Friday, February 8, 2013

All Roads Lead To Rome

Years ago, I read through a very old book about the Romans - an ancient trade-based society in the Mediterranean basin.  The first page I read, at random, contained a conversation between a senator and his friend on how they, the Romans, were sending their money to foreign lands - often hostile to Rome.
This was not good for the Romans, not because they did not have enough money to send abroad, but because the protection of their economic system lead to the debasement of their currency.  Rome operated on the principal of tribute, hidden as a command economy based on cross-border trade.  Taxes had to be paid to Rome for protection from hostile threats, and taxes had to be paid in Roman currency.
The Romans naturally had to send their money to foreign lands in exchange for goods, so protectorates could acquire currency to pay their taxes.  How else were these states to acquire currency?  And who else was there to keep these states safe from unwanted threats?
   Circo Massimo in Rome with the Domus Agusti (House of Augustus) in the
   background just behind the tree line.  Courtesy of the street level view at
Nearly two millennium later the Roman system has become an outdated, arcane and  absolutely abhorred artifact of economic history.  However, the cross-border trade, pioneered by Phoenician merchants, and  perfected by Roman legions, is a live in the Pacific base.

Americans send their money to foreign lands, at times up to 6% of GDP, and often times to hostile lands.  This is not because America demands tribute but because Americans are the most efficient users of capital, and foreign lands, especially poor developing nations, require investment to build their economies to developed-nation status.
Actual disposable income percent (blue); net exports as percent of GDP (black).
Before the Great Recession, American households had 30% more debt than they did disposable income.  Households' actual disposable income was gone and in its place, substituted, was debt.  Of course, Americans are creditworthy and have no problem obtaining credit.  Credit is the fuel of the modern economy but debt is the dead weight which kills fuel efficiency.
Actual disposable income.
Since the Open Door policies of Deng Xiaoping, Americans have been unfairly placed at the mercy of cheap Chinese imports.  It is obvious that economist have paid too much attention to the wealth effect of stock markets and house prices, those assets of concern for the wealthiest of Americans, and not enough to the budgetary wealth effects of cheap imports, one in which affects all Americans.  This third type of wealth effect has lead toward an increase in personal consumption as a percent of GDP, in which domestic manufacturing is sent abroad at the expense of increased indebtedness of the household.
Even with stagnant wages, Americans feel richer as the breadth of available cheap imports reduces their spending bill at large retailers, such as Walmart.  As Americans "save" through the purchase of cheap imports, they are then able to acquire previously unattainable assets, such as financial wealth through the acquisition of credit.

The poor developing nations, through which Americans "save", acquire trade once designated for more developed nations, which causes another type of wealth effect.  This cycle in many ways fuels credit consumption in the form of consumer credit in the US and industrial investment in China.

The greatest emphasis for China will be to balance its inflation and employment through sectoral shifts.  This has been given the guise of "domestic consumption" by mainstream media.  But, because all roads lead to Rome, China will create additional overcapacity separate from American consumption.  One which cannot be consumed by the American household - the military industrial complex.

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