Global Demand is Lousy ... Manufacturing Cutbacks ... Undergoing a Vicious Downward Spiral

Global demand is weakening. In substantial part that's attributable to the bubble bursting in the U.S. economy a few years ago due to excessive debt accumulated during the bubble blowing days.

We've discussed this debt deflation scenario previously, so we won't go into detail again in this posting. That said, you can bing or google Irving Fisher and "debt deflation" or if you prefer, Hyman Minsky and "The Financial Instability Hypothesis." They each describe accurately how the economic fiasco of the past few years occurred and why, and they did so decades ago.

In any case, consumers are tapped, households are tapped, mortgages are under water, wealth is depleted and, well, you know the story.

Manufacturing and the vicious spiral downward is the subject of Factory flu is global contagion:

"Across the world, production lines are shutting down and factory workers’ hours are being cut. A dearth of demand has fallen back on goods producers, suggesting the global slowdown will not turn around soon.

Wednesday brought news that factory activity either downshifted significantly or outright contracted in July. The euro-zone factory recession worsened last month. China posted its weakest official manufacturing reading since November. Readings from Australia and the U.K. were the lowest in at least three years. The Institute for Supply Management said the U.S. factory sector contracted for a second straight month.

The culprit for manufacturers is falling demand.

Germany, a factory powerhouse, reported machinery orders fell for a ninth consecutive month. In Brazil, the orders index dropped for the fourth month in a row. In the U.S., new orders dropped for a second consecutive month.

The problem is that falling demand feeds upon itself. Concerns about the euro-zone debt crisis and China’s past tightening action to slow inflation have led consumers and businesses around the world to cut their spending. Less global demand leaves less work for global manufacturers who, in turn, order fewer supplies and commodities from other producers. . . .

The weak state of factories is boosting expectations of central bank action. . . .

The problem for the U.S., at least, is that any move by the Fed may do little do boost demand directly.

The rise in stock prices that usually accompanies quantitative easing may help consumers and businesses feel wealthier. But unless that euphoria is followed by increases in actual sales and jobs increase, it won’t last."

Summing Up

Our world's economic problems are deep and severe.

Solving a debt deflation crisis is neither a short term nor a painless event.

It will take years and fundamental change as well. The debt driven Keynesianism as practiced by governments the past several decades is coming to an end.

That said, as long we continue to put off implementing the inevitable solutions which will necessitate an unfailing emphasis on private sector growth and government spending reductions, the return to a healthy economy and high employment will be delayed.

Tomorrow morning's unemployment number won't change that. For that matter, neither will talk about increasing taxes on only the fat cats. And putting off finding solutions to our public sector retirement benefits issues won't help anything either. Nor will striking manufacturing employees yearning for a return to the "good old days" achieve anything other than a pyrrhic victory, if that, in the end. They may not even have jobs.

Here's the real message behind the global manufacturing cutbacks. Factories will close. The only question is which ones. In the U.S. and even in socialist  France where President Hollande is attacking Peuguot leaders for trying to run the French auto maker in the best way they can.

Things are tough worldwide and pretending otherwise is an act of foolishness --- on everybody's part.

Thanks. Bob.