Temple" and "Wealth and Democracy", among other books). They were considered to be on the fringes by many then, but are now in the mainstream.

It's time for Daniel Yergin to write a sequel to "Commanding Heights - The Battle between Government and the Marketplace". I read that in 2000, about the time that Bob Woodward published his hagiography of Sir Alan.

wkwillis said...

The dollar will fall because the US is importing more than it is exporting, has done this for years, and has negative financial reserves overseas. The dollar will fall until the cost of production in the US will equal the cost of imports. Where ever that level will be. Remember, the US imports a lot of stuff, so the overseas importers will close a lot of inefficient plants as we stop importing, so our producers will be competing with the best of the producers overseas. Expect that the fall in the dollar will be higher than the common 10% for each 1% of the import/export gap.
This will increase manufacturing in the US, both primary industries like smelting, power, mining, synfuels, etc, and secondary, like machining and assembly plants.
This will decrease skilled immigration to the US. The US is a major importer of skilled labor. There will be considerable competition for skilled jobs in other countries as they are less interested in migrating to the US.
This will also increase skilled immigration from the US. On a permanent basis if they US does not change it's tax policy to allow overseas people to pay US taxes no higher than they would by getting overseas citizenship. A lot of the skilled American labor wouldn't mind moving to Australia if the rest of the skilled American labor (their friends, associates, colleagues, coworkers, whatever) had already moved there. This is why I don't expect a sudden crisis involving higher taxes for high income people. It would take about a month to move the top one percent of American workers overseas. And they pay half of the net (more than they consume in government services) taxes in this country.

Anonymous said...

It is foolish to believe that the problems the US is facing with massive debt burdens, chaotic financial markets, bursting asset bubbles and an impending consumer led recession will be somehow "contained" within the US.

As indicated by the freezing up of credit markets in Europe, Canada and England, the rot extends throughout the entire global financial market from Norway to Australia. The problems will appear initially in the US, in terms of a consumer based recession, but will soon pick up momentum and hit the peripheral countries like a tsunami leaving massive financial destruction in its wake.

China has more than $200 billion in trade surplus with the US. It is China's largest export market. To think that China will somehow 'decouple' from a US consumer led recession is simply fantasy.

Slowly but surely economists are finally awakening to this reality and are quickly discarding any absurd notions they previously held regarding decoupling.

CresceNet said...

Gostei muito desse post e seu blog é muito interessante, vou passar por aqui sempre =) Depois dá uma passada lá no meu site, que é sobre o CresceNet, espero que goste. O endereço dele é http://www.provedorcrescenet.com . Um abraço.

Anonymous said...

Anonymous said:

"Slowly but surely economists are finally awakening to this reality and are quickly discarding any absurd notions they previously held regarding decoupling."

Sayin' it's so don't make it so.

Please identify the structural factors within the world economy at large, or the Chinese economy in specific that would preclude a re-direction of China's production to other world markets.

In fact, I'd argue that the redirection is inevitable; as you mentioned in your post, arbitrage and offshoring will drive U.S. labor rates toward a much lower equilibrium point, causing a concomitant reduction in U.S. buying power. Ergo, China's $200B trade surplus with the U.S. is basically history. China has to find other markets.

So then the question is "which other markets, and how fast". How fast is directly proportional to the rate of globalization, and globalization seems to be happening very quickly.

Tell me again why de-coupling can't occur? Please identify structural impediments to trade flow change, and to labor rate (and hence income) arbitrage around the world.

Shawn said...

Hellasious,

Great post! Your idea of Interest Rate and the Hair Saloon is an interesting idea.

Keep up the good work, and a Prosperous Happy New Year 2008!

Brian Woods said...

H. Happy New Year and best wishes for 2008.

Brian P

Anonymous said...

"Please identify the structural factors within the world economy at large, or the Chinese economy in specific that would preclude a re-direction of China's production to other world markets."

1) Interconnected and interdependent global financial markets leveraged to the hilt vis a vis financial weapons of mass destruction i.e. CDOs, SIVs, CDSs, etc.

2) global real estate and stock bubbles, the most prime example being China itself, crashing simultaneously

3) Europe, England, US and Japanese economies stalling simultaneously as credit markets seize. Can you say Euribor and Libor?


Interesting that growth rates throughout the developed world are being ratcheted down simultaneously. Must be a coincidence.

Exactly what markets will China 'redirect' their exports to as Europe, England, Japan and the US begin their slide into deep recession?

Anonymous said...

China's trade surplus of $200 billion divided by $1.1 trillion Chinese GDP = 20%

$200 billion divided by $13.2 trillion US GDP =less than 2%

I wonder whose economy is more dependent on trade between US and China? I wonder whose economy will suffer the most in the event of a US consumer led recession?

JLS said...

"What is dynamic about Asia, if their growth is on the back of debt-ridden and dumbed down U.S. Consumers? Watch out below for China."

My opinion is that the growth in USA since about 1985 is due to taxe slashes (Reagan), a lower saving (10% in 1980 0% today), a growing trade deficit since 1995, and huge private debt.

The country who benefit the most of these policies where Japan in the 1980s and China in the 1990 since now.

Now these policies come to an end.
Far East depend too much about Export to USA.
Especially China because the standard of living is still very low, lower than Albania the poorer country in Europe.

"I wonder whose economy will suffer the most in the event of a US consumer led recession?"

1 Mexico, Canada
2 China, small Asian country depending too much on US Export.
(Philippines, Malaysia...)
3 Japan, Korea.
4 Europe (UK,Spain more because of high percentage of private debt), Switerland rather safe.
5 Russia, India
For the rest of the World I don't know (Latin America, Africa ...)

The criteria are the percentage of export to USA compared to GNP and the size and wealth of middle class.

JLS said...

"What is dynamic about Asia, if their growth is on the back of debt-ridden and dumbed down U.S. Consumers? Watch out below for China."

My opinion is that the growth in USA since about 1985 is due to taxe slashes (Reagan), a lower saving (10% in 1980 0% today), a growing trade deficit since 1995, and huge private debt.

The country who benefit the most of these policies where Japan in the 1980s and China in the 1990 since now.

Now these policies come to an end.
Far East depend too much about Export to USA.
Especially China because the standard of living is still very low, lower than Albania the poorer country in Europe.

"I wonder whose economy will suffer the most in the event of a US consumer led recession?"

1 Mexico, Canada
2 China, small Asian country depending too much on US Export.
(Philippines, Malaysia...)
3 Japan, Korea.
4 Europe (UK,Spain more because of high percentage of private debt), Switerland rather safe.
5 Russia, India
For the rest of the World I don't know (Latin America, Africa ...)

The criteria are the percentage of export to USA compared to GNP and the size and wealth of middle class.

Juan said...

Don, December 29, 2007 7:23 PM;

Absolutely. Rising productivity has never been so one-sided as usually portrayed.


Anon, December 30, 2007 3:21 PM;

What you say would be more correct if it tried taking account of the fact that a large portion of China's total mfg. and more than one half of its exports derive from foreign firms in China. As Martin Hart-Landsberg put it in 2006 :

"the [Chinese] economy [has been and remains] shaped by the activities of export-oriented transnational corporations..

Now, when understood that these transnats are de facto not-national enterprises that in many cases are also links in the larger global assembly line, it's clear from FDI data, etc, that China has been ever more tightly coupled and certainly cannot avoid crisis in the U.S.

Well, I should say that its clear so long as we don't take nations as the only proper unit of analysis but understand that national economies have largely been superceded from which we begin to see that 'decoupling' rhetoric is at the least propagandistic.

Nor should this be taken as China specific when, per 4/10/07 Department of Commerce findings, "related party trade (trade by U.S. companies with their subsidiaries abroad as well as trade by U.S. subsidiaries of foreign companies with their parent companies).. accounted for 46.8 percent ($863 billion) of [U.S.] consumption imports and 30.8 percent ($319 billion) of total [U.S.] exports"

If global capitalism was not a for profit affair 'structural impediments' might not develop. But since it is, they do and become exacerbated via the inevitable recession associated rise in economic nationalism.

Remember that 'minor' recession a few years ago? Take a look at the large drop in rate of growth of world trade. IICR, it was on the order of +14% to either +1% or zero.


Hellasious,

Another way to think of what's taken place is a shifting from creative destruction to destructive creation which is to say, a change in asymmetry. The system imagines to win by shorting itself.

Thai McGreivy said...

Hellasious, as always I love your blog.

I really think on this manufacturing theme you are guilty of 'true, true and unrelated'.

As Patfla has pointed out in an earlier posting, US manufacturing still represents almost 27% of world manufacturing. That share is if anything increasing over the last 20years. There are just no jobs in manufacturing anymore.

Let me make my point with a hypothetical... Say auto manufacturing's productivity improves 12% annually (for the sake of numbers). This would mean that auto companies will produce twice as many cars with the same number of workers in 6 years as they do today. At a certain point, unless they are going to produce an unlimited number of cars, the auto company will have to start 'laying off' workers as the market for cars becomes mature/fully saturated with autos.

This is a fundamental problem with ANY market where resources/size is finite. It is the same fundamental constraining force that leads us to conclude what the size of the housing market 'should be' and when prices have moved into 'bubble' territory. There is nothing either ominous or unhealthy about this.

Anonymous was also correct to remind you that you may be a little misinformed about healthcare worker service jobs (even exculding doctors... which in fact you should not since the ROI for education/training time of physicians is some of THE WORST in healthcare. Many nurses make more than many physicians today... and they can do this with 2 years of education after high school if they are smart and plan it right.
MRI techs, Physicial Therapists, Cardiac Rehab Therapsits, Occupational Therapists, etc... all make really good living for the time committment/educational investment they must put into their careers. Many people also find this work more fun than sitting in front of a computer all day. Do not kid yourself that the healthcare service jobs are all minimum wage.

It is defintiely true that nusring assistant jobs do not pay very well, however the reality of these positions is that they are mostly filled by
1. people who have either just recently emigrated to the US or
2. people who are entering the workforce for the first time
Further many of these positions are taken as apprentice career springboards to higher paying careers such as nursing, etc...
Today, the average nurse makes a whole lot more/has a much better educational ROI than the average MBA.


The real issue is not service vs. maufacturing, it's just not and unless you make a better argument, I am not reaching YOUR conclusion from your own data.

The real issue is just like the title of your blog says 'there is too much debt'. The West is spending money to pay for healthcare using an IOU that must be paid back by our children... only the collection date on that IOU is getting closer everyday.

The US/Western Europe/Japan are all in the midst of the largest intergenerational income transfer from young to old the world has ever seen. It was this same issue that led to the fall of communism: when young workers started fleeing East Germany in the early 80's to find 'better paying work' (the fruit of their labors were supporting their parents and their parent's parents to the point where the young eventually said 'enough is enough').

The same is happening in the west. Every day the % income transfer from young to old inreases (and the rate of growth of this transfer is increasing daily. Look at the data from the recent US Consumer Expenditure Survey: http://www.bls.gov/cex/csxfaqs.htm
you will see that only 3 things really represent the problem
1. Increasing expenses for housing
2. Increasing expense for education
3. Increasing expenses for healthcare


We know:
#1 is a bubble already deflating (made worse by taste preferences to live in LARGER HOMES more geographically remote than whe have ever lived in before).

#2 is a bubble plain and simple but no one wants to address it publically since who otherwise they would be labled 'anti-education'? A kiss of death politically.

#3 The biggest bubble of them all. Did you know 4% of Americans represent 70% of healthcare costs? This is also the hardest to address as it requires an open and honest national VALUES discussion, something this country (any country?) has never been very good at.

So in the meantime we just borrow to fund #3... you know as well as I that Medicare is the 900lb gorilla when it comes to governement spending (and this is not even counting the increasing costs of healthcare for all active military and US government workers, which in term represents a large % of 'non healthcare' spending). Add Medicaid, state healthcare expenditures and you can see this is the real ticking timebomb.

Other than Oil, all other issues are window dressing by comparison.

Anonymous said...

"Eventually China will stop supporting the US $ and its stock bubble will burst. Just like the US stopped supporting the pound in September 1928."

I hear that parallel drawn more and more and I agree. I think of China as being in the same position as 1920s America - ascendant, but doomed to go through the wringer with the rest of the world first.

chad said...

health care is low value? besides........the destruction is happening all around you.......look at media. look at all the worthless infrastructure. steve jobs is about to become the head of a major music label, and quite possibly a "t.v." exec as well as a killer consumer electronics manufacturer. the point i'm trying to make about rebuilding is it is never in what got destroyed. you expect us to go to widget making now?, after we've perfected it? that's why we're shippin those jobs elsewhere. and about creativity....... i believe you are using an application, along with countless others that have been "manufactured" here that was created since the great bubble burst that at some point would have been possible, maybe just not as soon as it was were there no speculative bubble. the trick with new technologies is monetizing them. did anyone ever bemoan the plight of the local blacksmith after henry ford completely obliterated a crucial line of work for a person if every community across this country? the creativity is all around you, and its never the same the next time around

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