FX Macroeconomics
Alas, we can produce more goods than we can consume. The problem is exacerbated by the distributional issues - the disparity of wealth and income. However, transfer payments by governments, es p e cia l ly since the end of WWII have been of great s ig n i f ic a n c e . They fund c on s ump t i on even when there is not sufficient work (unemployment c ompens a t i on and social se cur it y/st a t e pensions). In the US, transfer p ay m e n ts have been the fastest growing component of income since the late 1970s. Yet, even with c on s ump t i on elevated by these payments, it is not sufficient to keep pace with the capacity to produce.
CHINA’S OVER-CAPACITY
This over-capacity itself is one dimension of the surplus capital problem we think is so central. Over-capacity is often understood
in the context of China. China’s development has been predicated in part on its ability to rapidly enter new economic sectors with economies of scale.
equipment, flat-screen televisions, cell phones and solar panels.
Previously when fixed costs were low and a situation of over production arose, a producer might cut back on output rather than produce at a loss. However, when fixed costs
are
relatively high, as they are under modern production, a producer has little choice than produce at a loss.
In the US, transfer payments have been the fastest growing component of income since the late 1970s.
Yet, even with consumption elevated by these payments, it is not sufficient to keep pace with the capacity to produce.
There is strong competition between local officials to fund the next boom. Their special investment vehicles borrow the money to finance projects ranging from steel, cement and chemicals to earth moving
60 FX TRADER MAGAZINE October - December 2013 that half its producers capacity
C o n si d e r a couple of specific exa m p les . C h i n a pr o du c e s about half of the world’s a l um i n um supply. The price of aluminum has fallen sharply in recent years and, a recent report noted, are now
operating at a loss. Nevertheless, more smelters are being built. Meanwhile,
is being
shuttered elsewhere, unable to cope with China’s cheap output.
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