The Equanimist

Working Hypothesis (re So-Far Failed Attempt at Greater-US Market/Foreign Middle-Classification)

Posted in Economics, Economy, Public Policy, Socioeconomy by equanimist on September 25, 2010
When money represents discrete fractions of actualized human potential adjusted for an instantaneous estimation of future productivity increase, to account for net outflow of money as the US trade deficit ballooned in a continual expansion of the US-dollar denominated market, more US dollars were necessary to fuel the “greater-US” market without either disrupting the US socioeconomy or experiencing dramatic domestic deflation.

Money supply then would have to grow at the rate of productive population within the greater-US market (i.e., the domestic and foreign USD-denominated markets) adjusted for (an extremely near-term estimate of) productivity gains made by same (so to maintain full employment absent deflation).

Logically, attempts to ever-expand the greater-US market would require some still-greater money supply. [Indeed, for as long as the US pursues a policy of “creating middle classes” money supply expansion should outstrip labor population growth multiplied by the estimation of instantaneous productivity growth within the greater-US market by some instantaneous estimation of the rate of current expansion.]

The Federal Reserve would furnish money sufficient to the task. But, it wouldn’t get used to the purpose.

Fig. 1, Closed blue triangles and closed green squares represent M2 and M1, respectively. Closed red circles and open blue triangles represent the bottom 90% of US earners and the top 1% of US earners, respectively. Data sources: M1 & M2, Federal Reserve (link); wage data, Piketty and Saez, TabFig2008.xls (link). M1 & M2 are plotted in billions; incomes are plotted in hundreds of 2008 US dollars for the sake of scale. (Click on graph to see full-sized image, which will open in another tab.)

Because US workers were already highly paid relative to poor foreign workers, we would not expect US middle-class incomes to grow much as a result of greater-US market expansion (unless the creation/expansion of a greater-US market were to enhance productivity gains). And, as is clear in Fig. 1, US workers’ incomes remained relatively flat over the time period. But, if money were being used to purpose (i.e., to promote development of foreign middle classes) then we would not expect to see a rise in top-tier US incomes. But, we do.

From approximately 1982, the top 1% of US earners saw increases that roughly corresponded to the increase in M2.

Perhaps, in attempting to expand the greater-US market in rapid fashion while erecting no backstop against domestic disruption, we wanted something that we shouldn’t have expected:

In order to keep the US market competitive, poor foreign wages-per-capita would have had to rapidly approach US middle-class wages minus cost of transport (i.e., grow at a rate unsupported by the foreign-labor-pool-to-foreign-labor-demand ratio). Otherwise, poor foreigners would always out-compete US counterparts on a purely-cost basis.

Absent extraordinary wage increases in poor-labor countries (and in the face of anemic foreign demand for their own goods and services—the result of low wages relative to the cost of the goods that they produce), the US (and parts of Europe) would have to consume the excess supply or give up creating foreign middle classes. Of course, as much as was prudent, US-made goods and services could be replaced with foreign-made. US jobs would be slashed en masse at every opportunity. Fear of the prospect of unrest would (generally) make that temporary. Still, the average unemployment rate in the US has crept ever higher in the post-war era.

Fig. 2, US Unemployment Rate by Year, from Jan 1948 thru Aug 2010. Data source: Bureau of Labor Statistics (link). Black line is a linear regression calculated by Microsoft Excel. (Click on graph for full-sized image.)

Needing domestic jobs but unwilling to pay foreign workers enough to buy the goods that they’d produced; or charge US consumers less for goods and services than the market would bear (i.e., produce domestic goods at a loss and foreign goods at a profit); or lavish cash (so-called “profits”) on the US population, US stewards had to find some way to effect purchase of the surplus goods produced.

In the absence of real money to purchase excess goods, credit could be furnished US people.

Fig. 3, Consumer Credit Expansion. Open red diamonds represent yearly consumer credit. Closed blue triangles and open black circles represent M2 and M1, respectively. Closed green squares represent M1 + consumer credit. All numbers in billions. Data source: Federal Reserve (link). (Click on graph for full-sized image.)

That is, it seems that money might have been loaned, instead of given, to “average” US people in order to purchase the surplus goods—or money was siphoned off at every opportunity instead of perpetually circulated (depending upon your perspective). [It seems difficult to imagine how smart people expected this to work.]
As of now, credit associated with “excess” production/consumption (which became a way of life) must still be repaid but bottom 90% incomes have not risen to meet the burden.
More pointedly, it seems the world economy is dependent upon vanishing credit to purchase surplus goods despite plenty of fiat money for the purpose because top-tier earners have irrationally siphoned needed currency off the greater-US market.
Absent meaningful change, the greater-US market will fail. Non-western middle classes will not develop. Global stability will continue to elude. And, even the fate of the US market is uncertain.

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