Raymond Richman - Jesse Richman - Howard Richman
Richmans' Trade and Taxes Blog
World Economic Growth is Slowing
I suspected that world economic growth was slowing when gasoline prices started to decline this fall. My hypothesis has been that short-term changes in world oil prices are largely driven by changes in world-wide demand, not supply. When the world economy is growing, world oil prices tend to rise. When the world economy is slowing, oil prices tend to fall. Thus the price you pay at your local gas station is one of the chief indicators of world economic demand. But falling oil prices could have other causes as well. Perhaps an increase in Iranian oil production, due to the lifting of sanctions, was causing them to fall.
My suspicions of a worldwide demand slowdown were given support by the latest report of United States trade. In September 2013, U.S. exports fell by $3.0 billion, on a seasonally adjusted basis, from $191.9 billion the previous quarter. When worldwide demand declines, demand for U.S. exports tends to decline. But a one-month decline in exports does not a trend make. This decline could have been an aberration.
My suspicions were confirmed by a November 19 report from the OECD, one of the organizations that tracks world economic data. It predicts that, by the time growth is calculated for 2013, world economic growth will increase just 2.7% this year, down from a 3.1% increase last year. There appears to be a consistent trend of declining world economic growth:
The OECD statistics also show that U.S. growth is stagnating well below its usual 3% level:
So why is world economic growth slowing? One reason is the large and persistent trade deficits being experienced by many of the world's countries. Not only do persistent deficits sap jobs and take away investment opportunities, but they eventually cause financial collapse. Moreover, a world trading system with the same trade-surplus and trade-deficit countries year after year is not sustainable. Eventually, the trade deficit countries go into financial crisis which spoils the markets for the trade surplus countries.
In the fall of 2008, the United States experienced the financial crisis that results from trade deficits. With the collapse of the house price bubble, consumers could no longer afford to pay back the loans on their houses, originating from abroad, that had financed their purchases of imports, and American banks were left holding the bag.
For the past two years the southern eurozone countries (France, Italy, Spain, Portugal and Greece) have been enmeshed in trade-deficit caused depressions, which are hurting their imports from the northern eurozone countries. This year will be the second year in a row that real GDP growth in the eurozone was negative (-0.6% in 2012, -0.4% in 2013). There is an obvious solution. The Southern European countries should pull out of the euro and re-adopt their old currencies. Then their currencies would fall to trade balancing levels and they would get trade-balancing investment in their trade-competing industries.
In the rest of the world, the problem is that the East Asian governments, especially China and Japan, have been continuing their mercantilist currency manipulations in order to run trade surpluses with their trading partners. The U.S. trade balance with China has continued to worsen. Our merchandise trade balance with China just set a new negative record of $321.0 billion over the last twelve months, as shown in the following graph:
There is an obvious solution. The U.S. should adopt a scaled tariff upon the products of the trade-surplus currency-manipulating countries which would force them to either take down their barriers to U.S. exports or lose their share of the U.S. market.
But, instead, Federal Reserve Chair Ben Bernanke's has been buying U.S. long-term bonds (a strategy called "Quantitative Easing"), partly to weaken the dollar by sending private savings abroad so as to keep U.S. trade deficits from growing. This has been transferring some of the savings being forced into the U.S. economy by the mercantilist governments onto innocent bystanders.
Bernanke's strategy helped the United States for a while. An improving U.S. trade balance with the innocent bystandards offset the deteriorating U.S. trade balance with the mercantilists. But now Bernanke's strategy is forcing some of these bystanders into financial crises, which are starting to hurt U.S. exports. According to the OECD report:
The United States economy will experience a double-whammy in 2014. Not only will U.S. exports to the innocent bystanders fall, but Obamacare is likely to cause declining aggregate supply of services by those small businesses and self-employed people who are trying to avoid Obamacare penalties.
Don't pay any attention to rosy predictions for rapid economic growth in 2014. For example, the OECD is predicting that the U.S. economy will grow by 2.9% and that the world economy will grow by 3.6%. But last year, at this time, it was predicting 2.0% U.S. growth, not the actual 1.7%, and 3.4% world growth, not the actual 2.7%. The best prediction is that current trends will continue: The world will continue to experience slower economic growth in 2014, while U.S. economic growth will continue to stagnate.
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