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Why a Collapsed US Economy is
Good for the Global Economy
Friday, 10 April 2009
Melbourne, Australia
By Kris Sayce
It's Good Friday, and we're sure you're happy to relax today. All the shops are closed, and so are the stock markets.
So today we'll keep things brief.
One of those little things that's been nagging at us recently is the whole question of America's economic importance. For years the message has been that the American consumer is vital to the world economy.
After all, the American consumer accounted for about 70% of the US economy. When they stop spending, that's a big hole to fill.
You only have to watch the business shows on CNBC, Bloomberg or Fox Business to hear the same old story. "America will recover because… it just will alright." And "without America the whole global economy cannot survive, it needs us to spend."
However, that isn't true. The global economy doesn't need Americans to spend at all. That's the wonder of free markets and cross-border trading. I'll get onto that in moment. But first the reason this sprung to our mind.
We were watching CNBC and one of the panelists said something like (our feeble memory means we can only paraphrase):
"The world needs the American economy to recover. It needs the American consumer to spend. That's why foreign investors will continue to underwrite America by buying government bonds. And China's GDP per person is only about USD$3,000 so they can't fill the gap left by falling American consumption."
According to the latest stats, China's GDP per capita is actually closer to USD$6,000. But the truth is, whether it's currently USD$3,000 or USD$6,000 it doesn't matter. Because if the Chinese economy is able to continue to grow, and continue to produce then the gap between China's per capital GDP of USD$6,000 and the United States' GDP per capita of USD$47,000 will soon be closed.
Take a look at the chart of the Chinese Yuan against the US Dollar…
The Greenback has lost nearly 20% of its value since the Chinese government allowed the currency more flexibility in movements against the dollar.
You'll notice that it's only leveled off since the 'flight to safety' began mid last year. But that still spells trouble for the US dollar. The flight to safety was a knee-jerk reaction. It was the only trade that professional investors knew.
However, the game has changed and the US dollar no longer represents safety. And the idea that only Americans can afford to spend, that game is soon to change too.
How so? Simple, let's take a look at the numbers and reveal why China's USD$6,000 per capita GDP makes them wealthier than the US's USD$47,000 per capita GDP.
You see, for years the Western world has sent all their manufacturing off shore to China and other South East Asian economies. Why? Because labour and manufacturing costs in their own domestic economies became too expensive.
It was cheaper to the Chinese to make something and ship it half way across the world than it was to make it down the street.
That started to give some manufacturers a comparative advantage, so their domestic competitors had to do the same thing as well. We've seen that with Pacific Brands recently - although they're slightly late to this party.
But what we need to look at is the reverse side of the equation. Chinese companies aren't making all these products for nothing. They are making money, and thanks to state ownership, much of those profits are ending up in the hands of the government, who in turn are investing the money in US government bonds.
But what happens when the American consumer stops spending? Won't this be bad for China? Who's going to buy all the stuff they've been making.
The answer is simple. The buyers will be those in countries that haven't spent all their money - and there are plenty of those. Plus, a collapse in American spending will mean a collapse in the US dollar, which will mean an appreciation in the value of the Chinese currency and other currencies.
In effect, this simple act of US dollar devaluation suddenly makes the Chinese citizens comparatively wealthier. More of them would be able to afford to buy not only the goods they are producing, but goods from overseas as well.
Remember, much of the wealth in the US isn't real. It's a combination of growth by inflation and credit. If you remove the growth and credit and replace it with growth and savings from China and Japan, you actually end up with a much stronger global economy.
As for the United States, well, it will take years to recover from their spending binge. And in the meantime, the nations of South East Asia will be growing. And who knows, maybe it will get to the stage where Chinese manufacturers are sending their goods to be made off shore to Africa…
Or even Western Europe and North America.
Cheers.
Kris.
[email protected]
Good for the Global Economy
Friday, 10 April 2009
Melbourne, Australia
By Kris Sayce
It's Good Friday, and we're sure you're happy to relax today. All the shops are closed, and so are the stock markets.
So today we'll keep things brief.
One of those little things that's been nagging at us recently is the whole question of America's economic importance. For years the message has been that the American consumer is vital to the world economy.
After all, the American consumer accounted for about 70% of the US economy. When they stop spending, that's a big hole to fill.
You only have to watch the business shows on CNBC, Bloomberg or Fox Business to hear the same old story. "America will recover because… it just will alright." And "without America the whole global economy cannot survive, it needs us to spend."
However, that isn't true. The global economy doesn't need Americans to spend at all. That's the wonder of free markets and cross-border trading. I'll get onto that in moment. But first the reason this sprung to our mind.
We were watching CNBC and one of the panelists said something like (our feeble memory means we can only paraphrase):
"The world needs the American economy to recover. It needs the American consumer to spend. That's why foreign investors will continue to underwrite America by buying government bonds. And China's GDP per person is only about USD$3,000 so they can't fill the gap left by falling American consumption."
According to the latest stats, China's GDP per capita is actually closer to USD$6,000. But the truth is, whether it's currently USD$3,000 or USD$6,000 it doesn't matter. Because if the Chinese economy is able to continue to grow, and continue to produce then the gap between China's per capital GDP of USD$6,000 and the United States' GDP per capita of USD$47,000 will soon be closed.
Take a look at the chart of the Chinese Yuan against the US Dollar…
The Greenback has lost nearly 20% of its value since the Chinese government allowed the currency more flexibility in movements against the dollar.
You'll notice that it's only leveled off since the 'flight to safety' began mid last year. But that still spells trouble for the US dollar. The flight to safety was a knee-jerk reaction. It was the only trade that professional investors knew.
However, the game has changed and the US dollar no longer represents safety. And the idea that only Americans can afford to spend, that game is soon to change too.
How so? Simple, let's take a look at the numbers and reveal why China's USD$6,000 per capita GDP makes them wealthier than the US's USD$47,000 per capita GDP.
You see, for years the Western world has sent all their manufacturing off shore to China and other South East Asian economies. Why? Because labour and manufacturing costs in their own domestic economies became too expensive.
It was cheaper to the Chinese to make something and ship it half way across the world than it was to make it down the street.
That started to give some manufacturers a comparative advantage, so their domestic competitors had to do the same thing as well. We've seen that with Pacific Brands recently - although they're slightly late to this party.
But what we need to look at is the reverse side of the equation. Chinese companies aren't making all these products for nothing. They are making money, and thanks to state ownership, much of those profits are ending up in the hands of the government, who in turn are investing the money in US government bonds.
But what happens when the American consumer stops spending? Won't this be bad for China? Who's going to buy all the stuff they've been making.
The answer is simple. The buyers will be those in countries that haven't spent all their money - and there are plenty of those. Plus, a collapse in American spending will mean a collapse in the US dollar, which will mean an appreciation in the value of the Chinese currency and other currencies.
In effect, this simple act of US dollar devaluation suddenly makes the Chinese citizens comparatively wealthier. More of them would be able to afford to buy not only the goods they are producing, but goods from overseas as well.
Remember, much of the wealth in the US isn't real. It's a combination of growth by inflation and credit. If you remove the growth and credit and replace it with growth and savings from China and Japan, you actually end up with a much stronger global economy.
As for the United States, well, it will take years to recover from their spending binge. And in the meantime, the nations of South East Asia will be growing. And who knows, maybe it will get to the stage where Chinese manufacturers are sending their goods to be made off shore to Africa…
Or even Western Europe and North America.
Cheers.
Kris.
[email protected]
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