China

I can't remember where I saw it, but at least two separate articles have mentioned an amazing statistic: China's internal economy is only 25% of its economy. That means that 75% is export based. Ten years ago, the share was 40% internal/60% external.

Chinese officials have expressed wishes that the Chinese economy returns to this more sustainable (although still extreme) model. My prediction is that their wish will be fulfilled, although not in the way they expect. The easiest and most likely way for this to happen is for exports to shrink by 50%. This will be a minimum figure for 2009, as the whole pie of the global economy shrinks by record amounts.

And now for something more hopeful, albeit speculative. I've been pondering the question, "Where has the global economy gone wrong?" It seems to me that the first problem here is an imbalance of debt and production. The countries that were borrowing (US, UK, Iceland, parts of Eurozone, deficit countries in general) were not the ones increasing production. Production was increasing most notably in China. The problem that resulted, loosely speaking, from this is that the wrong goods were being produced. Too much capital, labor, and raw materials went to goods that benefited too few people (borrowers). Production was geared towards inefficient goods with negative externalities (econo-speak for McMansions and gas-guzzling suv's) instead of efficiency and return on investment. This is just a loose train of thought here so I won't develop it any further at this time. I will move onto the second problem which I see.

The second problem is perhaps an offshoot or a microeconomic version of the first. The problem is that too much wealth got concentrated in too few hands. For a few years, the middle class was able to borrow to sustain their spending spree, but that is now over. They will be saving for years to make up the wealth they have lost due to shrinking asset prices. When wealth is concentrated in too few hands, the value of that wealth will plunge, as the amount of productive capacity of the capital far outweighs the consumptive capacity of the overall population. The more concentrated capital is, the greater its productive capacity, while the more spread out capital is, the greater the consumptive demand. For example, one rich man can build a steel mill. However, he would be hard pressed to make anything useful if he tried to use all of its capacity just for himself. This is where I will leave this discussion. Perhaps later, I will work on the implications of these problems and possible government or non-government solutions.