Laguna, you make a wonderful argument my friend.
The points that I am not seeing in this discussion to date are regarding Capital Flight and Declining Real Wages.
The second, first.
Since the early 70's, real wages in the US have been consistently trending lower than rate of economic growth. There were several factors, initially, including the Baby Boomers and more women enterring the work force en masse, increasing competition for jobs and depressing aggregate wage levels, as well as the European and Japanese economies finally hitting their Post-War stride and claiming their competitive share of markets.
However, consumer spending was encouraged and relentlessly driven by both public and private entities regardless of consequence or reality.
The explosion of private consumer debt began with home equity financing and has progressed through unsecured credit card debt as Americans' have increasingly mortaged their lives for increased consumption depite decling purchasing power. All with the complete blessing and support of their government and financial institutions.
The ability of American's to service this private debt, however, much less reduce the principal and establish and actual positive net worth has continued to decline.
And this brings us to the point you made earlier. The US market is contracting. Consumer spending is suffering from more than a crisis of consumer confidence. Americans are simply earning less and spending less. Real wages can only decrease so far before the effects ripple throughout the rest of the economy.
An artificially high "standard of living" through cheap imports can only continue for so long until the mass loss of decently paying jobs reaches the point where aggregate spending decreases. America's GDP has only been maintained for this long from reckless consumer lending and that particular well has run dry.
However heretical it may sound to virtually every economic school of thought, unrestricted free trade is suicidal for developed economies. Declining wages are eventually consumed by necessities, leaving little room for additional consumer spending. The aggregate demand curve shifts leftward and we have recession. This should be patently obvious.
The argument for Absolute and Comparative Advantage for free trade have limitations. Never before have developed economies exported their manufacturing bases wholesale to other economies. We do not have one world economy. That has always been a facile term. While many economies are similar and roughly equivalent in terms of price/wage levels and regulation, most are not.
Therefore, Laguna, what I believe we are going to see in the future will be Stagflation within the American economy.
You may be underestimating the effects of rising global energy costs on price levels.
Inflationary pressures have only been temporarily checked by reduced demand and employment anxiety.
Eventually, workers will be forced to demand higher wages to compensate for escalating food and energy prices. Those demand curves are fairly inelastic.
Anyone who believes we can transfer the tradtional engines of wealth creation to the Third World within the space of a generation without destroying our economies is either willfully stupid or clinically deranged.
