US Economic Growth Deconstructed

I had planned a review of the UK economy and stock market, but I was overtaken by the news that US economy ‘grew’ by 0.9 percent in the third quarter. A fairly typical explanation for the growth can be found in a Telegraph article as follows:

The primary reason US economic output has rebounded so strongly is the slug of growth contributed by state programmes, including "cash-for-clunkers" and similar stimulus schemes.

As such, I thought it might be worthwhile to return to the well worn subject of GDP growth. What we are seeing is the mirage and magic of statistics. I will explain this as clearly and simply as I am able through an analogy, and show why this is all 'magic' growth.

Imagine that I am a farmer, and that my output of food is not quite enough to feed my family. As a result, I have frequently turned to my neighbour, who has each year lent me enough food to make up for the shortfall. As each year goes by, I am borrowing more and more from my neighbour, and I am starting to owe him a great amount of food overall. Finally, one year, a river floods and damages many of my crops and drowns some of my animals. My output is reduced to an even lower level, and I am going to struggle to meet my family’s needs.

Once again, I turn to my neighbour, and ask to borrow even more food to take my family through the next year. He agrees and loans even more food than on previous occasions, and I add the borrowed food to the store of my own farm’s output in the barn. At the same time, I also do something to address the problem of the shortage. I decide to change the systems of measuring the output of my farm. For example, instead of counting my units of corn in whole kilograms, I change the units so that one unit becomes three quarters of a kilogram. With my new system, I now measure my output from the current year as all of the food in the barn, and find that I have increased my output of units of food overall for the year.

I look at the large pile of food in the barn, and behold that, despite the problems of my lack of output of food; I have actually achieved an increase in output. There are more units of food in the barn than in comparison with the previous year.

As my generous neighbour is lending me so much food, he comes around to visit my barn, and see how I am running things. As reassurance, I count out my units of output, and show him how much my output has increased. I am very pleased with myself, and I smile with pleasure as I count the units. Then I note that my neighbour is frowning and I am puzzled to find that my neighbour does not share my pleasure.

He asks whether I am going to repay him in the old units of kilograms or the new units of three quarter kilograms. Now I start to frown, and suggest that he does not understand the situation. For every unit he has lent me I will, of course, return one unit as a repayment. I am a little grumpy. Can he not see that my output has grown? Can he not see that, if I can keep up this rate of growth, I will achieve a level of output that will allow me to easily pay him his food back? I wonder at his lack of confidence in me when I have demonstrably improved my output.

I am left wondering that my neighbour simply does not understand output. My neighbour is left wondering how much longer he will continue to lend me food.

Note:

I finally got around to reading this week's copy of the Economist magazine. On reading the magazine, I was struck how many of my views which were previously considered radical (if not barking mad), are now mainstream. There was even one section where they contrasted financial wealth with 'real' wealth, which is almost a perfect mirror of my first article, 'A Funny View of Wealth' (which predicted the economic crisis in the UK). The Economist also addressed the relationship between the US and China, and much of their analysis mirrors the analysis I offered a long time ago (though with different outcomes), and the same applies to the prospects for the $US (again with different outcomes).

I should also mention that I predicted a $US collapse for April of this year and got it wrong. However, the possibility of a $US collapse is now being discussed in the mainstream. What I am really saying is that, in about 6 months time (a wild guess), expect to be reading that the growth in the US economy was not genuine growth at all.

The G20 and Ongoing Delusions

A Major Error in the post - comment added on 6 April:

I have had a commentator point out a somewhat ridiculous error in the blog. I intended to write about the recent G20 communique, and instead pulled up the text from the previous communique. Thank you to Tiberius who (very politely pointed out this error).

Essentially, the error was caused by a search for the document pulling up the older version. I should have checked the dates. This is a serious error and I therefore would like to offer my apologies. My aim was to go straight to the source, rather than rely on the interpretation of others. However, checking that I have the right source is a good starting point.

I have left the post as it stands. The principle of this blog is that nothing is deleted - even if it is rather a bad mistake. I only ever add notes and comments (as in this example) and date the change. However, in light of the error, please disregard this post. Once again, please accept my apologies for an idiotic and careless mistake.

I was puzzled at some of the commentary in the other media, but their commentary makes rather more sense now.....

Cynicus Economicus

Original post follows:

As promised a post on the G20 outcome. If you have the time you may wish to read the full text of the official communique, which can be found here.

Perhaps the most striking thing about the communique is the acceptance that the nature of the financial system was such that the world developed an unsustainable imbalance. However, the way that this is phrased still fails to accurately reflect that many of the imbalances were the direct result of policies of central banks, and no mention is made of the role of the regulators in creating the financial products that were to play such a large part in the crisis. In fact, the communique offers a vague and disingenuous picture of the causes. As such I will quote the section titled 'Root Causes of the Current Crisis' and examine it in some depth:

3. During a period of strong global growth, growing capital flows, and prolonged stability earlier this decade, market participants sought higher yields without an adequate appreciation of the risks and failed to exercise proper due diligence. At the same time, weak underwriting standards, unsound risk management practices, increasingly complex and opaque financial products, and consequent excessive leverage combined to create vulnerabilities in the system. Policy-makers, regulators and supervisors, in some advanced countries, did not adequately appreciate and address the risks building up in financial markets, keep pace with financial innovation, or take into account the systemic ramifications of domestic regulatory actions.

4. Major underlying factors to the current situation were, among others, inconsistent and insufficiently coordinated macroeconomic policies, inadequate structural reforms, which led to unsustainable global macroeconomic outcomes. These developments, together, contributed to excesses and ultimately resulted in severe market disruption.

The best way to examine this, is to take each point, and examine how it reflects the reality. Point (1) is as follows:

'During a period of strong global growth, growing capital flows, and prolonged stability earlier this decade, market participants sought higher yields without an adequate appreciation of the risks and failed to exercise proper due diligence.'

They describe economic growth during recent times, and this is an accurate description of the world situation. However, what they do not acknowledge is that the so called growth of the Western economies was a growth in activity form debt expansion, not a growth in wealth. In other words the growth was centred in the developing economies, and the growth in the Western economies was illusory (a post which shows how illusory that growth is can be found here).

With regards to the market participants (the major banks) seeking higher yields and taking risk, they were simply responding to two factors. One of these was the wall of money flowing into Western economies due to factors such as the low interest rates and Quantitative Easing (printing money) in Japan, the massive accumulation of petro-money in the Gulf states, and the quasi-mercantilist policies of China to achieve export growth. The problem such a wall of money might create is that, whilst the first tranches of money might be usefully used, the later tranches of money would have ever less opportunity to be invested in productive investments. The money had to go somewhere, and we can see the roots of bad lending into consumer markets. These imbalances were not the result of 'markets' but the active manipulation of the economy by governments.

If we combine this with the Basel regulatory framework (the other factor) it is possible to see the severe problems which can be firmly laid at the door of the central banks, and regulatory systems. Even the Bank of England admits that Basel I was the spur towards securitisation, and encouraged off-balance sheet activity. To this we might add that the system was responsible for the use of ratings agencies to assess products (e.g. CDOs), and the internal 'rocket scientist' calculation of risks that proved to be so wrong headed. Finally, the accords actively encouraged banks to lend to governments for the purposes of capital adequacy, thereby offering a further spur (as if any were needed) for some Western governments to borrow excessively (thereby leaving them vulnerable to the current shocks). A longer discussion of how the regulatory system helped to cause the crisis can be found here (a long post, and this is just one element of it).

In other words, whilst the banks may reasonably be cited as problematic, if not idiotic, they were in large part responding to a regulatory and macro-economic environment that was determined by government and central banks. It is always difficult to assign culpability in such cases, but there is much that can be laid at the doors of those who are behind the communique, those who now profess wisdom after the event.

Point (2) is as follows:

At the same time, weak underwriting standards, unsound risk management practices, increasingly complex and opaque financial products, and consequent excessive leverage combined to create vulnerabilities in the system. Policy-makers, regulators and supervisors, in some advanced countries, did not adequately appreciate and address the risks building up in financial markets, keep pace with financial innovation, or take into account the systemic ramifications of domestic regulatory actions.

Whilst this appears as an acknowledgement of fault by regulators and government, it still essentially pins the blame firmly on the banks. The nearest it comes to any real acknowledgement is the mention of 'ramifications of domestic regulatory actions', but this fails to accept that the underlying problem was resultant from the combination of factors outlined in response to point (1). By appearing to accept a modicum of fault, this is simply a distraction from the depth of the problems that were created by those controlling the economic system.

Point (3) is as follows:

Major underlying factors to the current situation were, among others, inconsistent and insufficiently coordinated macroeconomic policies, inadequate structural reforms, which led to unsustainable global macroeconomic outcomes. These developments, together, contributed to excesses and ultimately resulted in severe market disruption.

This ignores the single most important factor in this economic crisis, a point that I have discussed at many points in this blog. The real underlying cause of the crisis is the doubling of the global labour force in a period of about 10 years, resultant from the increases in mobility of capital, access to technology and access to world markets (discussed in more detail here). It is simply baffling that one of the most dramatic changes in the world economy continues to be ignored -even as a potential factor.

Having misread the causes of the crisis, it is inevitable that the solutions that are proposed are going to be misdirected. On the positive side, at least the communique acknowledges the severity of the problems, but it would be impossible to do otherwise. I will go through some of the points that they are proposing:

Continue our vigorous efforts and take whatever further actions are necessary to stabilize the financial system.

This raises the simple question of what has been achieved so far? $US trillions have been poured into various bailouts, and yet there is still a dysfunctional financial system. Banks which are completely insolvent continue to absorb ever more money whilst still remaining insolvent. The latest method of hiding the insolvency is the change in the 'Mark to Market' valuation of assets, which is a way of hiding the underlying (non) value of assets. Quite simply, such policy is delusional. The latest Geithner plan for the US financial system, is just yet another case of destruction of wealth dressed up as salvation. However it might be spun, an artificial price will be set for toxic assets, and the inevitable losses will have to be 'monetised'. Such monetisation means yet more printing of money such that, one way or another, every $US will be taxed to pay to support insolvent financial institutions.

At each stage of the bailouts, there are the same promises that the latest measure will solve the problem, but each time the bailout fails another round of bailouts follow. All the time, there is talk of 'getting credit flowing again', as if the trade imbalances might be solved by endless expansion of credit.

Underlying all of this is a belief that some financial institutions are simply 'too big to fail', and this is at the heart of the problem. Governments have determined that these financial firms can never fail, and then wonder why they take outrageous risks. They have created a casino in which, if you bet on black and red comes in, it becomes an inconvenient blip in your operations. One way or another, it will eventually be back to business as usual, with every other sector of the economy paying for bank losses.

The next point is as follows:

Recognize the importance of monetary policy support, as deemed appropriate to domestic conditions.

This should win prizes for having no meaning whatsoever. What on earth might this actually mean? Does this mean that, in the past, this has not been policy? Have governments and central banks previously not recognised the importance of monetary policy support?

The point that follows this does, at least, offer something that might have a vague meaning:

Use fiscal measures to stimulate domestic demand to rapid effect, as appropriate, while maintaining a policy framework conducive to fiscal sustainability.

The key word in this is sustainability, but what might or might not be sustainable is not mentioned. For example I have, since the start of this blog, suggested that the UK government would need to turn to the IMF for funding for the very reason that the fiscal policy would not be able to be sustained in the face of economic crisis. From the Telegraph we have an article in which 'a senior cabinet minister' is talking about the necessity to go the IMF. The latest spin on this is to say that it is no longer to be seen as an act of desperation, which is perhaps one of the most audacious incidents of spin in this whole crisis. Can the US fiscal policy be sustained? The Congressional Budget Office thinks not....

I also asked in the early posts in this blog who might be able to fund the IMF as the crisis deepens. As if on cue, there is now the news that the IMF is simply going to print money to pay for activities:

At the behest of the world leaders, the IMF will increase the amount each country has in so-called Special Drawing Rights (SDR) by $250bn.

This is effectively global quantitative easing – comparable to the unprecedented measures the Bank of England carried out last month when it committed to pumping £75bn into the British economy. This is a form of printing money.

Under the IMF scheme, each country has an allocation of a shadow IMF currency – known as SDRs. This currency can be converted into useable currencies such as dollars, euros or sterling. The amount of SDRs was dramatically increased by more than ten-fold yesterday. The scheme is best regarded as a safety valve for struggling economies, and rich countries are likely to donate some of their SDR allocation to those most in need.

Is the endless fiscal expansion based upon credit, endless expansion of the money supply sustainable? What do these people think money actually is? Is it some magic thing that can create actual wealth from nothing? Does the production of money of itself make us wealthy, or does our labour make us wealthy? Endless borrowing for consumption and spending and printing of money does not create wealth - it simply destroys it.

As this is already a long post, I will not go into more detail on this, although this deserves greater consideration. Instead I will jump to the discussion of regulation. On the one hand the communique insists that regulation is a national concern, but on the other suggests that action should be taken to avoid 'regulatory arbitrage' i.e. seeking out the best regulatory environment. That these two goals are incompatible is surely obvious? They later say:

We call upon our national and regional regulators to formulate their regulations and other measures in a consistent manner. Regulators should enhance their coordination and cooperation across all segments of financial markets, including with respect to cross-border capital flows. Regulators and other relevant authorities as a matter of priority should strengthen cooperation on crisis prevention, management, and resolution.

So what they really mean is that there will be international standards. However, assuming that they can come up with a commonality of regulation, is that a good thing? The first point to mention is that the Basel frameworks had this goal, but were in fact major contributors to the crisis. There are many more passages that have similar objectives. Perhaps the absurdity of such regulatory aims can be found in these passage from the communique:

Strengthening Transparency and Accountability: We will strengthen financial market transparency, including by enhancing required disclosure on complex financial products and ensuring complete and accurate disclosure by firms of their financial conditions. Incentives should be aligned to avoid excessive risk-taking.

And:

Enhancing Sound Regulation: We pledge to strengthen our regulatory regimes, prudential oversight, and risk management, and ensure that all financial markets, products and participants are regulated or subject to oversight, as appropriate to their circumstances.

At the heart of this is the central delusion that risk can be managed and assessed. It is the idea that risk is somehow something that can be defined. This is exactly what the Basel regulatory framework sought to do. This is the Basel framework that said that essentially said that OECD banks were 'safe'. They were not. Why will the next method of assessing risk be any safer? The same people who made this error are likely to be the same people who will make the next determination of risk.

Even more disturbing is the detail. For example we have the following:

Mitigating against pro-cyclicality in regulatory policy

We can all remember talk of the 'Great Moderation', the 'New Economy', the 'post-Industrial Economy', or the infamous Gordon Brown statement of no more boom and bust. Just as the determination of what was safe was completely wrong, so was the determination of the state of the world economy and national economies. Once again, the same people who called the world economy wrong, who called the state of national economies wrongly, will be the ones that will now apparently call them right. Why should such assertions be taken seriously?

In one respect, the communique does offer a positive perspective, and this is the commitment to open trade. However, there are no mentions of what allowed the severity of the distortions of trade, such as central bank manipulations of money supply. Whilst tariff barriers are important, they pale into insignificance compared with the potential distortions in the money supply, such as those created in Japan, or the Western economies. What of Chinese mercantilism - holding down their currency to ensure export growth, and to make imports more expensive? Can a system of open trade work in a system where these distortions are allowed?

Inevitably, the communique covers a lot more detail, and I will not comment on each and every point. A summary of the communique can be seen as follows:

• An assessment of the crisis that ignores the centrality of governments and central banks in the creation of distortions - and crucially ignoring the effects of the impact of the massive input of labour and the role of this expansion in the crisis
  
• A belief that the same people who failed to see this crisis coming will see the next crisis coming
• A belief that the same regulators who set up the current system, with terrible results, will be able to regulate against another crisis
• A belief that risk can be seen in advance, even though history shows us that it can not be foreseen
• A belief that a more unified regulatory system will stop crises, when the previous attempt to do so helped create the systemic nature of the current crisis
  
• No mention of how the money supply in individual economies is one of the most central/important factor in the world trading system - just some vague illusions with no action on this central factor
  

Perhaps the central point here is that our 'betters' somehow see themselves as both omniscient and omnipotent. They are still deluding themselves that they have the wisdom and foresight to control economies through their endless tinkering. All the while they delude themselves in this way, they still fail to acknowledge their own pivotal roles in the current crisis. It is clear from the communique that they know that there are problems that they have created, but these are buried and lack any clear explanation or action. It is far easier to blame the impersonal financial system (and outside of the G20 scapegoat some big name bankers) than confront their own failings.

In the case of the Western debtor economies, if our 'betters' were to accept their role in the crisis, they would need to forgo some of their power. In particular, they would have to abandon the fiscal irresponsibility that allows them to spend the future wealth of their voters, whilst pretending that it is the government's money to spend. It would mean that they would have to abandon their endless expansion of money and credit, and face up to the underlying real wealth creation of their economies, and face the fact that their policies of borrow and spend simply can not be continued. It is a message they fear telling the voters, and so they pretend that such a system might continue.

For the creditor nations, they would need to face the fact that they have been pouring their wealth into a delusion, and that they must accept that the paper they exchanged for their wealth is of little value. That would be a very bitter pill for them to swallow.

The G20 is a whitewash, which just promises more of the same delusion that put the world economy into this mess in the first place. It is the same people with the same delusions offering more delusions. It is not a new world order, but the maintenance of a fantasy old world order. Quite simply, they propose more and more of the economic tinkering that hid the changes that took place in the world economy - the massive expansion of the world labour force. Their solution is to try to maintain the imbalances that this expansion created. Rather than accept the real redistribution of wealth that this represents, they are seeking to pretend that they can keep going on as before - just with ever more of the kind of 'control' that turned an adjustment into a crisis.

The Root of The Problem

I was talking with someone yesterday, and was trying to explain why there are so many problems in the world economy at the moment, and gave a simple explanation that seemed to make sense. It is far from being a perfect explanation, but it does make the problem very clear. In this case I am trying to turn a two way conversation into a written explanation, so I hope it makes sense and accept my apologies where I mix metaphors. What I did was compare the world to 3 towns; Poortown, Richtown and Commoditytown.

Poortown is, like its name, very poor and has a population of 10,000. For some reason, they had followed mad policy, and had inadvertently made everyone poor in the process. Richtown also had 10,000 people and, by contrast, had got the basics of economics right and had flourished. Most people in this town were doing pretty well, and they could enjoy many good things in life. Commoditytown did ok, but had suffered booms and busts, and never seemed to manage stability.

For some reason, Poortown finally decided that they would give up on their crazy policies and would follow the same policies as Richtown, and try to become richer. After all, if policy worked for Richtown, why not them? Now, before Poortown could do anything, they needed to learn how Richtown had succeeded. Their problem was that they did not even have a way of travelling to Richtown to find out, so they built a path through the mountains that separated the two towns and invited some of the people from Richtown to come over and take a look at Poortown.

A few brave individuals from Richtown, decided to take a look, but were nervous about going, as Poortown was famously unfriendly. However, when they arrived, they were welcomed with open arms. The place was pretty poor, but it was very friendly. Poortown suggested to the visitors that everything was different now, and that they planned to get as rich as Richtown. A few brave individuals decided that there was an opportunity, and decided to take a risk and start businesses in Poortown. They noticed that there were lots of opportunities to cut their costs and increase profit because the poor people of Poortown did not want much pay. Just as importantly, there were lots of people in Poortown, and they imagined selling their products to them, and having new markets for their goods.

A few brave souls set up manufacturing in poor town, and had many problems at the start. The workers were not very good, and there were many problems to overcome. However, the local government of Poortown was determined to make everything work so that, over time, life got easier and they started to make money. They noticed that the workers were quick to learn, and that the people of Poortown were very determined to get rich. It seemed that, for many years, they had been secretly envious of the wealth of Richtown.

The individuals setting up business in Poortown started making profits, and more and more individuals started visiting Poortown to set up their own businesses. Poortown responded by widening the road through the mountains between the two towns, and trade between the two started to boom. Everything was fine for many years. The growth in trade meant that there were many things that suddenly became cheaper in Richtown, and everyone was making a profit. Poortown was getting richer faster with several thousand of their people getting better jobs, and Richtown enjoyed cheaper goods.

The trouble started when the business owners in Richtown started to move their factories to Poortown in ever larger numbers. It was just much cheaper to do business in Poortown and, as the workers of Poortown got better and better at business, they became ever more attractive as workers. Some of the people of Poortown were even setting up their own businesses as they had quickly learnt from the Richtown businesses. This led to a situation in which the people of Richtown started to buy more and more things from Poortown, and less and less from Richtown. Poortown started to use the money earned from the people from Richtown to accelerate their growth to riches by investing in more and more factories.

Meanwhile, in Richtown, businesses were starting to shut down as they could not compete with Poortown. Everyone thought that this was not a problem though, as all the cheap goods from Poortown led to a boom in shopping. Moreover, Poortown was lending a large amount of the money they were making from Richtown back to Richtown. After all, Richtown was a good place to put money as it had always been rich. Everything looked fine.

All the while this was going on, Commoditytown seemed to be doing pretty well. As Poortown grew, they found that boom was back. However, they were more cautious than they had been in the past. Several times they had seen booms, but each time they invested to meet the boom, they had found that they ended up making less money, as they started taking too much material out of the ground, with no place to sell it. So they expanded slowly. Each year a bit more expansion. The trouble was that they were not keeping up with the increase in demand, and many of their commodities were reaching capacity. They then faced this problem but, whilst they were trying to increase capacity, they found that they just could not do it fast enough. They needed to build new mines, and needed lots of machinery, and they just could not do it fast enough. On the upside, prices were going up and up and up. They were getting rich, and were getting even richer by lending their big profits to Richtown.

Everywhere was booming. Richtown was flooded with money, Poortown made more and more goods, and Commoditytown was selling more and more commodities at high prices.

It is at this point that everyone started to notice something. All the while that Poortown grew, it had been so poor before, that it had huge numbers of willing and cheap workers. All of these workers wanted to be as rich as the Richtown workers. Meanwhile in Richtown, less and less workers were working in factories, because all the factories were going to Poortown. In fact, it was hard to see that Richtown was producing very much of anything compared with before. They had started with a hundred factories, but thirty had already shut down and moved to Poortown. More were planning to move. Thousands of the Richtown workers were moving into new jobs to support the massive expansion in consumption. More and more people were spending more money, but nobody asked where the money came from to spend on consumption. The trouble was that they were borrowing all that money.

Then it happened. Commoditytown had orders that it just could not meet. Prices went ever higher, as everyone fought for the commodities that were available

The problem was that there were more workers all competing to be the ones who would use the commodities to make things. There were more workers wanting to make things than there were commodities to supply everyone. The commodity cake was only so big, and the question arose to who would be able to buy how much of the commodity cake. Richtown looked on aghast. Poortown looked on and suggested that it was best placed to take the commodities, as it could turn out goods from the commodities cheaper than Richtown. Only so many goods could be made from the commodities available, and so someone was going to lose out.

Meanwhile there were more workers in Poortown as it built roads to the outlying villages, which meant ever less commodities per worker. Poortown had 10,000 workers, and still they were only using a few thousand. As fast as Poortown grew, there seemed to be no end to the supply of new workers available for work.

The situation was arising that the commodity cake needed to be shared out amongst the workers in Richtown and Poortown. Although the commodity cake was getting bigger, there were more and more people trying to share it. It was a competition to see who would get how much of the cake. It was at this point that it started to dawn on Richtown that they were no longer in a position to win the cake. Doing business in Richtown was expensive. Doing business in Poortown was cheap. With only so many commodities to be shared out, they were going to lose out.

However, the situation was much worse than Richtown had realised. All the while Poortown had been booming, they had been lending lots of money to Richtown. The people of Richtown had used a lot of that money to buy the products of Poortown. They had not used the money wisely, and had not invested it. They had spent it. They now not only owed large amounts of money to Poortown, but also to Commoditytown.

It was suddenly occurring to a few people in Richtown that they owed a lot of money, and that they had no way of paying it back. Not only that, but they were still finding that they were losing factories to Poortown, which was still a much cheaper place to do business. Their ability to pay back the money was getting worse, not better. All the while this was happening, there was a state of denial in Richtown. They kept pretending that Richtown was really very rich and that, one way or another, they would always be rich. Curiously, Poortown and Commoditytown still believed this too.

What no one had thought about, was that the commodity cake would have to keep growing as fast as the number of workers, or one day the amount of cake available would not be enough to go around. At that point, the worker who was most cost effective would get the commodities. This would mean that the Poortown workers would get more, at the cost of Richtown workers as, for many products, they were more cost effective. Richtown would get poorer, whilst Poortown would get richer. At least until more commodities became available.

End of the analogy.

The point at the heart of this analogy is that there has been the fundamental change in the world economy. The world has changed dramatically. Give the same capital and technology to a worker in a country with lower costs of doing business, and wealth will move to that country. With more and more workers becoming available, the amount of commodities available per person is dropping. In short, there is a massive oversupply of labour versus commodities. Not all of the workers can be utilised in productive ways. In principle, everyone could get richer, and the emerging economies could just catch up with the rich economies. However, in order for this to happen, there needs to be the availability of both capital and materials for everyone. In the case of not having enough material (supply bottlenecks) there will be competition for the available resources. In this situation, there will be winners and losers. At the moment the world has bottlenecks, and the resources available for consumption are now being redistributed. The winners will be those who can make the most cost effective use of the available resources and, in many cases, that is not the rich world (as we currently know it).

The speed of the rebalancing will, in part, be determined by how quickly the emerging economies catch up with the rich economies in infrastructure, management and technology. It will also depend on how quickly supply of commodities catch up with demand. For the moment the imbalances will cause turmoil, due to the poor allocation of capital into rich world consumption, rather than investment into productive output. This has meant that the available resources have been directed towards consumer led growth, rather than the necessary expansion of commodities to support the growth in the output of the world economy. The competition for the limited output, and allocation of, the limited supply of commodities has now started. The process will see a levelling up of the emerging economies, and a levelling down of the rich economies.

I am not sure that this is as clear as it could be, so feedback and comments are welcomed. I am aware that it does not paint a pretty picture, but it is not possible to have a massive expansion in labour without a massive expansion in the materials necessary to make the labour productive. That is the simple point I am trying to make.....

Note Added After the Original Post:

I have not really accounted for Japan in this post, as it does not quite 'fit'. I have been meaning to post on the subject of Japan for some time, and hope I will have time soon.