When Black Friday comes I’ll stand down by the door
And catch the grey men when they dive from the fourteenth floor
When Black Friday comes I’ll collect everything I’m owed
And before my friends find out I’ll be on the road
When Black Friday falls you know it’s got to be, don’t let it fall on me
- “Black Friday” by Steely Dan, from Katy Lied (1975)
Y = C + I + Xn + G
- John Maynard Keynes, The General Theory of Employment, Interest and Money
In Keynes’ famous GDP equation the size of nation’s economy is measured by its Consumption (C), Business Investment (I), Net Exports (X), and Government Spending (G). Of these four factors only two really offer an eventual return: Business Investment and positive Net Exports both create new wealth for a nation. Investment results in improved production efficiencies, funds new technologies, and generally raises standards of living in the most efficient way yet discovered. When a nation exports more value in goods and services than it imports it recognizes a profit, like any business and its people reap the dividends (albeit not always equally).
However, when a nation focuses it short-term economic hopes entirely on the importation and consumption of consumer products the net result is spending on dead-end goods that do not contribute to production of wealth and are not exported for profit. Financing of the associated sustained trade deficit must result in either capital transfer (loss of savings or assets) or debt (borrowing against assets or future earnings), which reduces investment and retards future consumption.
When the inevitable shortfall is filled by government spending directed at increasing consumption rather than investment the process of decline is accelerated. In the aggregate funds can only be expropriated from the more productive sectors and are naturally reallocated to the ones that are most quickly failing. Factories close while housing prices and retail sales artificially sustained. Houses do not produce new wealth; factories produce new wealth by adding labor value to raw material and creating something more valuable than the sum of its parts. Using tax revenues to subsidize the purchases of imported consumer goods simply expands the economic leakage.
The result of all this is simple to predict:
- The demand and hence value of domestic labor falls
- The demand and hence value of labor in the foreign producer rises
- The returns to capital invested aboard rises
Bottom line: America has created a system perfectly designed to kill jobs, reduce middle class wages, and make the top-end of the investor class wealthier.
I call this our “Social Bifurcation Engine” and anytime the economy turns down, our citizens encourage our government (Democrat or Republican) rev this engine up higher and higher in the mistaken belief that it will stimulate the economy into a return to production. However, because of the giant leakage of consumer spending and the accelerated flight of capital investment to China such stimulus is no longer effective. At some point, probably not to long from now, this overworked engine will simply explode in an economic disaster with significant business and political consequences.
This is not an indictment of capitalism nor of appropriate government investment in things like infrastructure or R&D, it is an indictment of political naivety and CEO stupidity.
Now, if you wanted to make this scenario even worse, assume that your “trading partner” – the one who is making all the money off this – understands how this works and intentionally suppresses the cost of labor in its own nation by repressing worker’s rights, and ignoring safety and environmental regulations that have enormous health consequences because they don’t value individuals. In other words, “China.” These factors all prevent the natural balancing mechanism that would check the death spiral of American wages by reducing the incentives for U.S. capital to flee to Shanghai.
When the Boys from Beijing beat striking workers with batons, poison Chinese kids with their unbreathable air, and slowly kill the elderly in their “cancer villages” they don’t do it without reason. They do it because they know the never ending trade deficits are undermining the American and European economies and that the Social Bifurcation Engine will eventually undermine the political stability of their enemy. The domestic collateral damage in China is simply a necessary and acceptable cost in their quest to stamp out liberal democracy and export their brand of National Socialism with Chinese characteristics to the world.
Understanding that the existence of a healthy and wealthy America has long driven Chinese yearnings for political reform – witness the Goddess of Liberty at Tiananmen in 1989 – Hu Jintao and co. know that in the end their unpleasant system cannot survive while democracy prospers.
The men who rule China have carefully crafted and sold the world a Big Lie whereby they convince the West that the policy of engagement will lead to Chinese political reform and eventually to shared prosperity through trade. Obviously there is no empirical evidence for either of these outcomes after three decades of experimentation. We have simply created a stronger, more repressive communist China and a weaker, bifurcated America. For God’s sake, it’s time to stop!
You can start by skipping your Black Friday shopping trip to the Great Wall of Mart and instead invest your money in America by buying a U.S. made good or service from a local firm. Or you can save your money for the real Black Friday that is sure to come if nobody else heeds this call.
Greg Autry is the co-author of Death by China. He teaches macroeconomics at the Merage School of Business, UC Irvine. He writes and speaks on China, space, economics, investing, and business strategy. For more information, please visit http://www.deathbychina.com and follow the author on Facebook and Twitter.