ACTIONABLE ADVICE FOR FINANCIAL ADVISORS: Newsletters and Commentaries Focused on Investment Strategy

Follow us on

Content Channels

Most Popular This Month

Most Popular This Year

Bruce Greenwald on Structural Problems in the Economy and Unemployment

November 10, 2009

by Robert Huebscher

The conventional wisdom is that World War II ended the Depression.  Is that correct?

The reason why World War II got us out of the Depression, and the reason that Argentina suffered because it didn’t participate, is that it is actually industrial policy that gets everybody off the farms.

That policy also accumulates purchasing power, so that when people are in the cities, there is demand for appliances and cars.  They have moved and they are now part of the productive economy.  So the demand is sustainable.

One of the great concerns at the end of WWII was that everyone thought we were going to go back to the Great Depression.  In Argentina, of course, that happened.  In the US and everyplace else, everyone was surprised and relieved. But the reason is that you’ve gotten everyone off the farms and into the cities.  It was through both the war industries and in the army.

How does this relate to today’s problems?

The comparable thing that is going on today is that manufacturing is dying, and it is dying for exactly the same reason, which is productivity growth is 5% to 6% a year and demand growth is 2% to 3% a year. 

That’s why Japan has had such a difficult long-term problem.  They are manufacturing-driven, and they think of themselves as a resource-poor country, where their imports of food, energy, and raw materials are absolutely essential.  They want a huge margin of safety of exports over imports.  The only way you can do that is by manufacturing.  That’s harder and harder to do as manufacturers die. So they’ve basically done a little bit of what was done in the Depression, which is that you’ve got to employ these people.  And many countries, like Japan, try to do it through exports. 

China has decided to grow, and they can’t grow based on domestic demand, so they have to do it through international demand, and that’s of course demand from manufacturing.  They have exactly the same problem as Japan.  They have a command economy, and they have sort of kept their workers busy, but they are heading for big trouble.  Manufacturing employment hasn’t grown for three years in China, and that’s a huge problem for them, despite the fact that, like Japan, they are manipulating their currency, which is just a modern version of protectionism.  And they’re generating exports. 

Japan and China are in the same situation.  Germany is too; they have powerful unions and powerful firms, and basically those who they are undermining – because they have fixed the Euro exchange rate – are the other European countries. Overall, the Euro should go to $2.50.  But there is no way they will let that happen, because they would go from surplus to deficit, and all their manufacturing jobs would be gone. 

Then you’ve got Korea, Thailand, Indonesia, and Malaysia, all of whom used to run deficits.  The problem was that they had to borrow in foreign currencies to finance those deficits.  Everyone got nervous about the deficits.  Their currencies collapsed.  The burden of debt destroyed the manufacturing countries predominantly.  But they went from deficit to surplus because their imports collapsed and their exports took off.  They’re never going to run deficits again, and you see it in the data.  They’ve been there and don’t like it and they’re not going to do it.  Brazil, which had the same experience, is pretty much in the same place.

So you’ve got these enormous trade surpluses as a result of countries trying to sustain in various ways their manufacturing bases, partly because they have people marooned there.  But also, like with agriculture, they think they can’t have a successful economy if nobody makes anything. 

You go into a Japanese factory, by the way, and nobody makes anything.  There are more people on the loading dock, which is a service function, than there are actually in the factory.  That’s why they are a hopeless enterprise.