The US recorded a 0.6% growth rate in FY ’07-’08 3rd quarter, the household income increased by 0.3% which is less than its prevailing inflation rate of around 2%. Any country with such a statistic would be off to the drawing board of saving more but not the US. It’s spending actually increased by 0.2%. It is managing to spend more and more even though it doesn’t increase its earnings more.
Ironically it’s the world that is ensuring that the US is spending more, though it doesn’t add much to the world in terms of its own production. It’s like the case of our corn producer mentioned earlier. For any other country with such a trade deficit the currency of the country would be battered in the forex market since no one would prefer to have it but that isn’t applicable for the US.
Here is my 2 cents on how would this be possible. US being US and the birth place of credit card is a master at spending. Thanks to its phenomenal progress economically it created enough wealth to be the world’s largest buyer, almost as big as the buying proportions of all other countries put together. With such a buying power, the countries of the world had an amazing market to tap, especially add certain markets where the US produce could be matched and even bested in the market offerings like cars. This adds to the importance of the US markets; because if the US consumers don’t buy then these countries that export to the US do not have a market though they have a product that is customized for the market. And if your companies go down the economy is heading on the one way street making itself a fantastic object of case study on why it cracked like the SE asian “tigers” were in most B-schools across the globe.
Let us consider a country like Japan, an industrial giant, with an export oriented economy and a savings rate of 45+%. The country is the best example of beating the US at its own game. The best selling cars, consumer electronics, gaming console in the US are from the Japanese manufacturers. If the US decides not to spend, the Jap economy would crash and would have so much of surplus Yen that it would lose its value in the Japan. I’m not sure if this would be called by a relatively good term called recession as now the country should be called bankrupt for the future.
The other way that US became important is by the outsourcing that it is involved with. Irrespective of the furore that is seen today, US companies have been outsourcing since considerable amount of time. Premium companies like Nike have long stopped manufacturing in the US ad have shifted to cheaper pastures like Thailand and other Far East countries. If the US consumers stop spending, Nike would stop spending on the production activities and there goes another industry on its journey to the bottom of the earth.
Another outsourcing that drives the economies is at the service level, the likes of call centres, BPOs, KPOs etc. For the US companies involved in these the major advantage is that of cost savings. Very few other economies have the scale to support such an industry across the globe from the pacific rim islands to the shores of the far east. Once the economy goes bust the services wouldn’t be consumed in subsequent years, and there goes bust another set of industries and countries based on the industry. Thus effectively the US has ensured itself of being a superpower by not having superior technologies or markets or wealth but by ensuring that it spends and spends more than anyone can.
Being the engine that drives the current world, US have achieved a unique status of the most preferred borrower to the point that it dictates the terms of its borrowings. It’s like you and I dictating the terms of the home loan including that of the interest rates and the payment options. Being the major consumer the US dollar is the mode of payment and any dip in the value of the dollar against the local currency would hit the exporters. If the value of the local currency appreciates the producer receives lesser in his local currency than he did earlier. This results in reduced real profits for the company in the local currency. Reduced profits results in 3 major things, firstly lesser spending by the company, next lesser taxes to the government from the company and thirdly lesser salary t its employees. All three would ultimately lead to decrease in the economic growth. There could be couple of classic arguments against Uncle Sam being the “Atlas” of the world economy. Hence reduced spending by the US should and would affect only those countries that are export oriented and not the ones like India that have a good local demand.
Interesting and appears very logical but the increase in consumerism in India is driven by the US. The Indian companies that are thriving today thanks to the renowned consumerism weren’t this good a decade ago. Bajaj Auto an indigenous motorcycle manufacturer in India has its share rising some 753% since March ’01 till Feb 15 ’08 thanks to its 50+% market share cumulatively in the segments it services. This interestingly coincides with the Indian growth story beginning and it what drove the growth…. Services sector. Considering that IT and ITES was the driver for the service sector and the major clients of the IT sector are in the US the dependence on US economy becomes obvious even for a relatively insulated economy like India.
By way of comparison, the gross revenues from IT services was in 2004-05 about 20% higher than the GDP generated in India's construction sector and almost three times as much as the GDP in mining and in electricity, gas and water supply. gross revenues from IT services exceeded 12% of GDP generated in India's services sector as a whole, which accounts for more than 50% of the nation's GDP. Having said this, the major contributor to this revenue growth in the IT sector is US and a recession in the US would hence slowdown the growth story. It is already evident from the sub-8% growth estimates for this fiscal year dropping form 9+% estimates for the last.
Overall the world will catch cold whenever US sneezes and this is bound to remain the situation till another economy or region comes up to guzzle and gorge to the level that US does on any product and considering the intertwining of the economies as of today such a consumer might take decades to rise and dethrone the USD.
