First lets all worship the much maligned American Consumer ! After all most of the economic development in the rest of the world, especially China (and certainly the Indian IT bussness) has happened due to the voracious appetite of the American Consumer. So the world is in trouble. The American Consumer, encouraged by the manipulative financial wizards of Wall Street, has grown too fat and suddenly realized they have been consuming far far more than they can afford. They have to start shedding quite a few pounds and the financial world is in absolute panic. There is talk of depression. There is talk of the fall of the financial and banking systems of the world. I would like to invite those that know more about this to contribute. but let me kick this off first …
In any economy increase in paper wealth has to be matched by an increase in productivity. Or at least the increase in paper wealth must be distributed evenly across te economy, providing a boost in confidence, expenditure and most important – savings. What was happening in the US that a rise in glamorous debt instruments – with incredible complexities – encouraged the the US consumer to borrow against their savings (in most cases the value of their houses) – far beyond the real value of their savings. So the value of your saving (say your house) was measured not in real value, but in the amount of money you could borrow against it.
The debt instruments were created so that a larger and larger percentage of the increasing debt of the consumer was pocketed in cash by the creators of the debt instruments. And not pushed back in the ‘productive economy’ but back further into the ‘debt economy. And of course when a few people n Wall Street started to make billions of dollars a year, a frenzy took over, and every one saw this as an ever continuing bonanza. But at the center of it there was no matching productivity. It was illusory wealth – which the increasing consumer debt merely got transferred to National Debt as the US consumer consumed more and more, paying for it through debt instruments. So the Chinese bought more and more treasury bills thereby taking over the US debt. In effect they were buying the US economy !
So now that the bubble has burst, where does China stand if the US consumer stops consuming ? I have just been to California where recession seems to hit last. That is because the easy going lifestyle of the people encourages a “it is not happening to us” attitude. But it is. My friends who own restauraunts are feeling the pinch. Those that own high end boutiques are feeling the pinch. And Hollywood as usual in complete denial will soon have to come to terms with cost cutting as hedge fund financing dries up. I think personally it will be good for Hollywood to cut down drastically on overheads. Too much money never gets on the screen.
I think China is extremely vulnerable. I have in this blog argued before that true economic development is internal. The unbridled desire to export and to judge the nation by it’s export economy is extremely dangerous. True economic development lies in a robust internal economy. For example while the Indian Tourist Board moans about not enough tourists, I would argue that it is rise in domestic tourism that is an indicator of economic development.
So back to China – I am not sure what the percentage of exports to GDP is, (anyone enlighten me ?) but am sure it is pretty high and much higher than India. So an extreme recession in the US will have a knock on effect on China and in the IT sector in India too.
But thankfully the European economy is becoming robust. The EU as a whole is not almost as biig as the US economy. Europe is bound by old culture and tradition, which is both it’s block to entrepreneurial development , but at times likes this provides the bulwark to support the world economy.
The world’s economic leaders should look to :
a. To support the US economically. Financial aid to the US from China ? Yes, that is a reality and something that should be done ! No country in the world yet has reached the technology developement process that US has. It is the one sector that has delayed the recession in the US and it needs to be supported.
b. An Asian Economic Zone between China, India, Korea and Singapore. A kind of a Asian Common Market. t will stimulate the deamnd and supply and savings between the rising nations and reduce a dependance upon the failing US economy and ultimately the consumer.
c. Greater trade relations with the rising Europe. The inclusion of the educated and hungry East European populations into the EU is already providing a greate rentrepreneurial spirit there.
Please come in with your thoughts,