You are a company with $10 million in the bank. You make and sell widgets. You can sell 1,000 widgets a month at a profit.
The President and Fed Chairman tell you that it is your patriotic duty to invest those $10 million to hire more workers and sell more widgets.
The problem is that there is demand for 1,000 widgets a month and until demand increases, calling for more widgets to be manufactured, making more widgets will be counterproductive, even disastrous for the company.
If you make 2,000 widgets per month, and can’t sell them, the price will go down, the company will post losses and pretty soon everybody is out of a job. Current workers join the old ones at the unemployment line, increasing instead of decreasing unemployment. The cash is gone, tax revenues decline and government expenses go up.
You can push a wet noodle, but it isn’t going to move the other end until there is something on the other end pulling it forward. American business is sitting on $2 trillion in cash, but consumers are buying all the widgets now that they can afford and until the demand for widgets in the U.S. increases, business spending will not occur and could even prove to be counterproductive.
What will U.S. business do? In a global economy, it will look outside U.S. borders to where consumers need and could afford more and more widgets. Emerging economies are creating millions of new consumers each year. This is the market that U.S. business into which it should invest and expand.
A case in point would be the Principal Financial Group, a life insurance company. It started selling insurance overseas in 1990. In 1998, PI lost $45 million.
In 2010, it earned $137 million, which was more than the domestic life insurance business made. It now has 2.9 million clients in Mexico, 160,000 in Chile, 3.5 million in Brazil, 185,000 in Hong Kong, 459,000 in Malaysia, 1 million in India and 1.1 million in China.
The primary business premise is to find demand and fill it. Life insurance is their widget.
Where do you think the demand for oil is? Where do you think the demand for pork is? Where do you think any demand is?
Ideas of protectionism are counter productive. 96 percent of world consumers are outside the U.S. and unless the U.S. business goes after these consumers, the U.S. economy will stagnate. A lot of damage has already been done by the failure to ratify pending Free Trade Agreements in a timely manner. No work on new FTAs is being done.
The message to the world is that the U.S. is closing up its market and the response will be for trade partners to close their markets to whoever treats them accordingly.
The math is simple as to who is going to benefit longer term. The answer to U.S. economic stagnation is trade – selling widgets to where demand for widgets is increasing every day.
Over 500 million new consumers will be made in Brazil, India and China by 2015. The U.S. consumer has put too much on the easy payment plan and is under water, finding that getting out of debt is not easy.
The U.S. consumer is not going to be in the market for new widgets in a timeframe soon that will accelerate U.S. economic growth. The Obama administration and Democrats don’t understand trade.
It is a two-way street, but demand growth and the opportunity to fill it is far greater for exports ahead than it is the domestic market. The lack of a lasting benefit of monetary stimulus to domestic economic growth despite all the financial resources expended to stimulate it, are evidence of that.
The Democrats’ $700 billion stimulus didn’t create any demand; it just bailed out the fiscal irresponsibility of states. The Administration is hamstringing the economic recovery by holding FTAs hostage to appease unions who promote protectionism.
China’s economic growth has been predicated on exports. The U.S. dollar is priced right to sell U.S. products.
The government can continue to maintain roadblocks to U.S. companies expanding trade and continue to push more stimulus to see if they can move the noodle doing more of what they have been doing that hasn’t produced results.
What this Administration hasn’t done is move trade agreements, which lower barriers to trade, to ratification status by Congress, or lift a finger to negotiate any more.
The way for the U.S. to revive its economy is to aggressively integrate U.S. business and U.S. workers into the economy that is growing – the world economy.
One would have thought that was one lesson learned of the Great Depression, but it doesn’t appear to have soaked into politicians prepared to repeat the mistakes of the past.
David Kruse is president of CommStock Investments Inc., author and producer of The CommStock Report, an ag commentary and market analysis available daily by radio and by subscription on DTN/FarmDayta and the Internet.
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