May 13, 2009 12:14 pm


The absolutely necessary global consumption rebalancing is occurring and US current account deficit is set to plunge despite the unfortunate slight rise in April's U.S. trade deficit:

The U. S. recession has been agonizing, but the curtailed domestic demand and increased savings of Americans could actually be helping to cure the global current account imbalance that many have blamed as a root cause of the financial crisis.

Some are saying the recession is even set to drive the country's current account deficit to a decade low by mid-2009, providing a good omen for future U. S. economic growth.

American consume less and save more - Retail sales continue to drop in April more than economists"predicted." (They are as good as predicting economic developments as earth scientists the weather). Of course, they do. Americans are focusing on saving more and getting out of debt. So, Time magazine runs articles about finding new ways to save and Dave Ramsey gives advice on how to get out of debt.

Chinese consume more -

China's retail sales continue to grow robustly, in line with market expectations and the year's first-quarter pace. Retail sales for April climbed 14.8% from the same time last year, to 934.3 billion yuan ($137.0 billion), according to the National Statistics Bureau on Wednesday. That compared with the market forecast of a 14.4% rise and March's gain of 14.7%. Beijing has unleashed numerous subsidies and other incentives to get consumers shopping more and saving less. In adjusted terms, China posted 17.0% real retail sales growth, compared with 16.4% in March, according to some analysts' calculations.

Should Americans care? Yes. We own GM!

China's auto sales for April soared 37.4% from the same time last year, to 831,000 vehicles. While floundering at home, General Motors ( GM - news - people ) had a banner month in China, with sales rocketing 50% to 151,084 vehicles. Foreign food chains, from McDonald's ( MCD - news - people ) to Yum! Brands ( YUM - news - people ), which operates KFC and Pizza Hut, have been aggressive about cutting prices in China to drive sales and grab market share during the slump.

What remains to be done? China must increase wages. It will be good for the Chinese and good for the rest of us as it will increase our ability to compete:

Still, getting Chinese consumers to spend like those in the West will take at least several years. For all the talk of Chinese consumers' propensity to save, a key challenge is that wage growth has not kept up with the country's exports and investment growth, UBS economist Tao Wang said in a report this month (See"China's Other Worry: Wage Slowdown"). Household spending has lagged as a result. China would need to rebalance its economy, distributing more industrial profits back to labor rather than capital investment.

How should we increase a reluctant China's incentives to rebalance its economy? Continue to buy less and save more thereby keep Chinese exports plunging.

China's exports plunge continues to be worse than expected, impeding recovery for the first major economy to emerge from the global slump. Marking the sixth straight month of declines, April exports tumbled 22.6% from a year earlier, compared with the market consensus forecast of 18.0% and March's 17.1% drop.

Yes, my friends, Capitalism and free markets work, if not painlessly, especially as they must overcome increasingly inane command and semi-command economies! Who was the one who said that the world cannot function well, indeed, survive half free and half slave? Well, neither can a free market system and it is time both Asian autocrats and American wannabe autocrats understood it. Aren't we lucky that the Obama/Biden administration's counterproductive efforts to spend as much as they can have met with so little success?!

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