Volker: "We cannot rebuild the economy to the tune of 70 percent consumption or housing booms. It will just break down again,"

CNBC has an interesting news bit about something Volker said. First off, let me give kudos to AmericaBlog for first picking this up. In a meeting at the White House, the famed former Fed chairman basically said we need to rebalance the economy.  That to have a GDP where over half (well 70% give or take) is due to consumption is not sustainable long term.

The alternatives to help bolster future economic growth include boosting exports, applying innovative technology to green issues and improving the nation's infrastructure, Volcker said.

The former Federal Reserve chairman, who now heads the White House Economic Recovery Advisory Board, said Obama understands that "We cannot have so much consumption."

Consumer spending accounted for 70 percent of the U.S. economy before last year's economic meltdown, a level that Volcker said was sustained only by "the magic of financial engineering."

"We cannot rebuild the economy to the tune of 70 percent consumption or housing booms. It will just break down again," Volcker said.

(original story scource: CNBC, copyright 2009)

He's right.  Our economy really is a mirror of other lopsided economies that rely on the opposite, China & Japan mainly on exports.  Much like managing your own investment portfolio, you don't want to put all your eggs in one basket.  Yet, for decades, this is essentially what we have done.

You cannot simply pin your hopes on keeping your job on the chance that Jane & John Q. Public will continue to max out their credit cards.  This whole consumption-dominated economy is a creature of the 20th century harking back to when we started losing our manufacturing. Since at least the 70s, services started to take up more and more of the employment prospect versus manufacturing.  The only other growth in employment was government. 

While you can say that new service jobs do contribute to the economy, if is due to the fact that we are dropping manufacturing, there is a cost which shows up in the current account deficit.  I know I know, that is borderline "economic fiction." But let me ask you this, when you buy that Sony TV or whatever using your service job earnings and it's made in Taiwan or China, where does the money end up? 

Rational economies require balance, something to tide one over when one part of the economy is not doing well.  Once more, like a portfolio, if growth stocks aren't performing then either defensive stocks will or bonds or precious metals.  You have to have options, an economy is no different!  A young woman working on an assembly line say making televisions will take that money and spend it at a store. The young clerk at the store will then take his money he's earned at the store will go pick up his kid from school, driving on a road that is being repaved in a public works project using tax dollars from both.  The guy working on that road will want to relax after working, so he goes and buys a television that just so happens to be made at the plant the young woman was working at!  It's all circular!  Of course it also helps that the televisions being made in that town are sold in foreign markets as well, so when there isn't demand at home there may be enough over the border.

But that isn't what we got.  Instead, we got everyone working at the store with the clerk.  Too many employees means the supply/demand curve favors the employers, who thus tries and gets the lowest wage possible for them.  These armada of clerks don't make enough so they use their credit cards to buy groceries while their paychecks goes to pay the rent. To accomidate this, rates are kept low, because now most money is generated through this service system (which also then possibly results in some new asset bubble).  Since there is no manufacturing, the demand for infrastructure isn't as great, and the roads don't get paved as much.  Meanwhile, to just keep the box store in the area, taxes are kept low to ease the burdon of the retailer, but this results in the previously mentioned road thing and a cutback in school funding. I could go on, and I am aware I missed somethings and there are holes, but you get the idea.

Lastly I go back to a famous quip by German Chancellor Angela Merkel.  When asked by British Prime Minister Brown how was it that Germany's economy didn't suffer as badly in the "Great Recession", she replied "because we still make things."


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As said here numerous times and I heard James Galbraith

say it on Bill Moyer's Journal last Friday - policy makers are fighting to get back to status quo of several years ago instead of trying to move forward with new ideas.

It is an opportunity wasted.

RebelCapitalist.com - Financial Information for the Rest of Us.

or old ideas

Those from the Great Depression worked hard to put some sane regulations in place, so all of those lessons were thrown into the garbage heap and we need many of them back.

Why isn't Volcker the head economic adviser? He makes way more sense, or replace Geithner?

Definition of insanity

doing the same thing and expecting a different result. Hello, is anyone in the White House.

RebelCapitalist.com - Financial Information for the Rest of Us.


Exactly, my good man, exactly!