Whats gone wrong in the last couple of years with the American Economy?
Did the average Joe started working less or producing less efficiently? The answer is NO.
So what the hell has happened?
Why this fuss about people losing homes and jobs?
To my knowledge, this has two lines of answer.
People who look for Macroeconomic data or analysis read no further.
This has no such content.... this is just a simple logic.
Logic I
This is very simple to answer.
So as an individual what all I use in a day?
Forget the toiletries....
Gas, Car, Tyre, Stereo, iPod, Mobile phone, TV, the quintessential computer, software for computer, clothes, toys for children, food etc etc....
Now, how many of them are made in your own country??????
Apple Computers in some of its products says "Designed in Silicon Valley, California, Made in China."
In the name of shareholders' value, in the name of economic profit, everything is produced at the cheapest place and sold at the costliest place.
Now, What makes American Economy?
Lets take classical economic theory which says, GDP, its a function of gross consumption, gross investment and the net of export & import.
To be more specific,
GDP= gross consumption+gross investment+(exports-imports)
*forget the government spending for a while.
Now, what has happened is, MONEY IS TAKEN FROM developed countries AND IS INVESTED IN NEW FACTORIES AND PRODUCTS IN CHINA, INDIA, RUSSIA, POLAND, TURKEY & others.
What the great management guys from Harvard & Wharton did not understand is - people in developed countries need enough money to buy these products - to keep the consumption boom.
I welcome creation of new factories including in MY COUNTRY. But - this is a big but - is the average citizen of developed nations left with more money for us to prosper?
If you say yes, you are dumb.
If your answer is no, then the next logical question is where did it go?
Well, you want oil, its from Arab, you want iPod, its from China, you want fuel efficient cars, its from Japan, you want efficient software, its from India, you want cheap labour, its from Mexico so what else do you have to produce? Coke, beer & ???
One man's food is other's poison. This statement has been vindicated by a gradual reduction of American Economy.
Now lets come to GDP.
Its, as said, Consumption + Investment + (Exports - Imports)
By my logic and probably by many others' logic, US was & is importing more than exporting.
Well, when did China open its economy? Late 70's & early 80's?
Only in mid 80's US started importing more than exporting......
Lets take insvestment out from the equation..... beacasue we know there were very less investment compared to the post world war II US.
Lets give numbers to each term and say total US consumtion is $1000 every year and you export $400.
And import in year 1980 is $300.
Also lets say, consumption grows annually by 10% and export too by 10% and now, imports by 20%.
By this, in a span of five years,
Consumption will be $1464
Export will be $585
Import will be $622.
So there is a $37 deficit -> (EXPORT - IMPORTS)
Now you understand the problem.....
Moral of the story is - you cannot take away jobs and expect the people to be more prosperous and with higest per capita income or purchasing power parity or whatever economic mumbo jumbo you use.
So what to do now? Stop all imports from India, China, Brazil, Mexico, Arab & Turkey??? NO.
Increase the Government Spending..... and that is what Mr. George Bush did by injecting capital to banks and that is what Mr. Barak Obama has proposed to do. Textbook economics.
When I say, economics is flawed, I don mean textbook economics. But the interpretation by alumni of Harvard, Princetons, Sloans, Purdues & Whartons of this world.
Well there may be different views on it... but on a general note, I believe this is how the deeper problem was created.
All in the name of the Shareholder Value Creation/Addition......
I'm not saying don produce here or buy products from here....
If you import more, find a way to put more money in the hands of your people.
Lemme take another post to look at New Age financial instruments.