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> Allentown
> The global economy is suffering from a lack of aggregate demand.
> With insufficient demand, nations compete furiously for their share
> of the diminishing growth pie.
> In the U.S. and Euroland, many policies only temporarily bolster
> consumption while failing to address the fundamental problem of
> developed economies: Job growth is moving inexorably to developing
> economies because they are more competitive.
> Unless developed economies learn to compete the old-fashioned way –
> by making more goods and making them better – the smart money will
> continue to move offshore to Asia, Brazil and their developing
> economy counterparts, both in asset and in currency space.
> Well we’re living here in Allentown
> And they’re closing all the factories down
> Out in Bethlehem they’re killing time
> Filling out forms
> Standing in line
> And we’re living here in Allentown
>
> – Billy Joel, 1982
>
> We’re all Allentowners now. Granted, 90% of the workforce is still
> reporting for work on time, but our standard of living, our
> confidence in the future – we’re standing in line in Allentown. Lost
> in the policy debate surrounding the elections and the subsequent
> demonization of the Federal Reserve’s Quantitative Easing (“QE2”)
> policies has been any recognition of why we no longer live on Ronald
> Reagan’s shining hill or how we might possibly reclaim higher
> ground. There are two fundamental explanations:
>
>
> 1) The global economy is suffering from a lack of aggregate demand.
> In simple English that means that consumers are not buying enough
> things and that companies are not hiring enough people because of
> it. Growth slows down, especially in developed as opposed to
> developing countries, and the steel mills of Allentown, USA and
> Sheffield, England close down.
>
>
> This shortfall of global demand is a nearly impossible concept to
> grasp amongst politicians and their citizenry. Don’t people always
> want to buy more things and isn’t demand theoretically insatiable?
> They do, and it is. Yet economic growth is a delicate dance between
> production and finance and when a nation’s or a family’s credit card
> gets maxed out, then demand/spending slows measurably. We are
> witnessing these commonsensical repercussions across the entire
> continent of Europe today and to a lesser extent in the United States.
>
>
> Developing nations and their consumers want to buy things too. And
> while their economies are growing fast, their overall size is not
> yet sufficient to pull along the economies of Europe, Japan and the
> U.S. Their financial systems are still maturing and reminiscent of a
> spindly-legged baby giraffe, having lots of upward potential, but
> still striving for balance after a series of missteps, the most
> recent of which was the trio of the 1997–98 Asian crisis, the 1998
> Russian default and the 2001 Argentine default. And so their
> policies are oriented towards export to debt-laden developed nations
> instead of internal consumption, leaving a gaping hole in global
> aggregate demand. China is a locomotive to be sure, but it cannot
> pull the global economy uphill on the basis of mercantilistic
> exports alone. It needs to develop many more of its own shopping
> malls and that will take years, if not decades.
>
>
> 2) With insufficient demand, nations compete furiously for their
> share of the diminishing global growth pie. All look to borrow
> growth from somewhere else. Nearly a half century ago, the
> undisputed champion of global growth was the United States – it held
> all the cards: an unscathed post-WWII industrial base, an
> acknowledged Bretton Woods reserve currency and an educated
> workforce able to out-innovate any and all competitors. No wonder
> our policies encouraged open markets and free trade policies that
> would only feed the United States hegemon. At some point in the
> 1970s to 1980s, however, the rest of the world began to catch up.
> Japan produced better cars than Detroit, the Iron Curtain fell, and
> the rise of China was soon to rock American/developed economies out
> of their presumption that the world was their export oyster. Billy
> Joel’s Allentown was transformed from an iron and coke/chromium
> steel behemoth into an unemployment center, filling out forms –
> standing in line.
>
>
> And so the United States and its developed economy counterparts face
> an unfamiliar crisis of unrecognized dimensions and potentially
> endless proportions. Politicians and respective electorates focus on
> taxes or healthcare when the ultimate demon is a lack of global
> demand and the international competitiveness to thrive. The solution
> for more jobs is seen as a simple quick step of extending the Bush
> tax cuts or incenting small businesses to hire additional workers,
> or in the case of Euroland, shoring up government balance sheets
> with emergency funding. It is not. These policies only temporarily
> bolster consumption while failing to address the fundamental problem
> of developed economies: Job growth is moving inexorably to
> developing economies because they are more competitive. Free trade
> and open competition, like a stretched rubber band, have snapped the
> U.S. and many of its Euroland counterparts in the face. By many
> estimates, Chinese labor works for 10% or less than its American
> counterparts. In addition, and importantly, it is able to innovate
> as quickly or replicate what we do. Jobs, in other words, can never
> come back to the level or the prosperity reminiscent of 1960s’
> Allentown, Pennsylvania until the playing field is leveled.
>
>
> This phrase of a “level playing field” opens up endless
> possibilities. If, in fact, the solution to how we can reclaim the
> vision of Ronald Reagan’s “shining hill” and the Allentown of
> decades past is to “level the playing field,” there are obviously a
> number of ways to do it. The constructive way is to stop making
> paper and start making things. Replace subprimes, and yes, Treasury
> bonds with American cars, steel, iPads, airplanes, corn – whatever
> the world wants that we can make better and/or cheaper. Learn how to
> compete again. Investments in infrastructure and 21st century
> education and research, as opposed to 20th century education are
> mandatory, as is a withdrawal from resource-draining foreign wars.
> It will be a tough way back, but it can be done with sacrifice and
> appropriate public policies that encourage innovation, education and
> national reconstruction, as opposed to Wall Street finance and Main
> Street consumption.
>
>
> The second route to the level playing field involves political and
> financial chicanery: trade and immigration barriers, currency
> devaluation and military domination of foreign oil-producing
> nations. It is by far the less preferable route, but unfortunately
> the one that is easier and, therefore, most politically feasible.
> Politicians do not get elected on the basis of “sacrifice.” They get
> elected by pointing to foreign demons, be they in the Middle East or
> in Asia. The Chinese yuan is a far easier target than the American
> workers earning ten times their Chinese counterparts and producing
> an inferior product to boot. Politicians also get elected by
> promising to keep taxes low, even for the rich, with the argument
> that small business owners cannot afford the increase. The real
> beneficiaries however, are the mega-millionaires of Wall Street and
> Newport Beach. And yes, policymakers at the Fed write trillions of
> dollars’ worth of checks under the guise of quantitative easing, a
> policy which takes Charles Ponzi one step further by purchasing the
> government’s own paper in a last gasp effort to support asset prices.
>
>
> Faced with these two decidedly different routes to “level the
> playing field” it seems obvious that the United States is opting for
> “Easy Street” as opposed to “Buckle Down Road.” Granted, “The Ben
> Bernank” as a YouTube cartoon rather hilariously labeled him, has
> for several months importuned Congress and the Executive Branch to
> institute substantive reforms, while he attempts to keep the patient
> alive via non-conventional monetary policy. But very few others are
> willing to extract their heads from the sand. The President’s debt
> commission with its insistence on low personal and corporate income
> tax rates and a mere 15 cent increase in the gasoline tax was one
> example. The Republicans’ reluctance to advance detailed ideas for
> budget balancing is another. And the Democrats’ two-year focus on
> the biggest entitlement program since Social Security – healthcare –
> as opposed to fundamental reforms to counter our lack of global
> competitiveness – is perhaps the most grievous example of lost
> opportunity. Unlike the United Kingdom, where Prime Minister Cameron
> has championed fiscal conservatism, or even Euroland, which is being
> forced in the direction of Angela Merkel’s Germanic work ethic, the
> United States seems to acknowledge no bounds to what it can spend to
> bolster consumption or how much it can print to support its asset
> markets. We will more than likely continue to “level the playing
> field” via currency devaluation and an increasing emphasis on trade
> barriers and immigration, as opposed to constructive policies to
> make this country more competitive in the global marketplace.
>
>
> If so, investors should recognize that an emphasis on currency
> depreciation and trade restrictions are counter to their own
> interests. Not only would their dollar-denominated investments lose
> purchasing power over time from a global perspective, but they would
> do so also via a policy of near 0% interest rates, which are
> confiscatory in real terms when accompanied by positive and
> eventually accelerating inflation. In addition, although corporate
> profits are in many cases broadly diversified across national
> borders, there should be little doubt that the objective of tariffs
> and trade barriers is to advantage domestic labor as opposed to
> domestic capital; profits, therefore will ultimately not benefit.
>
>
> Unless developed economies learn to compete the old-fashioned way –
> by making more goods and making them better – the smart money will
> continue to move offshore to Asia, Brazil and other developing
> economies, both in asset and in currency space. The United States in
> short, needs to make things not paper, but that is not likely unless
> we see a policy revolution in Washington DC. In the meantime, our
> unemployed will continue to fill out forms and stand in line. We’re
> living here in Allentown.
>