White House economist (CEA
Chairwoman) Romer today said the economy in the future will see business
investment and exports filling the hole left by consumer spending (and fiscal
stimulus) as households save more. The economy, Romer said, would be less
dependent on consumption as the savings rate reverts to the 1990â€™s level at 66%
down from 70% currently. She also said households would no longer tap
home equity to finance current consumption to the extent of the last
decade. Government is filling this whole now with mainly fiscal policy
and some aspects of monetary policy â€“ more like drop in the bucket that private
consumption filled until last September.
She probably is right in the
long run, as in anything is possible the more years one allows for something to
happen like exports and business investment to pick up the slack from reduced
But this is not possible for
the next several years at least. Not even China can direct its economy from savings to consumption
overnight and its government holds all the marbles. If China canâ€™t transition to a demand-led economy how can the
US export its way to prosperity ahead? Germany and the Euro Zone will go American? This is a
world of lessons learned and if there is any lesson learned it is donâ€™t count
on leverage to buy ones way to happiness. Having a savings for a rainy
day is wise, not cheap. Europe for the most part (excluding the UK which did behave very American-like in the last
decade) does not need to learn a lesson it already knowsâ€¦the wisdom of
US high tech exports have a world marketplace to sell into but quasi
adversarial states like China mean only some tech exports ever make it to China. Europe has adequate domestic tech substitutes
in hardware and software and outside things like video games, higher education
and Hollywood movies, there is not much else Europe wants that is American â€“ in
time maybe golf clubs and fishing rods when China discovers leisure and
respects as well as enforces property rights.
Sadly the $787bln fiscal
stimulus and $1.8trln projected budget deficit for FY2009-2010 will not fill
the hole left by a household in mean reversion and in a world where net wealth
has collapsed. What has helped fill the hole indirectly has been the
massive provision of liquidity by the Fed via conventional and unconventional
means and we all agree this is unsustainable without a Zimbabwe-like ending.
And with the US consuming
much of what the world makes, when this stops happening as it has, the rest of
the world does not have the income to support the level of imports that high
levels of exports helps support.
Global output gap is
enormous as happens in world recessions. And a world recession brought on
by a sudden collapse in credit flow does not allow for more typical business
cycle adjustments. Instead it is feast and famine overnight leaving firms
heavily exposed to excess inventory (or employment if service-based
firms). What business wants to expand capacity? Well surely there
are some like those in green technology, but this part of the economy is still
insignificant and not a major factor in growth, and not even with government
Business investment is
likely to remain depressed as long as or longer than household savings rates
I think todayâ€™s US trade
report shows just how badly global trade is hurt when US consumption collapses. Looking at the table
below I have highlighted the change in bilateral US trade deficits with major regions using Q1 2009 data
compared with Q1 2008 data (note bilateral data are seasonally unadjusted and
hence year-over-year comparisons are more meaningful than month-over-month
comparisons). Only the bilateral deficit with China is holding up
relative to the rest of key trading partners (down 8% Q12009/Q12008) suggesting
massive substitute effect â€“ Chinese made goods for rest of the world made goods
(and a stronger case for yuan appreciation). Mexico and Canada have seen their surpluses with the US implode. So has the EU. And Japan as
well. Auto demand (lack thereof) is surely a key driver in the reduced
imports into the US from major auto producing nations. And OPEC has seen its oil
exports hit by reduced consumption and lower prices compared with a year ago.
BALANCE March Feb
Jan-Mar09 Mar08 Jan-Mar08
Q109/Q108 (negative is US deficit growth, positive US deficit growth as in SK or US surplus growth as in Brazil)
-830 -1,915 -5,290
-71.8% (this number
screams sell C$...Chrysler and GM plant closings to cripple Cdaâ€™s exports and
-41.7% (if you like risk,
would be more inclined to be long Asia FX/asset risk than Mex or even Brazil)
-44.9% (sell euros â€“ see stocks
rolling over, export-led economic model leaves Europe little scope to absorb global
recession, and no scope for firm EUR)
-8.0% (best of the
-56.5% (what safe havenâ€¦new
lost decade in store hereâ€¦next major yen rally on collapse in risk, go short)
+28.8% (better of risk currencies)
of risk currencies â€“ best in class)
255 +364.7% (warning signal low but audibleâ€¦long
My point is Romer may be
right in some distant point in time, but not in the next decade at least.
Which means the private sector will not come roaring back on the coattails of
exports and business investment. And as government finds it canâ€™t keep
throwing borrowed dollars at the problem (just as Japan did in the lost decade),
outside of the Fed generated money creation, there is not much in the cards
that will drive US growth much above flat to 1.5% when the recession ends (well
into 2010 at the earliest).
My question is how long can
export-led economies hold out when global trade is under such intense
pressure? Protectionism is inevitable and there are signs of it
already. When Germany, Spain and Italy adopt cash for clunkers and auto sales surge, the US will follow (bill already in works in Congress),
this is a form of protectionism if indirectly.
China may be in fine shape to throw resources at its slowdown. But China canâ€™t afford to throw money at China at the rate that will trickle down to the developed
world and restore world trade.
We may be seeing green
shoots on the macro landscape. But green shoots in a draught will not
bear flowers or fruit.
Where does growth come from
ahead? The government until it finds it canâ€™t keep it up and then it is a
hobbled private sector (earnings starved firms, income/wealth starved
households in need of deleveraging and banks filling own holes and
recalibrating leverage) that yields a US version of Japanâ€™s lost decade.
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