Global Economy (merged)

[Doly]

Well, I keep reading occassionally the Financial Times, and from time to time you get one of those "long view" articles saying that the current global imbalances can't go on forever, but they can't give you any decent estimations on when or how it's all going to crash.

I bet that when it happens, it will be like the Great Depression. You will get experts saying it's just a temporary adjustment, even as it's happening.

We will only see the crash on the rear view mirror.

[MrBill]

Well, I keep reading occassionally the Financial Times, and from time to time you get one of those "long view" articles saying that the current global imbalances can't go on forever, but they can't give you any decent estimations on when or how it's all going to crash.

I bet that when it happens, it will be like the Great Depression. You will get experts saying it's just a temporary adjustment, even as it's happening.

We will only see the crash on the rear view mirror.

Well, the imbalances obviously cannot continue indefinitely.

As I have already posted here before (many times actually) .

The US consumes 2/3 of the world's current surplus. That is the world's net savings. It is doubtful that they can consume 100%. And it is impossible for them to consume more than 100%. So by definition the US current account deficit is limited by all other countries surpluses, and other countries run deficits as well.

Secondly, one country's trade surplus has to be another country's deficit. So, if the US can no longer pay for its imports then oil producers and Asian exports can no longer sell to them. That reduces those exporters' current account surpluses.

But finally, although many countries feel uncomfortable running large surpluses with the USA, they are also unwilling to cut back exports and grow slower themselves.

And so far no one reached a consenus for unwinding those surpluses, which would include lower, slower growth for those exporters; and higher real interest rates accompanied by higher domestic savings and lower consumption by Americans as they repay debt.

Quite the opposite. Those exporters are keeping their currencies low, not just against the US dollar, but also against the euro, to keep their own exports and headline growth as well as job creation high.

So it is pretty hard to unwind imbalances when no one is willing to bite the bullet and settle for lower, slower growth themselves.

[roccman]

"Secondly, one country's trade surplus has to be another country's deficit. So, if the US can no longer pay for its imports then oil producers and Asian exports can no longer sell to them. That reduces those exporters' current account surpluses. "

This is where I am not convinced.

Why would almost 3 billion Indians and Asians not become their own consumer machine?

We are at a point where America is becoming increasingly irrelevant on the global playing field.

[MrBill]

"Secondly, one country's trade surplus has to be another country's deficit. So, if the US can no longer pay for its imports then oil producers and Asian exports can no longer sell to them. That reduces those exporters' current account surpluses. "

This is where I am not convinced.

Why would almost 3 billion Indians and Asians not become their own consumer machine?

We are at a point where America is becoming increasingly irrelevant on the global playing field.

This is a little like 'having your cake and eating it too'.

Yes, India can sell to China and China can sell to India, and everyone can stop selling to the USA. Or everyone can stop accepting USD as payment for sales to the USA, and insist on yuan or rupees instead.

But a $13 trillion economy growing by $450 billion per year with 300 million consumers is not irrelevant on the global playing field. It is a source of demand for many of these developing countries. That demand is not easily replaced. And not overnight. The US is also an important destination for excess capital as well.

I do not have to sell to my best customer, but then I do not get any business from my best customer either. That lowers my revenues and my profits.

So the simple fact remains

C/A Surplus = C/A deficit
Trade Surplus = Trade Deficit
and if you are talking about the
Balance of Payments (BOP)
Interest earned abroad = Interest paid abroad

You can cut the USA out of the equation, but the equations still have to balance even if Asia is only trading with itself.

[roccman]

"But a $13 trillion economy growing by $450 billion per year with 300 million consumers "

Just 20% of China's population makes up the 300 million american consumers.

And I would argue - we are at a point where 300 million american consumers are out of money and almost out of jobs...retail sales down...credit spending up...making hamburgers is now classified a "manufacturing".

And "growing" by $450 Billion a year??

If I had a printing press in my basement I would be "growing" too.

How much is new money supply "growing" (M3) what 12-13% A MONTH??!!

The stock market needs to be at 15,000 JUST TO BREAK EVEN.

[MOCKBA]

"But a $13 trillion economy growing by $450 billion per year with 300 million consumers "

Just 20% of China's population makes up the 300 million american consumers.

How many chinese earning $26/week would it take to make up for american consumers who spend $26/week on Starbucks?

Even if americans would make minimum wage at $7.25 and work 40 hours a week if would take 11 chinese to replace one american or 250% of China's population... But Americans hate to make minimum wage... and would rather outsource that to China.

[vision-master]

Or India..............

[roccman]

FWIW

Rise of India & China will alter income balance


Edited for length. Please insert LINK as opposed to long URL address. Thanks.

[MrBill]

"But a $13 trillion economy growing by $450 billion per year with 300 million consumers "

Just 20% of China's population makes up the 300 million american consumers.

And I would argue - we are at a point where 300 million american consumers are out of money and almost out of jobs...retail sales down...credit spending up...making hamburgers is now classified a "manufacturing".

And "growing" by $450 Billion a year??

If I had a printing press in my basement I would be "growing" too.

How much is new money supply "growing" (M3) what 12-13% A MONTH??!!

The stock market needs to be at 15,000 JUST TO BREAK EVEN.

GDP growth is NET of inflation. Hence the GDP deflator number.

M3 is no longer measured, so no, we do not know what it is.

M2 growth in the USA is significantly lower than money supply growth in the Australia, Canada, EU, Russia, and yes, China or India.

When China 'sterlizes' $1.2 trillion worth of export receipts, they do it by selling yuan to buy US dollars and euros. They print those yuan. Hence, why China's money supply is also increasing. Ditto for India.

If and when 300 million Americans lose their jobs, regardless whether they are in service or manufacturing industries, then they will put at least 300 million Chinese out of a job as well. Likely more.

And if they so choose, Chindia can simply demand payment in yuan or rupees for all those exports. They do not have to accept US dollars do they?

[I_Like_Plants]

"But a $13 trillion economy growing by $450 billion per year with 300 million consumers "

Just 20% of China's population makes up the 300 million american consumers.

And I would argue - we are at a point where 300 million american consumers are out of money and almost out of jobs...retail sales down...credit spending up...making hamburgers is now classified a "manufacturing".

And "growing" by $450 Billion a year??

If I had a printing press in my basement I would be "growing" too.

How much is new money supply "growing" (M3) what 12-13% A MONTH??!!

The stock market needs to be at 15,000 JUST TO BREAK EVEN.

There you go Rocc you answered your own question. Sure Chindia can become their own consumer machine, but what we have is hyper-consuming, no one, no state, no people, can go around living in 2000+ square foot houses, eating cheeseburgers, driving SUVs and all that, sustainably. It can be done for a short while.

In fact according to the Olduvai Theory, about 100 years.

[roccman]

"In fact according to the Olduvai Theory, about 100 years."

I thought Duncan revised that to 2008-2012 timeframe....

Soooooooo...

That hundred goes to 82 years (2012)

Yes?

[virgincrude]

Err, did anybody else notice the news that the US economy had zilch growth so far this year? Lots of BS about how things are looking good from both the NYT and WP, but more realistic analyses here:

“Yesterday we learned that 1st quarter GDP “grew” at an annualized rate of only .6% (of course if the government used honest inflation numbers, real GDP is already contracting). Slower growth means fewer jobs and declining incomes, which will further pressure the housing market as homeowners have less income to confront rising adjustable rate mortgages. For potential home buyers the situation is even worse. Not only do they face higher mortgage payments but they must now come up with actual down-payments (which they do not have) and meet far stricter lending standards, including documenting their inadequate incomes.
http://www.financialsense.com/fsu/edito ... /0601.html


"The GDP has plunged to .6% over the last two quarters, the slowest growth since 2002 (see Home Prices Rise:a Surprise?) yet the birth/death model is adding jobs at one of the highest clips ever.

The BLS has not released details of how their model works. Shouldn't that come under the Freedom of Information Act? Or is the birth/death model a top secret security risk? How does the BLS get away with this nonsense and why does anyone believe these jobs reports? That's the biggest puzzle of all.

Mike Shedlock / Mish
http://globaleconomicanalysis.blogspot.com/

Looks like your recession has started already

[EnergyUnlimited]

"In fact according to the Olduvai Theory, about 100 years."

I thought Duncan revised that to 2008-2012 timeframe....

Soooooooo...

That hundred goes to 82 years (2012)

Yes?

Within this 82 years electricity supply may become unrealiable, but you will still have it for 99% of time in first world (means about 3-4 days a year in NY without light...).
It will still take 2 or 3 decades more to deteriorate power supply sufficiently to create significant "permanent blackout areas" in current western nations.

[roccman]

"Within this 82 years electricity supply may become unrealiable, but you will still have it for 99% of time in first world (means about 3-4 days a year in NY without light...).
It will still take 2 or 3 decades more to deteriorate power supply sufficiently to create significant "permanent blackout areas" in current western nations."

I really need to see links or more explanation...even if it is anecdotal.

I work in the electricity generation field - NEPA permitting.

In the southwest we are running a 400 MW shortfall EVERY year for the past 5 years.

Bulk generation is in the "planning stages", but lights on is very far off for most of these projects...

Ergo

www.desertrockenergy.com

Planning started in 2001 for this 1500 MW project...EIS is not even close to being final...then add another 5 years for construction.

Also Mohave is now entirely dead...1680 MW off line.

Sorry to say...our electrical grid in on its last leg.

[Tyler_JC]

"But a $13 trillion economy growing by $450 billion per year with 300 million consumers "

Just 20% of China's population makes up the 300 million american consumers.

And I would argue - we are at a point where 300 million american consumers are out of money and almost out of jobs...retail sales down...credit spending up...making hamburgers is now classified a "manufacturing".

And "growing" by $450 Billion a year??

If I had a printing press in my basement I would be "growing" too.

How much is new money supply "growing" (M3) what 12-13% A MONTH??!!

The stock market needs to be at 15,000 JUST TO BREAK EVEN.

Oh, so the money supply is increasing by a factor of 3.8 every year? (X*1.12^12=3.8X)

Money supply growth is quoted as an annualized growth rate, not a monthly grow rate. Otherwise they would say that the money supply is growing at 1% a month, not 12%-13%.

And 20% of China does not have the same spending power as 100% of America. Or even 20% of America for that matter.

The Chinese simply do not have enough income to consume at America's level.

An increase in the value of the Yuan would put considerable pressure on Chinese exports and would put many of them out of business.

Also, the price of foreign imports would drop at the same rate that the price of exports increased, leading to a deterioration of China's massive trade surplus and thus shrinking GDP growth.

[roccman]

My bad...per year...still not a good outlook.

"Knees would be knocking audibly in the credit markets, if the Fed still reported M3 growth. ***Annual growth (SGS Ongoing M3 series) accelerated sharply in April to 12.9%, from 11.7% in March. [ See chart below / Bill ]*** The last time annual M3 growth approached 13%, the Fed was liquefying the financial system in the wake of the 9-11 terrorist attacks. Before that, the year was 1981 and official annual CPI inflation was running about 10%. If 10% inflation sounds familiar, that is roughly the level of annual CPI inflation that would be reported today using the CPI methodologies of 1980. [ See chart below ] ***Exacerbating the financial catastrophe that slowly is unfolding for the U.S. markets, the economy is in a deepening recession [ See chart below ]*** and the U.S. dollar has begun suffering nascent selling pressures. [ See chart below] ***In terms of monthly averages, gold already is at an all-time high, and the trade-weighted dollar is at an all-time low.*** Out of touch with reality, the Dow Jones Industrial Average keeps bouncing to new highs."



http://www.shadowstats.com/cgi-bin/sgs

[ColossalContrarian]

The Chinese simply do not have enough income to consume at America's level.

That’s pretty bad when our (America’s) national savings rate is -2%. It’s like our debt is also an income.

An increase in the value of the Yuan would put considerable pressure on Chinese exports and would put many of them out of business.

Also, the price of foreign imports would drop at the same rate that the price of exports increased, leading to a deterioration of China's massive trade surplus and thus shrinking GDP growth.

The rest of the world should keep loaning us money! (*for their own wellbeing!!!*)

[EnergyUnlimited]

"Within this 82 years electricity supply may become unrealiable, but you will still have it for 99% of time in first world (means about 3-4 days a year in NY without light...).
It will still take 2 or 3 decades more to deteriorate power supply sufficiently to create significant "permanent blackout areas" in current western nations."

I really need to see links or more explanation...even if it is anecdotal.

Collapse of grid will rather be an exhausting but gradual process, not a speedy one.
You will have to wait a bit longer for permanent failures of grid in richer countries.

I work in the electricity generation field - NEPA permitting.

In the southwest we are running a 400 MW shortfall EVERY year for the past 5 years.

Certain levels of shortages can be addressed by cuts of nonessential supplies to industrial uses, enforcement of conservation policies, say by lowering of households supply to 5A per 1000 sq ft of inhabited property, bans on use (and sales...) of air con etc.
This will allow for grid to work a bit longer.

Planning started in 2001 for this 1500 MW project...EIS is not even close to being final...then add another 5 years for construction.

Also Mohave is now entirely dead...1680 MW off line.

Sorry to say...our electrical grid in on its last leg.

My bet is, that all NIMBY factors together with BANANA principle will get swept under a carpet, once severe power shortages are faced.
So prepare yourself to face final rape of environment.

[roccman]

"My bet is, that all NIMBY factors together with BANANA principle will get swept under a carpet, once severe power shortages are faced.
So prepare yourself to face final rape of environment."

No argument here...it hath been foretold:

Sec. 1506.11 Emergencies.

Where emergency circumstances make it necessary to take an action with significant environmental impact without observing the provisions of these regulations, the Federal agency taking the action should consult with the Council about alternative arrangements. Agencies and the Council will limit such arrangements to actions necessary to control the immediate impacts of the emergency. Other actions remain subject to NEPA review.

THE STFU CLAUSE IN THE NATIONAL ENVIRONMENTAL POLICY ACT.

[I_Like_Plants]

EnergyUnlimited I thought it was fairly common knowledge, outages are a way of life in the US - sure only a few days a year, but they do happen. Also no water a few days a year, working on pipes etc., also heater for hot water out, this is just a way of life. In rural areas and areas with severe winters Americans plan, or at least should plan, on being on their own for a couple of weeks, no electricity or help - this is routine stuff in these areas. "Blackouts" (no electricity) were a common occurrance when I was growing up, and we kept our kerosene lamps handy. Bedtimes got even earlier too! In fact I'd say there are less outages now than when I was a kid, but if you think everything's perfect here in the US electricity-wise, you're seeing an ideal, not the real.

The Olduvai Theory says in 2030 things will be like they were in 1930. So, we have to look at how it was in the 1930s - well, a lot of people didn't have electricity, a lot of the time it was off-and-on, people had no phone or a party line phone, etc. I can see people sharing one cell phone now, and we'll sure see it in the future. We do have some people now living with no electricity, of course homless people sure live that way but also a lot of people who are financially on the edge.

As someone said here, it's easier for an American to confess they have a child molester in their family than admit to having financial problems.