The Great Unwinding

Writing in the Financial Times, Martin Wolf has pointed out why the US government's unofficial weak dollar policy isn't so smart. Although in recent quarters "net exports contributed a quarter of US growth," exports are "only some 12 per cent of GDP. They must grow by considerably more than 10 per cent a year, in real terms, if the contribution of net trade to the rate of growth is to be as much as 1 percentage point. It is likely to be much less."

Sounds technical, but it means that the U.S. can't replace the engine of consumer spending with the engine of exporting for foreign spending. Two reasons are obvious: most of the world's population does not have as much money as Americans do, and they aren't willing to spend all their savings and more to do it.

Wolf calls this the "great unwinding" - an end to the growth caused by spending based on borrowing against rising housing prices. He describes it as "a turning-point for the world economy." The question is whether the "emerging markets" will be the "demand engines" of the economy to replace the US consumer.

My own guess is not. The US consumer was able to be the little demand engine-that-could because of decades of prior social investment, housing price inflation, easy credit, and no saving for tomorrow. Most of the world's population lacks some or all of these things. In addition, though many of them are wealthier than ten years ago - China is the leading example, some of the Indian population is another - the manufacturing system depends not on their wealth but on their low wages.

The world needs social development spending as much - more really - than consumer spending. We should figure out how to get that!