Consumption Markets and Balance of Payments

Someone asked me the question how is the US able to create massively scalable e-commerce businesses? This got me thinking in a different direction but first a simple answer to the question.

US is by far the largest consumption market globally by a factor of 3-4x compared to any other country in the world. Supported by very high acceptance of the medium and confidence this has allowed for massive increase in the e-commerce market has allowed for this. VC funding and low cost start-up ecosystem is very supportive.

Country	GDP (Nominal)*	Household final consumption (“HFC”) (% of GDP)^	HFC (as % of US HFC)
US	16,244	72
China	8,221	36	25.3%
Japan	5,960	61	31.1%
Germany	3,429	58	17.0%
France	2,614	58	13.0%
UK	2,477	66	14.0%
Brazil	2,253	62	11.9%
Russia	2,030	48	8.3%
Italy	2,014	60	10.3%
India	1,842	61	9.6%

* Nominal GDP 2012 (IMF)  ^ World Bank 2012

Now the other direction, a closer look at the table above shows the key imbalances in the global economy:

• US is the key importing nation driven by its consumption markets, the next three countries on the list are leading exporters globally (China, Japan & Germany). How long will this Balance of Payment imbalances sustain? More of this later; and

• Chinese consumption is the lowest compared globally, significantly below global norms. Investment imbalance and financial repression are primary contributors.

Balance of Payments

The last 2 decades of global expansion has been driven to a large extent by liberalization of trade. The top 4 countries in the list are the principal participants in this exchange. But in the net impact it has been pretty much a one-way traffic. The global financial crises was in many ways a manifestation of the underlying cycle of very high savings in Asia driving cost of borrowing lower in the US which in turn supported the housing bubble. While trade liberalization allowed for continued reduction in product costs. While the financial crises passed the underlying causes were never addressed.

• Chinese followed the global financial crises by their own version of credit boom of which they are now witnessing the limits.The economic impact of faltering export engine was addressed by expanding domestic investment. The Chinese realize this imbalance cannot continue and are looking to take the first baby steps to address the issues. But getting local consumption going requires radical change and this adjustment will mean slower GDP growth (i.e. US in the late 1920s, Japan in the late 1980s). The Chinese & US M2 was ~US$8 trillion around the financial crises. The US M2 is ~US$10 trillion now and the Chinese are exceeding US$16 trillion. The highest money supply expansion ever in history in such a short period.

• Japan has adapted ‘abenomics’ to get their moribund economy moving. But adverse demographics means growth in the economy can only come through higher exports, to where, into the US?

• Germany whose export driven economy self-corrected before the Euro era driven by the exchange rate adjustment is currently finding the adjustment very difficult. >60% of German exports were into the Euro area. As this slows, the German economy will falter unless they can export more, to where, US again?

In my view US will witness a new era of growth driven by shale gas finds and, consequently, cheaper cost of production. This will result in the largest debtor nation pushing back on imports over the next few years. This reduction of imports will also be driven by reduction in underlying commodity prices as the Chinese import falters. However, as imports reduce, it will put structural limits on growth of China and Germany. Japan is trying to find a way in ‘abenomics’ and the Trans Pacific Partnership, which the US believes is in its political interest.

So will this change continue to be supported by currently high consumption in the US. I believe US consumption levels will continue to be high supported by the retiring baby boomers and medical costs, rising interest rates notwithstanding. Finally, production is easier to create which China, Japan and Germany have..but it needs the customers i.e. the US more than ever.