Why Consumption Won’t Come Back

We live in a world where increasingly one global price exists for commodities, natural resources and other factors of production. Due to trade liberalization and the influx of more than two billion workers (from China to India to Vietnam) the labour force is not shielded from this development. Income inequality between countries has fallen whilst income inequality within countries has risen. The reasons for this are simple; most (manufacturing) work can be done after learning a relatively simple set of instructions and even typical middle-class jobs require just a few years of training. On the other hand, those with a skill-set that is in demand and hard to acquire see their purchasing power rise as they can leverage their wages over goods whose price has been commoditized.

Labour Structure

After World War II it was relatively easy to get a decent-paying job in manufacturing right after high-school, investors mostly stayed within their national boundaries. When people complain that manufacturing jobs are transferred overseas because labour is cheaper there, they forget that it is only because they were born in a Western country that they could even think of demanding multiples of a foreign-labour wage. Both provide the same labour and there’s not a huge productivity difference, why then is it expected that the company compensates one much higher simply for carrying the right passport?

The vast majority of Western workers would see their purchasing power fall dramatically were they to provide the same labour outside their home country. That ranges from blue-collar workers to waitresses to clerks. When people talk about a lack of demand in the U.S. they fail to acknowledge that demand is nothing else but purchasing power and there is no fundamental reason why an American worker at McDonalds should demand higher purchasing power than a Chinese university graduate. There is simply no way that any system where this is the case can be upheld for long. There may be some premium for living in the ‘right’ country but certainly not as high as it is today. The labour structure and wage demands in the U.S. however do not reflect this.

Looking at the labour structure in Asian countries this issue becomes clearer. The Asian system provides two main benefits: one is the lower level of taxation of the economy and labour which increases competiveness vis-à-vis Western rivals and secondly, and less transparently, by lowering the cost of essentials such as food, the wage level of export-industries can be lower without a corresponding loss in standard of living as the cost of living is reduced thanks to the structure of labour. Otherwise unemployed workers compete in low-skill areas and drive down the price of going out, having dinner outside or simply having a good time by enjoying the vast amount of human services.

Yes, these workers constitute an underclass in society. Due to our philosophical and moral inheritage we feel bad about people toiling for hours on end receiving little compensation in return. That underclass benefits from a generous welfare system in the West where transfer payments routinely exceed developing-world wages. According to numbers by BoostUp, one in three American students isn’t graduating from high school. If you have a look at the figures from states such as California you will struggle to comprehend the sheer scale of the issue. In the past decade these people could finance consumption via several measures such as landing a factory job even after dropping out of high-school or using credit and home-equity withdrawals. All those options are gone and there is no conceivable way how these people can demand a wage which is going to be a meaningful. GDP and consumption can only be high if the underlying human capital is strong. But with huge parts of the workforce deteriorating or not substantially more productive than foreign competitors how is consumption ever supposed to pick up?

For investors in the stock-market this isn’t necessarily bad news as companies have a diversified revenue stream and will see their income from emerging nations pick up. It is all about finding the right mix, between companies who have a huge upside thanks to exposure in countries where purchasing power grows and companies whose revenue stream will be impaired due stalling income from their main markets. The Chinese market is surprising in that it allows foreign companies a large market share in non-sensitive areas. American brands are everywhere, a stark contrast to South Korea or Japan. India and Brazil will be similarly open for business.

Cursory Glance at the Budget

Incidentally, this is also why any budget deal that may or not be struck this week will hold out for long. International competition also applies to countries

In Asian societies people that are at the bottom of the social ladder have the corresponding mindset that they don’t deserve hand-outs from society, never mind transfer payments as large as in a Western state. In contrast, they do what little they can to move society forward. Our societies have made the choice to carry weaker people on the back of stronger ones. It is more and more difficult for governments to justify social spending when other governments use their tax money to expand infrastructure and become ruthlessly more competitive. The power to tax its citizens is ultimately what stands behind any government’s promise to honor its obligations.

Markets flush with liquidity, a deleveraging environment and occasional flights to safety will continue to hold the price of Treasuries high for a certain amount of time which is why a case for buying Treasuries and selling them at an opportune time exists. The case for buy & hold on the other hand is on very shaky fundamentals.


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