US Consumes Far More than It Produces. Threatens Global Division of Labor

Portends a world of regional blocks with little trade between them

Sun, Dec 14, 2014
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Made in China, consumed in the US

Mikhail Khazin is an extremely popular intellectual in Russia, who speaks mostly on economic and geopolitical matters.

His ideas are important because they influence thinking in Russia, and interesting because they are original.

They are far different from both the ideas that hold sway in the West, and the ideas the West imagines are attractive to Russians.

Our contributor The Saker was able to secure a long Q&A session with Khazin that was translated by a team of his volunteers.

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We are presenting exceprts from the discussion in a series of articles. This is the final, fifth installment. This way for the first, second, third and fourth.

This material originally appeared at The Vineyard of the Saker


The situation with industry in the US in the past couple of years has somewhat improved.

There are two reasons: changing energy prices in the US (and here we must say good words for the Obama administration), and the rising cost of production in China.

However, the main factor for long-term growth - private demand – is in decline. This suggests that growth in the US does not even have a medium-term prospect.

The drop in private demand is the main impact of the economic crisis, which has continued since 2008. Nothing can be done here, because the main mechanism of its stimulation - the refinancing of private debt in an environment of a decline in the cost of credit - is no longer working.

Recall that the discount rate of the US Federal Reserve, which was 19% at the beginning of the “Reaganomics” policy (the main tool of which was increasing lending to households), declined almost to zero by December 2008.

It’s impossible to raise the rate now, because it will bring down the whole pyramid of debt around the world.

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Twice as many imports

Today US households every year consume about $3 trillion more than they earn. The situation in the EU is not much better. This means that aggregate demand in the world will be sharply decreasing.

In other words, continuing to keep the trading and financial infrastructure of a global system of division of labor won’t be cost-effective.

The world will most likely return to regional systems of division of labor. Each such system will have to provide domestic production of basic consumer and investment goods.

The territory of their self-sufficiency will be regional, with high enough inter-zonal trade barriers. In this scenario the WTO has no prospects.

Sanctions

Sanctions have shown that the US these days is impossible to negotiate with. It means that the matter is not whether Russia can do without American technologies or not; in fact, it is about how it needs to proceed without them.

If the economy were healthy, then while Russia would resolve all her current problems, the US would go forward, but amid sagging demand…

The US will likely go backwards; this is a standard expectation amid long crises. Sure, the problems of Russia won’t be resolved on their own, it is necessary to update the economic policy. On the whole, sanctions do not constitute a critical matter for the time being. They even can be increased, but there is no guarantee that it will not precipitate a crisis in the US.

Retaliatory measures are rather political. By the counter sanctions Russia shows that this is not the way to treat allies. And if they are not allies, then are they enemies?

In other words, does the US push Russia into an anti-American union with China? Certainly, the union with China is a disputable matter, but if there is nobody to talk to in the European Union, if the political elites of the EU are subservient to Washington, and if the U.S. behaves inappropriately, then what are the options?

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