Vaporizing Money

Wall Street: We Have Too Much Stuff

What’s behind the turmoil? Fundamentally, we have too many resources, nobody wants them, and the people making them aren’t being paid enough.

Brendan McDermid / Reuters

On Monday morning, the Dow Jones Industrial Average fell 1000 points and it ended the day off more than 3.5 percent. The S&P 500 fell by a similar amount. The Nasdaq was off more than 8 percent at its worst. The losses, part of a contagion from China, have been coming fast and furious since July, although we also had a similar bout of “volatility” last October when a large cross-border pharmaceutical merger fell apart.

“Volatility,” by the way, is Wall Street’s polite term for vaporizing money.

The Dow, off 10 percent from its highs, is officially in “correction” territory. So, what, you have to wonder, is being corrected?

At its core, it’s untenable that the world can be so full of poverty while, at the same time, so full of resources (both raw and corporate) that nobody seems to want.

The water filter in the Frigidaire needs replacing, as does the SodaStream cartridge and this has been true for weeks, without affecting your life. You have 50 apps on your phone but only use a handful with any regularity. One of those apps, Seamless, lets you order food from more than a hundred restaurants that deliver to you, but not one of them appeals. You can’t even imagine what it is you want. Meanwhile, Apple wants to sell you a watch that can also order food. Elsewhere in the world (honestly, in your neighborhood), there is crushing poverty.

Capitalism, as we practice it around the world, has not done the best job of efficiently allocating resources. Broader distribution of wealth, in both countries like the U.S. and countries like China, would create a foundation of demand that could best utilize the resources we have available and fuel future growth.

This swoon is particularly vexing, as so much seems to be going right with the U.S. economy. Unemployment is down. Growth is slow but steady. The housing market has recovered in most areas. The Federal Reserve is starting to murmur about raising interest rates—the first step in a return to post-financial-crisis normalcy.

Yet the markets have a formidable wall of worry to climb. Commodities have slumped. Metals and grains falling back to their 1999 low. That’s a concern. The world is full of productive commodities for which there is no need.

The problem, we’re told, is China’s slowing economy. China has little need for the raw materials that have been the fuel for the growth that brought it to economic prominence over the last 15 years.

But China has 82 million people, according to the World Bank, who live on less than $1.25 a day. Beneath the headlines, China is a poor country.

The story of the economic miracle we’ve been reading about since 2000 is at best incomplete. But China seems to have reached a point where it cannot profitably bring economic growth to the majority of its people.

China is a beneficiary of globalization, yes, but in the same way that many resource-rich countries have been, throughout history. There are well-documented tragic stories of countries rich in timber, farmland, oil, or minerals and metals that manage to join the world economy but whose people never really benefit. Nigeria, a huge oil exporter, is a good example. The foreign companies, who have, in partnership with Nigeria’s government, extracted the oil, have fared far better than Nigeria’s people.

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China is not resource-rich. China’s capital is human capital. It may as well be another oil company.

When a Chinese company cheaply manufactures the components of an iPhone, Apple winds up with the majority of the wealth. China seems not to have produced any great brands. China’s state-owned companies wield vast influence in Africa but in the world of the G7 advanced economies, Chinese companies are relegated to the lowest value work.

China has attempted to devalue its currency, to boost its export potential and to protect its economy’s role as the builder of what others direct and design. China cannot meet the needs of its people by continuing to do the world’s grunt work any more than Nigeria can meet the needs of its people by letting foreign companies extract its resources.

But China is huge and, for all its problems of wealth accumulation and distribution, it is hardly alone in that regard. In the U.S., we have a consumer-driven economy full of consumers burned by the financial crisis and, in the case of the youngest among us, deeply indebted by the costs of the college degree that is now the ticket for entry into polite society.

U.S. companies that sell to the ultra rich are fine, but they can no longer count on the middle class for growth. So, they search for growth overseas. Forty percent of the earnings of the S&P 500 companies come from abroad.

In an attempt to defend its role in the world economy, China twice devalued its currency in the last two weeks. Meanwhile, the dollar has grown stronger, hurting the export potential of the U.S. multinationals that make up the S&P.

Since U.S. stock prices represent the share of interests in future earnings, it makes sense that prices have recently plummeted: The market is unsure of the unequal future it helped create.