Michael Maiello's picture

    Our Continued Demand Slump

    The world economy still suffers from a global lack of demand.  That's what caused the market correction in China that sparked a (temporary?) contagion in the rest of the world.  When it comes to the economic basics -- energy, grains and metals, everything's in a bear market.  The Daily Beast asked me to write about the markets and I took my stab. Basically, I think that China is deflating too early.

    China's economic miracle has been overly hyped. Yes, great strides were made in bringing the percentage of people living on less than $1.25 a day from over 30% to just over 5%.  But you don't get people up to such a meager level of income and then declare victory.  When it comes to eradicating poverty, we have always set the bar too low by helping people move up from misery to squalor and then not doing much else.

    Contemporary China is still a wreck.  It has reached a point where it has vast needs for resources but cannot profitably move them to the people who need them most.  Yes, China has big export businesses but the real winners of this arrangement are the U.S., European and Japanese companies who utilize the cheaper labor, lower environmental standards and whatever other advantages they can extract in order to expand their own margins. No matter how many parts of your iPhone are made or assembled in China, Apple ultimately wins the spoils.

    Of course, US stocks got killed, too.  I look around and it's hard for me to believe that most Americans have "made it" to the point where demand for goods and services would slacken here.  I think the want is there but that the means are not.

    We haven't optimally distributed our capital so that everybody can play and that virtuous cycles can form.  That doesn't mean we're in a bear market, but it seems as good an explanation of the last three days as any.



    The Federal Reserve is expected to increase interest rates this fall.  When the interest rates go up the stock prices fall.  Some or the volatility is because traders are taking off the top their profits before Septembers interest rate hikes. This market correction has been expected. China's crash simply triggered it. 

    China doesn't know what it is doing by trying to maintain 7% growth.  They have created some bubbles in the process and moves to hold on to the gains in their stock market is failing. They have been practicing a form a mercantilism of a export only economy.  The Chines does not have the income to buy the products they make. There is no safety nets so money is saved instead of buying things. Many experts have been pointing out all summer that China may not be honest about their growth numbers and have been padding them.  

    Many western governments don't carry enough debt right now to keep their economies stimulated.  US certainly don't have enough government debt and not enough tax revenue. Krugman talks often about this.  

    Very good article, Michael, congratulations.

    Of course, the stocks have had very high PE's and so a correction was probably in the works just on technical grounds. And uncertainties about China's practices in trying to control the markets has the world investor community wondering about unknowns.

    But given underlying weaknesses which were being masked by inflated values the good news is that the market turmoil happened now before the Fed​ started putting on the brakes.

    One kind of stuff we don't have enough of is affordable housing. It's too bad that the tight lending regs are restricting potential home buyers at a time when interest rates and building materials are low.

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