October 23, 2006
Cloning the American Consumer
The most interesting bit in Barron’s is always the interview, and this is the most interesting bit from this week’s interview with James Paulsen:
“While the trade deficit is at record levels, the more important record in my book is the number of consecutive years we’ve run a deficit: 15 continuous calendar years. To me, what we’ve been through in the last 15 years with our trade picture is equivalent to the Marshall Plan after World War II, which was directed at rebuilding war-torn Europe and Japan. At the time, it was highly criticized as throwing money down a rat hole. But it turned out to be one of the greatest investments in U.S. history because it is still paying dividends today.
Today’s trade deficit is exactly the same thing; it is a massive stimulative policy aimed at jump-starting economies and utilizing previously underutilized resources in the world. It has been an incredibly expensive policy. It has cost us jobs. It has cost us lost domestic spending growth for a decade and a half, and it is just now starting to bear fruit. Last year, our trade deficit with Malaysia represented 18% of their GDP. We gave China 9% of their GDP. In 2001 emerging-market consumption in U.S. dollar terms was 40% of U.S. consumption. In ‘05 it was more than 50%. I am not saying where the money is being spent, just that in a few years the emerging economies will exceed U.S. consumption in dollar terms.
In a few years, we will have entirely cloned the U.S. consumer. That is, we are creating a world of middle-class shoppers. The concern has been the U.S. consumer has been the sole locomotive for world growth. Well, we are no longer the sole locomotive. We are taking the Mall of America out of Minnesota and putting it in Indonesia.”
Correct. I recently had lunch with a group of kids (young professionals in their early 20’s) at a Papa John’s here in Beijing. I noticed that they were all wearing clothes from American Eagle or Abercrombie and were all sporting either Motorola RAZR phones or iPods (often both). And they all ordered Cokes (with ice). It was a scene that made me smile.
October 23rd, 2006 at 11:01 pm
ROFLMAO since when is it good for any country to export it’s entire manufacturing base? The reason this is being done is not to help others, but to export inflation and import deflation. The US has expanded credit in the last 15 yeras like never before in the history of any nation,empire etc., and the effects of all this currency inflation would be like a tidal wave of price inflation at home. So the solution is to exploit all the cheap labor in China and let all the illegal aliens in to perform all the services at cut throat rates (besides they also send all the money earned back home). The only US export thesedays is the Dollar. And it’s value won’t hold up forever.
October 23rd, 2006 at 11:10 pm
i see, so, theres indeed a master plan behind this deficit spending…and maybe its about time to buy eur and gbp against the usd again to track the devaluation project to be set for the next stage
October 24th, 2006 at 12:12 am
Well, if you’re the most indebted nation ever, it would be best repay/service those debts in dollars worth substantially less.
October 24th, 2006 at 6:22 am
CM: I’m a distant (Florida) reader of your site, I enjoy your personal insight on the subject matter and your style.
Thanks for sharing.
October 24th, 2006 at 8:23 am
camabron: the simple fact is that when we exported manufacturing, we exported labor volatility. It’s a lot better to design iPod’s here and build them over there. Let the other nations deal with idle factories and blue collar labor. Besides, our labor force will shrink once the boomers go to pasture, why have all those factories take up all that land when you can build condos on them?
October 24th, 2006 at 9:49 am
Peter: I’m partial to the CNY myself. ;-)
StockRoach: Thanks for reading and for the kind words. My wife is not too thrilled with my style, especially when I wear checked shirts with striped pants.
October 24th, 2006 at 4:29 pm
What is CNY?
I haven’t seen striped pants in years…Chinese fashion?
October 24th, 2006 at 4:35 pm
pancho: Chinese yuan or Renminbi (RMB) if you know some Chinese. I’m a big fan of striped pants, especially the type made popular by Austin Powers.
October 24th, 2006 at 10:14 pm
Tom: So an economy based on financial bubbles/speculation/credit creation is better than a manufacturing one which creates added value ? World gone upside down. As to the engineering side, the Chinese are graduating way more engineering students than the USA is. The simple fact is that the manufacturing base was exported and the service sector was given to the illegal aliens simply for the sake of massive currency inflation and so the Governemnt wouldn’t have to pay the political price today.
October 25th, 2006 at 1:15 am
Camabron: We replaced low value manufacturering with high value knowledge based jobs. The US is still the leader in innovative products. Do you want to be a cost leader or innovation leader? Cost leaders are inherently low margin and produce some value but not as much as the other.
Now the fact that China is graduating more scientists/engineers is of concern but we were talking of manufacturing in the first place. This could become a problem for the USA real soon. I don’t disagree with you there.
For all the crap that we’ve been thru in our economy and the creation of credit bubbles, why do we still have relatively low rates? My guess is that the bankers are more interested in volatile areas of the world where they can charge more interest than the good ol USA.
Personally, I really don’t care if a Mexican or an “illegal alien” picks fruit or mows my lawn. That frees up my time for other high value opportunities, like reading this blog! :)
October 25th, 2006 at 2:21 am
Tom. It won’t end well. You can’t go against the laws of nature or common sense for that matter and expect a happy ending. The fact that rates are still low doesn’t mean they’ll stay that way. Markets are driven by perceptions in the short run, not by realities.
October 25th, 2006 at 4:42 am
Camabron: the wild card in all this is cheap oil. If energy costs too much then this whole globalization experiment could break down.
October 25th, 2006 at 8:22 am
Camabron: Let me point you to a CNN article about “insourcing”. It seems that foreign companies are building manufacturering plants in the US and employing labor here.