04/05/10 Baltimore, MD - 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.
The next thing you know, you are taking over the auto industry…and health care…
…and fixing prices for breast implants…
Bill Bonner
Since founding Agora Inc. in 1979, Bill Bonner has found success and garnered camaraderie in numerous communities and industries. A man of many talents, his entrepreneurial savvy, unique writings, philanthropic undertakings, and preservationist activities have all been recognized and awarded by some of America's most respected authorities. Along with Addison Wiggin, his friend and colleague, Bill has written two New York Times best-selling books, Financial Reckoning Day and Empire of Debt. Both works have been critically acclaimed internationally. With political journalist Lila Rajiva, he wrote his third New York Times best-selling book, Mobs, Messiahs and Markets, which offers concrete advice on how to avoid the public spectacle of modern finance. Since 1999, Bill has been a daily contributor and the driving force behind The Daily Reckoning. Dice Have No Memory: Big Bets & Bad Economics from Paris to the Pampas, the newest book from Bill Bonner, is the definitive compendium of Bill’s daily reckonings from more than a decade: 1999-2010.
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“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” One thing is for certain the middle class of India is going to want to buy a lot of gasoline which is really good for the futures markets and oil companies and the speculators and the manipulators, and not so good for the rest of the world like here where gas will be up to 5 or 6 or maybe even 10 bucks a gallon very soon. O Boy this manipulation stuff is easy.
Like .99 cents is so much lower than $1.00. Really pathetic.
This is my second attempt to post my comment. Will it work this time? We will see. “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” One thing is for certain the middle class of India is going to want to buy a lot of gasoline which is really good for the futures markets and oil companies and the speculators and the manipulators, and not so good for the rest of the world like here where gas will be up to 5 or 6 or maybe even 10 bucks a gallon very soon. O Boy this manipulation stuff is easy.
Like .99 cents is so much lower than $1.00. Really pathetic.
We’ve had fantastic economic news last week and again this week! Obviously, as I have been saying for months, the economy roared back and the recession ended in 5/09.
This shouldn’t surprise you at all. For some reason, you think that no one has money. Did you see them lining up for an unneeded $500 electronic gadget last weekend? See that’s the problem with the doomers, they can’t see beyond their own gloom.
Step back and look at the overall situation. In the US, a very small percentage are affected by home prices and foreclosures but you’d think it was 1 in every 2 the way the doom squadron reports it.
Let’s celebrate and give credit where it is due – to Dr. Bernanke and President Obama. As I’ve repeated many times here, they pretty much took us from a cliff back to prosperity in a relative heartbeat.
Dear Harry,
I am so amazed at the way you worship Obama and Bernanke.
They saved you so well, that all the “money”
you and your family and friends have will be worth nothing.
People really believe what they want to believe.
Dear god, Bill, this might just be THE best essay i’ve ever read on economics. I’m saving it to my children. One thing I could say is: who is consuming more than they produce? the USA. What we see now is a shift of historical proportions. Thanks for this enlightenment.
Consumption of more goods equates consumption of more energy. As demand surpasses supply for oil, higher energy prices are inevitable. Like last time, when oil hit close to $150 a barrel, energy cost will act like a brake on the economy.
Neither the current administration or the party of no (the republicans) have a plan to deal with peak oil. The market-place has provided only band-aid solutions to solve the problem of depleting oil. Cheap, abundent energy has powered world growth during the last hundred years, not economic ideology.
Unless we find an alternative, inexpensive abundant source of energy, we will live in a Malthusian world without the resources to innovant our way out. We all will join the unfortunate and be forced to survive on $3 a day.
brilliant write up….It really feels good to read logical things that actually make sense…..THANK YOU
A short comment on your housing woes. I and my wife purchased a house six years ago that was built in 1883. Since it was built it has been moved once, jacked up and had a new foundation/basement poured under it and extended at least four times so it bears the evidence of it’s years and it’s various former owners.
The oldest part is as good and as sound as it was when it was built (early photos prove it’s original appearance matches with the present). Subsequent additions have suffered from increasingly modern materials.
The vinyl framed dual paned windows are the worst “improvements”. They perform worse than the century old windows and will need to be replaced soon although they are less than twenty years old. We plan to replace them with European style dual pane windows.
You may have experienced these while you were in France; a set of windows that can be opened that are on the inside of the window and another set, also openable, that are on the outside of the window. sometimes old ways of doing things are much better than what is touted as new, modern or progressive.
Very well done and to the point analysis there, Mr. Bonner. And you didn’t even insert a “Great Correction” to boot!
Complex questions sometimes have simple answers and they are often overlooked by those that are heavily degreed and paid to develop over-complicated theories that are intrinsically erroneous as you can see coming from many an ‘economist’ these days. The crap that comes out of their mouths consequently is astonishing to say the least.
Bonner just gave them an extended education and a lucid cathartic towards the attainment of clear thought.
RH
Harry is correct if you are a “trader” as this market is for them.
BB is correct if you are part of the “common folk” and are watching from the dungeons of lost jobs and houses, crushing of public education because of horrendous tax revenue losses…and on and on.
This exemplifies the difference between Wall Street and Main Street.
He may be brilliant as some of you say but the most accurate commentary from Bill so far is when he says he ‘doesn’t know’ what will happen. So far he has been accurate with that prediction.
This is great. Harry and his friends are making enough money to pay the taxes it is going to take to get this country’s head above water with the huge debt we have taken on so him and his friends can cash in. Nothing is for free.