Thursday, August 06, 2009

How can the economy grow if consumption does not pick up?

What is the basic problem with the global economy today?

I have made my view quite clear in this blog: unfashionably, I maintain that the fundamental problem is still toxic assets - and, while a temporary reprieve has been provided by governments being persuaded by our elites to spend an unprecedented amount of tax money, the result is the economic decline is merely slowed or halted, at the expense of massive public liabilities that will haunt the relevant countries for decades to come.

And "slowing down or halting the decline" is not the same thing as an economy that is growing healthily!

In the global economic model that we have at present, economic health depends entirely on consumption.

The US has been the primary consumer in the world, with private consumption in 2008 amounting to some US$10 trillion, which accounted for 16% of global output. By contrast, private consumption in the EU, even though it is a much more populated region, was about US$9 trillion; and the largest population group in the world, Asia, provided less than US$5 trillion of consumption. This was already in the middle of the crisis, with spending in the US and Europe slowing from their usual highs, and spending in Asia being artificially boosted by government actions.

US and EU consumption is continuing to slow due to more people being "let go" from their jobs, and those who have money becoming much more careful about when and how they spend.

Will Asia be able to take up the slack? As far as I can see, not in terms of private consumption. Even in the case of governments with cash, e.g. China, they have not so far succeeded in encouraging private consumption, rather the governments has spent money on things such as highways (which is of course very good, and which does indirectly put money in the hands of employees).

So we have two choices: either re-expand global consumption with all the ecological consequences, or we can re-orient the global economy towards a more rational and sensible model - on which I have written at several points in this blog and in various articles. Sphere: Related Content

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