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The spend force

Americans have been buying what the globalised world has been producing. America’s gargantuan trade deficit is a measure of this, writes Saubhik Chakrabarti.

india Updated: Jan 27, 2008 20:39 IST

SOME TIME after a group of young men took a shortcut to immortality — as they understood the concept — by flying two passenger airliners into what was then global capitalism’s iconic symbol, America went to war. George W. Bush cheered as ordinary Americans joined the battle. And America and the world were saved from a great danger. Now those American soldiers are fatigued. And America and the world are scared again. Thus stock market yo-yos and all this talk of global economic troubles.

Millions of Americans armed with nothing more than a credit card and, soon, credit lines flowing out of rising house prices, rescued their own country and the world from a major economic slowdown after 9/11. The twin towers were destroyed at such a time that always makes you wonder whether Osama bin Laden majored in jehad as well as macro-economics. In America, unemployment was rising, the stock market was pensive, the dotcom bubble had burst, and in most major and semi-major economies around the world, economic growth was faltering. Perfect conditions for inducing terrorism-triggered global economic gloom.

But America had the weapon of mass consumption. Just how effective this was becomes clear with a bit of history. The world has always envied American mass consumption. Those tracking numbers, however, know that a paradigm shift happened in the late 1990s and the early part of this decade. Around the 1960s, when the post-war boom was still on in America, mass consumption and the economy more or less grew in tandem. Between 1997 and 2007, growth in mass consumption outstripped that in GDP. Michael Mandel, chief economist for the Business Week, estimates that this translated into American consumers spending, between 2001 and 2007, $ 3 trillion more than would have been the case had consumption and GDP growth kept pace.

Americans fought in every mall, main street and downtown store, and kept themselves and all of us from dropping down the economic ladder. Just how important the American consumer has been is also clear from this data. The pre-2001 boom was led by capital sector spending (easy way to distinguish between capital and consumption expenditure is to think of money spent on, respectively, machines and McDonald’s). The post-2001 boom has been led by consumption spending. But, and here’s the killer fact, the share of consumption expenditure in American GDP in the post-2001 boom is five times more than the share of capital spending in American GDP in the pre-2001 good times. American mass consumption, over 70 per cent of US GDP, has been hugely important for America recently. And for the world as well.

Morgan Stanley’s Stephen Roach has been one of the most consistent advocates of the thesis that the American shopper is the most important global economic player. American mass consumption is a little less than 20 per cent of the world GDP — an astonishing figure. Roach’s data says American consumer spending is 20 per cent more than Europe’s, 350 per cent more than still economically anaemic Japan’s, 900 per cent more than China’s, whose communist rulers are true to type perfectly happy with depressing mass consumption as long as invest/exports keep the economy booming, and 1,700 per cent more than India’s. So Americans buy a lot. And much of what the rest of the world sells is bought by America.

In the post-2001 American shopping spree clothes, consumer electronics, automobiles, furniture, recreational equipment were major shopping items. These are precisely commodity groups that saw cheap imports into the US. Americans have been buying what the globalised world has been producing. America’s gargantuan trade deficit — the value difference between exports and imports — is a measure of this. So, yes, India and China may be getting richer, Germany may be booming again, high energy and raw material prices may have increased spending power in Latin America, the West Asia and Russia but all put together they can’t get close to what the American shopper does for the world’s economic growth.

That’s why stock markets are nervous everywhere, and hoping that Bush and Ben Bernanke, head of US Federal Reserve, will rearm the American consumer-soldier. Oddly, he has not been spending because his income has been growing at a rapid clip. Real wages did not climb sharply during the post-2001 boom. What did is what economists call the wealth effect — rising house prices, combined with a sophisticated financial system that allows mortgages to be used as purchasing power enhancers, allowed American consumers to spend more than what they earn. Between 2004 and 2006, Americans extracted $ 800 billion annually out of rising house values. As helpful was the rise in non-housing consumer lending.

But if housing boom started faltering, if job income didn’t rise enough then the consumer-soldier, facing high personal debt and fading wealth effect, wouldn’t be an effective fighter. That’s precisely what’s happened. US job creation data doesn’t make for good reading. Roach argues the housing sector — the so- called sub-prime crisis, at the bottom of which is home loans to poorer households, is a warning sign of, not the main reason behind, economic concerns — may see falling house prices in 2008 and 2009.

Economists dream of a smooth rebalancing the world’s economy: over a period of, say, five years America’s trade deficit decreases, China’s and Japan’s consumption rapidly increases, India rapidly becomes a really large economy, so Americans save more, buy less, the non-US world takes up the slack in shopping, etc, etc. That may happen or a nastier adjustment may take place, with the American consumer-soldier leaving the battlefield and no one, for some time, to take his place. Or, like post-2001, there may be a miracle. No economist could predict in the aftermath of 9/11 that a housing boom-led American consumption fest will take America and the world out of the danger zone. America’s economy is famously capable of surprises. May be there’s something in the Bush-Bernanke packages that will revive spending?

Can the American shopper save the world again?

Saubhik Chakrabarti is Deputy Editor, News X