Re: Re: Re: Re: beginning of the end?

[Barnet Wagman <wagman@xxxxxxxxxxxx>]

> though looking at the foreign-exchange value of the dollar is important, I
> think that looking at aggregate demand is more important. There are two
> polar alternatives:
>
> 1) the US trade deficit pulls up the rest of the world, allowing a
> mutually-reinforcing demand-side boom amongst the capitalist nations
> (especially the already-developed ones), upward harmonization of demand
> growth.
>
> 2) the rest of the world's slow growth (higher interest rates in Europe,
> etc.) pull the US down, so that demand growth harmonizes in the downward
> direction.
>
> If the "race to the bottom" (the downward harmonization of wages relative
> to labor productivity driven by intensified mobility of capital and, more
> generally, the neoliberal revolution)[*] is to be taken seriously, the
> first option is unlikely, since as wages fall relative to labor
> productivity that hurts consumer demand relative to world potential output.
> (The exception, of course, is when consumption is financed via debt
> accumulation or inadequate saving, as in the US. But only a small sector of
> the world can pull this kind of consumption boom off at any one time.)
>
> So I think that option #2 is more likely.
>

It seems likely that capital inflow (which exchange rates presumably reflect)
is having an effect on U.S. aggregate demand, by jacking up stock prices and
delivering massive capital gains to U.S. investor/consumers, as well as via
more traditional channels.  (Although I haven't seen any numbers on this, is
seems a safe bet that the incomes of millions of retired people now depend on
the stock market.)

Rather than heading towards upwards or downward harmonization, perhaps we are
in a relatively stable regime, where (non-direct) foreign investment transfers
wealth to US asset holders, who then use that wealth to continue consuming
imports, thus sustaining foreign output and the possibility of continued
investment-based transfers to the U.S.  Of course, such a regime requires
continued confidence in the U.S. as a sink for world savings.  Five years ago,
I never would have imagined that such confidence could still be in effect, but
apparently it is.  I now tend to think that a shift of investment away from
the U.S. will require not only a loss of confidence in the U.S., but also a
alternative trendy investment locale.  After the debacles in Russia, Mexico
and Asia, I suspect that the financial 'community' is pretty  skittish about
investment outside the G7.

Barney Wagman