By Professor Ricardo Ulivi, Ph.D.
For the past few years, the US economy has been expanding at a rate slower than the historical norm. Lately, however, growth has accelerated. Are we out of the woods? I don’t think so. The main reason our economy has grown, while Europe and other parts of the world are showing little or no growth at all, is the Fed’s easy money policy. It is not due to productivity, innovation or other factors that would make growth sustainable and real.
While the Federal Reserve announced a few weeks ago that it has stopped its record bond buying program, the Japanese Central bank unexpectedly reported recently that is was beginning its own massive bond buying program. In other words, they are copying the Fed’s formula that has led, so far, to economic growth. But is this growth sustainable or a mirage?
Structural reforms are needed, not easy money
I believe our economic growth is a hallucination. Easy mortgage money created the debacle of 2008-2009, and the Fed’s massive bond buying program since then will have severe consequences in the future. That’s because we, as a nation, have not addressed the real problem our economy is facing. We need to make some structural reforms, or China will continue to beat us in commerce, big time. If commerce were a football game, the Chinese would be up by 60 points, and it’s only the first quarter!
China is the problem
China IS the reason for the world’s economic slowdown. Their system combines the worker’s discipline imposed by the communist system—no unions, no strikes, etc.–with the opportunity to make money offered by the capitalist system. In other words, they have an entrepreneur’s dream economic system.
Let me give you some simple numbers to illustrate the Chinese impact and their threat to our economies. According to data from the World Bank, in 2013 the US GDP (gross domestic product–a measure of a country’s total production in goods and services) represented about 23% of the entire world’s GDP. China represented 13%. That is, we produced nearly twice as much as they did. The numbers are similar for Europe. However, in 1980, we produced nearly 10 times MORE than the Chinese did, and so did the Europeans. In other words, over the last 30 years, we lost perhaps 20% of the world’s production to the Chinese. And the Europeans and the Japanese lost as much of a market share as we did. Commercially speaking, the Chinese are killing us.
If your sales dropped 20%, what would you do?
Imagine if your company’s sales were to drop by 20%, and the outlook called for sales to continue to decline. How would your company react to this? Cut expenses? Roll out new products? Improve service? Or add to your company’s debt to continue to meet your payroll and losses?
How are the Americans, Europeans and Japanese reacting to the Chinese commercial onslaught? By printing money and lowering interest rates, instead of making structural reforms. We can’t compete that way. We have to get serious.
Let me give you an example of one structural change we could make in the USA. Reduce regulations. I will illustrate this need with a story. A few months ago I hired a lady to clean my apartment in Buenos Aires. I wanted to do everything legally, so I researched the issue. I have to pay an hourly rate, vacation time, sick time, holidays, and if I lay her off or fire her, I need to pay a dismissal fee. So I put together a one page agreement detailing all that’s required by law. Contrast this with the following: I worked for 35 years for the California State University. Yes, professors have a union. Today I received a copy of the new contract the union has negotiated, seeking our approval. It lists the responsibilities of professors as well as the job benefits. How many pages do you think this contract has? If it were ten pages, which is ten times longer than the one I used to hire a cleaning lady, you might say–that’s OK, because hiring a university professor is a bit more complex than hiring a cleaning lady. But the proposed contract I received is NOT ten pages long, but 136 pages!!!!! This is an example of overregulation, and if we are to compete against the Chinese, we better start simplifying rules here at home.
In sum, the Americans, Europeans and Japanese cannot compete against the Chinese. We need to change or we will be driven into another major recession. Monetary policy cannot cure the competitive disadvantage we are facing vis a vis China. Therefore, I conclude that the stock and bond market’s ebullience is a mirage created by the Fed’s easy money policy. We have not addressed the real problem, which is China’s ability to produce goods at extremely low prices, and we will pay for our lack of vision.
Be careful with your investments at this time. Their values are not being supported by sustainable factors. As usual, you can contact me by replying to this email or by calling me at 714-771-6000.