Quote Originally Posted by Schmedlap View Post
There must be an existing demand in order for lower prices to stimulate a broadened base of customers. If people do not demand the goods, then lowering the price doesn't do much. China sells us black berets. If we stop buying black berets, then I doubt that the excess supply in China will stimulate a fashion trend of Chinamen sporting French headgear. And as other countries feel the pain of doing less business with the US, they will have less disposable income, so China will not be well-poised to market their wares in other countries as an alternative.

Also, what you wrote works poorly in the short run, which I think you acknowledge, and not at all in the long run, which directly contradicts your assertion of "a short-term phenomenon." Profits will fall because the production capacity that was serving a Chinese and US market now only serve the Chinese market. In the near term, jobs in the export industries will pay less and there will be layoffs. In the long-term, businesses will shut down and look for new ways to invest their capital - many of which will fail. I think that you are excessively confident when you assert that it would be a "short-term phenomenon" that "might last for probably two years, maybe as few as six months." If anything, the short-term would be the endgame.


I think that just about anyone in the macroeconomics field would disagree. For example, the IMF has been sounding the drumbeat for about the past year of a coming global economic slowdown, in direct response to the US economic slowdown. Their forecasts seem to be about right and follow from the belief that the US economy has a significant influence upon the global economy.
I don't talk about exotic Giffen goods or other exceptions from the rule. The standard theory is that lower price = more sales potential. All else would not be modern economic theory.
The black beret example doesn't work well because a black beret factory could easily change its production portfolio - that's why I wrote repeatedly about a time of adaption.

A factory usually being owned by companies that have a strong interest to make profit. They won't simply stare at the USA and close the factory because Americans don't buy their goods anymore. They would seek other markets and adapt their production.

You seem to ignore consequently that the current model of exports in exchange for bare promises is much less reasonable than producing for those who actually add the value.

And the IMF has - like the World Bank - a record of being useless in economic theory. Too much agenda and ideology.
Plus; it's a human trait to be risk-averse. Most are. That's why so many people are conservatives. The want to preserve because they fear changes. That's already enough to explain why some sound the drumbeat.

Btw; I didn't mean or intend to assert that it would be nice if the USA broke down economically. The adaption phase would be unpleasant. But the present system is unsustainable and will go away anyway (or is about to do so). It's not the only system that can work fine, and in fact it's not really doing so anyway.
The dependency of Europe is certainly too small to be hurt badly. A loss of growth for a short time followed by a recovery (because growth depends on other factors in the long term anyway) is the most that the USA could do to Europe with an economic crisis.
The PRC would be be influenced much more. Not necessarily badly, though. They need to reduce their trade balance surplus and increase their domestic consumption faster than before anyway (not the least to keep internal peace).