If you want to have a sense of what’s going on at the moment with the economy and what the fuss is about with currency wars, it’s helpful to understand the five letters CIGXM. They’re aren’t random letters and it isn’t an acronym; these are the five variables for a basic economics formula for the determination of a country’s Gross Domestic Product: C + I + G + (X – M). These aren’t random variables but instead delineate the five core categories of aggregate spending that drive a nation’s economy. The five are:
C = Consumer Spending
I = Investment Spending (aka business investment, what companies spend in order to earn money)
G = Government Spending
X = eXports Earnings
M = iMport Spending
While they’re listed in a particular order, it’s more helpful to think of them in some historical context. Each plays a role but not always in equal portions; each however, has provided an outsized contribution in a period of our history so let’s look at them in order of history so that it makes some sense. Rewritten as development drivers, the equation could be I + (X – M) + G + C.
Remember that for the first 60 or so years of our nation’s history, we were mostly an agrarian nation. The industrial aspect didn’t truly take off until around the 1840s when innovations in manufacturing and transportation gave the first outsized push to the national economy. We’d grown beforehand, but it was largely on the back of our agriculture and harvesting of our natural resources until then. But the industrialization began in earnest in the 1840s, especially with the textile industry as mills grew up in river towns across the country, fed by the cheap cotton that now came up in bulk from the south. This was the first stirring of the I – Investment – portion; spending by businesses to domestically produce what was needed by a growing nation. It was one thing to build a transcontinental railroad, but the businesses that built them needed the items to make them run: locomotives, steel, and even the machinery necessary to build them in the first place. Likewise with textiles, guns, and everything else that grew with the young, spreading nation. This I portion drove the economy through the First World War and into the 1920s before it finally collapsed with the Great Depression.
The national development was also spurred through this period by an increasing drive to export American products abroad – the X variable. Developing and spanning a nation required vast amounts of basic manufactured goods, such as steel. With the natural resources here, these industries grew dramatically so that we needed less imported machinery as we manufactured more and more of our own necessary materials. By the First World War, we’d developed a huge export driven machine, especially to the British and French as they desperately fought the Germans. We lent money to them in huge amounts and with the end of WWI, we took over as exporter to the world and ran a massive trade surplus (X – M, with X > M). The thrifty Chinese have used the same mercantilist policies as we did during those years, actually lending us the money – via purchasing of US Government debt and subsequent federal deficit spending – to purchase their goods at Walmart. For about the past two decades, we’ve imported far more and run chronic trade deficits (X – M, with X < M).
The economy was mired through the first years of the Great Depression as everything – and I mean everything – literally collapsed. Hoover actually did some basically good things, but was constrained by the notion that the government had to balance the books and if there were no tax revenues then there could be no spending. FDR’s arrival in Washington led to the adoption of deficit spending that was proposed by John Maynard Keynes, who used this very formula as the basis of Keynesian economics. Keynes was literally saying Dude, if C and I are shot and nobody’s got the money for anything, then G is the only gun left in the arsenal, so go for it. In his defense, Keynes didn’t mean that the government should go hogwild like a horny cowboy just paid after a cattle drive up the Chisholm trail; he was clear that when things were back on an even keel, the government should pay off the debt. Shore, Jethro, hit the town but jes’ ‘member that youse gotta set some money aside fore when yer too old to be a-drivin’ herd.
Good luck with that. Like PJ O’Rourke once wrote: giving money and power to politicians is like giving whiskey and car keys to teenage boys.
The truth is that the government continued spending through the Second World War and actually did try to control itself at the end of the war. The budget had to be balanced and that naturally led to huge slashes in defense spending and the question, if G is no longer the driver to pay for I and the world is literally wrecked, what variable becomes the driver? Oh yeah, C – us. There has been a deliberate effort to get the American consumer to part ways with the income in the past three generations and it’s been wildly successful as first credit card and then student debt hit massive levels. As the consumer began to actually max out in the 1990s, the federal government’s spending reached massive levels and it too began running chronic budget deficits but this government spending helped mask the increasingly tapped-out consumer condition. How? Via immense spending with funding courtesy of the Chinese and easy credit courtesy of the Federal Reserve.
Are you seeing where we now are and where this is going? C is now as tapped as G. There is some controversy as some American businesses – I – have significant money parked offshore and aren’t truly using it productively and members in G want to see it come home. But the folks in I – companies like Caterpillar and Apple – are resistant because they simply aren’t stupid. Aw hell, Jethro wants more money but if I let him have it, he’ll jes’ spend it a-whorin’ and drinkin’ up in Abilene… They recognize that things won’t end well and are trying desperately to hang onto the money to tide them over.
So if the domestic C and G are tapped, and I is keeping it locked up away from G because G is a horny drunk. The only driver left is X and the new currency wars of nations actively devaluing their currency are an effort to make their products more affordable to other nations. This is the impetus of Japan as it devalues the currency to keep business flowing to it’s export driven economy. This is also partially our strategy, although the other intent is to pay off the debt with a devalued dollar. More countries will take this approach – Venezuela’s overnight devaluation of 46% is the newest example -and what some term the race to the bottom will continue. But as everybody pursues X, the value of any trade surplus is negated as the respective currencies are destroyed. Everybody’s come to Abilene for one last mind-bending debauch
Any cowboy with a lick of sense knew that an Abilene bender would be followed by a blistering hangover. But the thinking of our present crop of hands in G is this: Hangover? Hell, I caint get no hangover ifen I jes’ keep a-drinkin’.
The tagline in the blogosphere is that this isn’t going to end well. And it won’t.