Saturday, October 9, 2010

U.S. Consumption and Consumption Share of GDP

Looking at the BEA numbers there is little correlation between Consumption and Consumption Share, it's around the -.15 range. Therefore, it's initially puzzling to know what people like Soros, Geithner and Obama mean when they say the US has to reduce its dependence on consumption as a way to 'rebalance' the world economy, using consumption share as the illustration. It would be fairly easy to reduce dependence on consumption within GDP simply by boosting public investment, as was most obviously done during World War 2. Likewise, there is no reason to believe that a reduction in consumption will reduce consumption share - i.e. dependency - if it results in a collapse in investment. For instance, US consumption has been decelerating since the mid-1970's even as its importance in the economy has grown from about 63% to 70%. Similar numerator based thinking exists in regards to China, and in fact World War 2 United States looks a lot like China now, with booming consumption and falling consumption share due to heavy investment.

I would argue the end game has nothing to do with fat Americans and stingy Chinese, or a desire for rebalancing, but a desire by the Western finance establishment to take down the Chinese banking system. Floating the yuan on the currency markets would allow that to happen.