- The global economy is suffering from a lack of aggregate demand. With insufficient demand, nations compete furiously for their share of the diminishing growth pie.
- In the U.S. and Euroland, many policies only temporarily bolster consumption while failing to address the fundamental problem of developed economies: Job growth is moving inexorably to developing economies because they are more competitive.
- Unless developed economies learn to compete the old-fashioned way – by making more goods and making them better – the smart money will continue to move offshore to Asia, Brazil and their developing economy counterparts, both in asset and in currency space.
He concludes with these paragraphs (emphasis his):
If so, investors should recognize that an emphasis on currency depreciation and trade restrictions are counter to their own interests. Not only would their dollar-denominated investments lose purchasing power over time from a global perspective, but they would do so also via a policy of near 0% interest rates, which are confiscatory in real terms when accompanied by positive and eventually accelerating inflation. In addition, although corporate profits are in many cases broadly diversified across national borders, there should be little doubt that the objective of tariffs and trade barriers is to advantage domestic labor as opposed to domestic capital; profits, therefore will ultimately not benefit.
Unless developed economies learn to compete the old-fashioned way – by making more goods and making them better – the smart money will continue to move offshore to Asia, Brazil and other developing economies, both in asset and in currency space. The United States in short, needs to make things not paper, but that is not likely unless we see a policy revolution in Washington DC. In the meantime, our unemployed will continue to fill out forms and stand in line. We’re living here in Allentown.
He says we must make "fundamental reforms to counter our lack of global competiveness," which stems from our labor costs being up to 10 times labor costs in developing nations, and "level the playing field," but we should do it his way:
The constructive way is to stop making paper and start making things. Replace subprimes, and yes, Treasury bonds with American cars, steel, iPads, airplanes, corn – whatever the world wants that we can make better and/or cheaper. Learn how to compete again. Investments in infrastructure and 21st century education and research, as opposed to 20th century education are mandatory, as is a withdrawal from resource-draining foreign wars. It will be a tough way back, but it can be done with sacrifice and appropriate public policies that encourage innovation, education and national reconstruction, as opposed to Wall Street finance and Main Street consumption.
I don't see how any of that relieves pressure on US wages. Innovation and education have been our policy emphasis for decades, and it's time to admit that Chindia is quickly closing the gap in both. We either protect wages or protect returns to capital. Neither Bill Gross nor anybody else has a credible plan to do both.
The point that globalization is good for capital and bad for labor is also made in Citigroup's advice to its investors in the Plutonomy Memos.