March 28, 2005
In his latest commentary,
Morgan Stanley�s Stephen Roach, perhaps the only Wall Street economist who at
least partially comprehends the looming economic danger, once again lamented
that a "co-dependent global economy can�t live without the excess
consumption of Americans. " This echoes the popular misconception that Americans
are some how doing the world a favor by consuming the fruits of their labor.
The world no more depends
on American's consumption than medieval serfs depended on the consumption of
their lords, who typically took 25% of what they produced. What a disaster it
would have been for the serfs had their lords not exacted this tribute. Think
of all the unemployment the serfs would have suffered had they not had to
toil so hard for the benefit of their lords. What would they have done with
all that extra free time?
According to modern day
economists, if the lords had decided to increase their take, say to 35%, it
would have been the equivalent of an economic boom for the serfs, who would
have been insured more work. Too bad the serfs did not have economic advisers
or central bankers to encourage such progressive policies!
I have written on this
subject in the past (see my former commentaries entitled: �CNBC Redefines the
Word �Sacrifice�,� Feb 10th 2005 and �The U.S. is Not a Special Case, Just an
Extreme One,� Jan. 18th 2005). �Both
articles are archived in the commentary section on my web site at: http://www.europac.net/archives.asp. �However,
I would like to put the ridiculous assumption that the world benefits from America�s excess
consumption, and has something to fear from its cessation, to rest once and
for all. Consider the following analogy:
Suppose six castaways are
stranded on a deserted island, five Asians and one American. Further, suppose
that the castaways decide to divide the work load among them in the following
manner: (for the purpose of simplicity, the only desire the castaways work to
satisfy is hunger) one Asian is put in charge of hunting, an other in charge
of fishing, and a third in charge of finding vegetation. A fourth is put in
charge of preparing the meal, while a fifth is given the task of gathering
firewood and tending to the fire. The American is given the job of eating.
So, on our island five
Asians work all day to feed one American, who spends his day sunning himself
of the beach. �He is employed in the
equivalent of the service sector, operating a tanning salon which none of the
Asians on the island utilize. At the end of the day, the five Asians present
a painstakingly prepared feast to the American, who sits at the head of a
special table, built by the Asians specifically for this purpose.
Realizing that subsequent
banquets will only be forthcoming if the Asians are alive to provide them, he
allows them just enough scraps from his table to sustain their labor for the
Modern day economists
would say that this American is the lone engine of growth driving the
island�s economy and that without his ravenous appetite, the Asians on the
island would be unemployed. The reality, of course, is that the best thing
the Asians could do to improve their lots would be to vote the American off
the island. Without the American consuming all of their food, there would be
a lot more available for them to eat.
Alternatively, they could
spend less time on their food related tasks, devoting the extra time to
greater leisure or to satisfying other needs, which previously went
unfulfilled since much of their scarce resources are currently devoted to
feeding the American.
Now some of you might be
thinking that this analogy is flawed, as in the real world economy, Americans
pay for their food, so real world Asians providing the
meals receive value in exchange for their effort. O.K. lets assume that
the American on our island pays for his food in the same manner real world
American pay for theirs, buy issuing IOU�s. Let�s assume that at the end of
the meal, the Asians present the American with a bill, which he pays by
issuing IOU�s claiming to represent future payments of food.
However, all the
castaways know that the IOU�s can never be collected, as the America has
no food, or the means or even the intention, of providing any in the future. But
the Asians accept them anyway, and each night add them to the piles of IOUs
collected on previous days. Are the Asians better off as a result of this
accumulation? Are they any less hungry? Of course not.
Now let�s assume another
Asian castaway washes up onto the island, and assumes the role of central
banker. Now each day the central banker taxes the other Asians on the island
by confiscating a portion of the scraps of food the American throws them each
day from his table. The central banker than agrees to return these morsels to
the other Asians each day, in exchange for each Asian�s daily accumulation of
the American�s IOU�s, less a small percentage for himself, because the
central banker also has to eat.
Does the existence of a
central banker change anything? Do the Asians have any more to eat because
their own central banker gives them back a portion of the food he took from
them in the first place? Do the American�s IOU�s have any more value
because they can now be exchanged in this manner? Of course not.
Well, if it does not make
sense for the six make-believe Asians to support one make-believe American,
it does not make sense for billions of real world Asians to support millions
of real world Americans. The fact that they do so in exchange for worthless
IOU�s in no way alters this reality.
There is no question that
in the short-run, by allowing the U.S. dollar to collapse (in effect voting
millions of American�s off the island), there will be some temporary
disruptions to Asian economies. Of course there will be some initial losers,
particularly among those Asians who currently profit from this arrangement. However,
these profits come only at the expense of far greater losses born by the
broader Asian population.
In the end, the cessation
of America�s excess consumption, which is a burden that the Asians now
disproportionately bear, not a benefit that they enjoy, will be the best
thing that can happen to the Asian people. Like the serfs being liberated
from their lords, their scare resources will finally be freed to satisfy
their own needs and desires, and their standards of living will rise
accordingly. In addition, since their savings would then be available to
finance additional capital investments, rather than being squandered by
American consumers, their future standards of living will rise that much
faster as well.
Americans, being kicked off the Asian gravy train means its time to get back
to work. In simple terms, this means a whole lot more hunting and fishing,
and a whole lot less eating.
C.E.O. and Chief Global Strategist
Euro Pacific Capital, Inc.