Friday, January 8, 2010

More on Gross Purchases (and China)

In response to my post Why Does it Feel Worse than Reported?, a reader asked for a follow up chart:

What would be helpful here is a NET figure (& chart, of course) showing the shift (gross & per capita) from production surplus to consumption surplus. It's a little hard to read between the lines (literally) in this graphic.
The difference between GDP (what the U.S. produces) and Gross Domestic Purchases (what the U.S. purchases) is net exports. Thus, the charting is easy, but the result of the chart is rather astounding. The net level of purchases over production peaked at more than $2500 per person (that is literally $2500+ in a single year for every man, woman, and child within the U.S.) in September '06. This has "collapsed" to "only" $1150 a head, but that $1350 less that each person in the U.S. has been able to purchase (without producing) is a real decline.

So where does that leave us? It leaves us with entire generations (starting with the baby boomers) that believe it is the norm to purchase more than one produces. And why not? We have been able to follow this path (with the exception of the Volcker induced recession in the early 1980's) going on 60+ years.

But as the chart above shows, the scale of this excess purchasing in the early part of this decade was without precedent, which results in the below chart. The below chart details the cumulative real purchases that have been made over that 60 year window above and beyond what was produced in this nation. Resulting from an easy money policy, plus China dollar recycling (they produce, we finance) this cumulative level of real purchases made since 1949 spiked from $3 trillion in the late 1990's to $9 trillion in 2005$ by early 2008 (tripled in ~10 years).

Note in the first chart that every previous peak resulted in a reversion and this latest period was no exception. As a base case I would suspect a continued reversion in the top chart (i.e. net imports moving to zero), but what happens if the below chart mean reverts (we actually begin producing more and purchasing less) as well?

For one... more pain for the U.S. consumer, but a second result was recently outlined by perma-bear James Chanos:
“The Chinese,” he warned in an interview in November with, “are in danger of producing huge quantities of goods and products that they will be unable to sell.”
We shall see...

Source: BEA


  1. Wow! Great "pics"--and really scary. As the requester for this "net" look, I thank you for your quick and insightful follow-up.

  2. Does the underground economy affect this. There are many people who earn money not reported in GDP and spend it which is part of purchases. Otherwise, the difference shoul equal debt!

  3. antonw- we as a nation have accumulated loads of debt (government, consumer, business). this is one of the reasons why...

  4. Let me add some more fuel to the fire on two fronts. On the Chinese side THE goto source is Michael Pettis' blog China Financial Markets which has done a superb job of de-constructing the forced over-savings, mis-allocated over-investment and structural distortions.

    On the US side you'll find if you check into things that the point where spending stopped reverting and instead headed for Mars, passing the Moon on the way, coincided with a surge in private debt and, lo a miracle, the de-regulation of the Finance Industry.
    Data, charts, arm-wringing and tooth-gnashing here:
    Debt, Wealth, Finance & Outlook: Sixty Years of Bubbliciousness
    and here:
    Jobs, Debt & Growth: Level Setting the New Normal
    If you check out the last one this has been a VERY expensive party and will force us into a B/S rebuild and re-investment mode for years.

  5. Chanos is correct if he is talking about the Chinese trying to sell all those things they make to America at export prices. But they don't need to sell them to America if the CCP is willing to subsidise them for sale to Chinese Indian and rest of Asia's middle class, all of whom have no cars, no second TVs (not to mention a 3rd 60 inc LCD, latest iphones bla bla bla...) They just won't make a "profit", but midn you those profit were in phoney US dollars printed by the Fed, weheras from they get hard currencies from India, Indonesia, etc. And they won't have to bother with humongous digital entries trade/current account surplus to buy worthless US Treasuries, and they would not have to support the RMB either. Think Chanos would lose money betting against China, he should just bet on the collpase of US/UK bond markets or buy precious metals, like his peers.