The Market Equilibrium Trend changes from Supply-to-Demand to Demand-to-Supply Ascendancy

In number of articles, I presented the theory of Market Economics as based on the conception of the tipped-off, from a Supply to a Demand-driven Global Market Trend to a Demand-to-Supply Trend that was prompted by the ongoing Globalization and rising Productivity, which new Trend is consequential to the improving Technologies, the China’s Industrialization, the Outsourcing and Moving of Manufacturing, the Internet and etc developments that have accelerated these processes for the last 20-25 years.

Job automation will ultimately propel more people toward higher-paying, more productive employment that is better suited to the new era of “talentism,” when human imagination and innovation, not capital or natural resources, drive economic growth. But, if workers fail to acquire the skills to fill these new positions, they will be left behind.

This article uses available data and respectful papers to prove the validity of such a conception. And, brings upfront the necessity of comprehensive assessments and the needed changes in Economics to meet these new challenges. The beginning of the 21^st Century showed a tremendous effect, technologies, and globalization has on the concentration of industrial production into a few players globally.

The economic model that dominated most of the twentieth century was mass production by the many, for mass consumption by the many. Workers were consumers; consumers were workers. As paychecks rose, people had more money to buy all the things they and others produced — like Kodak cameras. That resulted in more jobs and even higher pay. That virtuous cycle is now falling apart. A future of almost unlimited production by a handful, for consumption by whoever can afford it, is a recipe for economic and social collapse. Our underlying problem won’t be the number of jobs. It will be – it already is — the allocation of income and wealth.

The transnational corporation along with the Chinese state enterprises have succeeded in achieving immense capacities and potentials for swift expansion by using a large pool of international capital, improving technologies, better-controlled management, and by outsourcing and moving of production (for transnational corporations mostly).

The global economy is awash as never before in commodities like oil, cotton and iron ore, but also with capital and labor—a glut that presents several challenges as policymakers struggle to stoke demand.

“What we’re looking at is a low-growth, low-inflation, low-rate environment,” said Megan Greene, chief economist of John Hancock Asset Management, who added that the global economy could spend the next decade “working this off.”

… “The classic notion is that you cannot have a condition of oversupply,” said Daniel Alpert, an investment banker and author of a book, “The Age of Oversupply,” on what all this abundance means. “The science of economics is all based on shortages.”

Consulting companies, e.g. BCG, Ernst & Young, Deloitte Consulting, contributed globally to share competitive practices, compare managerial and technological approaches that boosted competition and productivity.

The diversion between the large transnational corporation and Chinese state-owned companies from one side and the small and medium companies and most developing economies from another has grown larger than ever, living the last in competitive disadvantage and thus prompting inequality not just between rich and poor in the most developed economies, but also between developed economies (including China) and the most developing ones. Even further, the success of their improvements has reduced the employment elsewhere, ironically “supported” by a shrinking and inadequate global demand, more like a “Catch 22’s Perpetuum mobile”.

In fact, over the last few years, there has been a massive capital investment at a global level in developing new iron ore mining sites. This investment paid off in the beginning, thanks to the initial increase in demand for ore, mainly in China. However, circumstances have now changed, the pace of growth in China – the world’s largest consumer of steel and ore – has slowed markedly and consequently the global market is burdened by considerable excess supply.2 As there do not appear to be any immediate efforts (such as a rapid market adjustment on the supply side) to address the causes at the moment, prices for iron ore will remain under pressure with little prospect of them rising.3

2 For details, see Synagowitz, Bastian et al (2015a). Steel-Making Materials. Deutsche Bank Markets Research. Commodities Quarterly. March 31, pp. 92-113, 122. According to this analysis, global demand for iron ore may fall slightly in 2015 for the first time since 2009. It is therefore entirely possible that iron ore prices could fall below USD 50 per tonne in the second and third quarters. 

3 See also Synagowitz, Bastian (2015b). Negative momentum in iron ore and US prices continues. Deutsche Bank Markets Research. Steel Price Tracker. March 31.  

It has been argued that the “bottom billion may be trapped in poverty” (Collier 2007). The undeveloped markets i.d. economies along with the deteriorating such as Detroit will have to wait for their turn until the giant industrial economies like China become rich and uncompetitive in manufacturing. When the technological changes have made manufacturing more capital and skill intensive. So, it is creating fewer jobs. Some form of pre-mature deindustrialization seems to have set in (Rodrik, 2013, Subramanian 2014). This might be because consumers and households in developed countries now spend a lot less on manufactured goods than they do on services. This can put a limit to how fast the latecomers to development can grow through industrialization. While jobs in the industrial sector are shrinking globally.

In the past, technological and structural underdevelopment consisted of shortages that provoked inflation; however, in the presence, excessive manufacturing capacity and rising productivity brings high unemployment and prompts deflations.

Large retailers have penetrated markets and Internet sales have brought international goods to most markets, aiding the high manufacturing capacity. The market equilibrium on a macroeconomic level has become less perceptive to Supply than to Demand factor. [1] (see Drawing 1) Large Transnational Corporations employ about 0.82% of the global workforce taking more than a quarter of the global wealth adding to the widespread poverty [2], deteriorating middle class, rising inequality, and the Earth pollution, whereas poverty brings primitive fossil fuels heating, woods cutting, old car usage[3], and etc[4].; and, deteriorating middle class adds to the poor; what about excessive inequality? – It just accelerates the whole process, but most important it prompts the overall economic stagnation: market disequilibrium caused by inadequate demand.

Most of the Emerging Markets are hit by the same problems as the poor in the Developed Markets are, whereas the results are all the same no difference between Detroit and many Undeveloped or Emerging Markets: factors affecting the market equilibrium from the demand side, expanding Earth pollution, rising Discrimination and Radicalization caused by the economic upheaval of the 2007-9 recession and sluggish recovery. While the existing middle class has shrunk the poor was not given opportunities of rising to a middle class.

Shrinking fiscal reserves and trickle-down ideologies have imposed austerity policies to infrastructures, social and educational expenses, thus holding high unemployment from Spain, Portugal, and Italy to Greece, the living standards are free falling or Bulgaria, and Romania in the European Union, where slow business activities and lack of vivid improvement prevails. However, from Guyana, Peru, and Ecuador to Bolivia, Paraguay and Colombia in South America, from Guinea-Bissau, and São Tomé and Príncipe to Republic of the Congo, Chad, and Zimbabwe in Africa, from Afghanistan, Tajikistan, and Yemen to Pakistan, Uzbekistan, and Iraq in the Middle East, etc. markets are underdeveloped, infrastructure is either undeveloped or deteriorating, corruption is roaring along with poverty and disarray!

The world was never better, but it had never possessed the technologies nor the organization to be any better, but for the last few decades. In the past, the weak technologies and markets were a natural promoters of underdevelopment, poverty and the related discrimination and nationalism, but with the great technological inventions and improvements, the Internet and WIFI, the open globalized marketplace, and etc to have such roaring poverty and underdevelopment is inexcusable, thus I consider that if these if properly used these new developments would make the world advancing into a new era of prosperity; however, only a new system of economics that apprehends these new developments and abstract itself from the trickle-down philosophy would succeed in such improvement.

Joshua Konov, 2014

[1] [PDF] Global steel 2014 – Ernst & Young Excess capacity is the biggest threat to the sector While there are signs that the outlook for demand is slowly improving, excess capacity remains the biggest threat to the steel sector. The sector is straining under the relentless pressure caused by years of excess steelmaking capacity and low margins. While some capacity is expected to be removed over the next decade, the announced addition of capacity by steelmakers out to 2020 shows that investment is still alive and well. To counteract the investment in new steelmaking capacity, we estimate that about 300 million tonnes of steelmaking capacity needs to be closed for the industry’s profit margin to reach an unsustainable level, and raise the capacity utilization rate for the sector globally, from below 80% to more than 85%. The permanent shutdown of capacity is the only real solution to bring balance to the market but in the short term, it is difficult to see this happening given state participation in many countries and additional political incentive to retain employment, regardless of profitability. The overall net effect, however, has been an increase in steelmaking capacity despite the Chinese Government mandating 80 million tonnes of capacity to be removed restructuring and consolidation in the Chinese market, a handful of large Chinese steel players will emerge, leading to global competition intensifying. “Steel producers should test the vulnerability of their business models and the resilience of their strategies to ensure sustainable growth.“ Anjani Agrawal

[2] “It has been argued for more than 200 years that economic growth is associated with the manufacturing sector (Baumol 1967, Dercon 2014, Gelb 2014, Kaldor 1966, Rodrik and McMillan 2011, De Vries et al 2013, Winters 2010, UNIDO 2009). Services have been considered non-tradable, menial, low productivity, and low-innovation (McCredie and Bubner 2010). The East Asian Tigers are the classic success stories about how the conventional path to growth goes through industrialization. However, this conventional path to development seems to have hit a roadblock in other regions, especially low-income countries in Africa and South Asia. Indeed, several high-level reports on Africa—the 2014 African Transformation Report, the African Union’s Agenda 2063, the African Development Bank’s long-term strategy, the UN Economic Commission for Africa’s 2013 report, and UNCTAD’s 2012 report—have all raised concern about limited industrialization and technological progress. Indeed, in many African economies, manufacturing—the sector that led rapid development in East Asia—is declining as a share of GDP. The worry is that without a major transformation, Africa’s recent growth spurt may soon run out of steam.”

[3] Mongolia is the world’s most polluted country and also home to one of the world’s most polluted cities — Ulaanbaatar. The country’s main sources of pollution are its traditional coal-fueled stoves and boilers used for heating and cooking, as well as congested traffic and old cars. Heating is essential for the survival of its people for about eight months of the year. The country uses everything from coal, wood to refuse, such as black tar-dipped bricks and old car tires to fuel stoves and boilers World’s Most Polluted Countries

[4] Neither of the top 10 polluted sites is in the U.S., Japan or western Europe. However, a lot of the pollution in poorer countries has to do with the lifestyles of richer ones, noted Stephan Robinson of Green Cross Switzerland—for example, a tannery in Bangladesh that provides leather for shoes made in Italy that are sold in New York City or Zurich. “The pollution we see is not coming from the major global industrial companies, it’s all from small mom-and-pop shops, which prepare the raw materials that we then later use,” Robinson said. Or, in the case of Agbogbloshie, Ghanaians are polluted by the electronic devices Westerners have already used. Local people in such areas, Robinson added, “are very often polluting their environment not because they think it is fun but because it is a question of survival.”

Drawing 1 With the raised demand (from D1 to D2) the high Elasticity of the supply that has come with the ongoing Globalization and rising Productivity matches the demand by expanding (from S1 to S2) and thus living the same market equilibrium price (P1&P2). Such Supply Elasticity is probable to a certain turning point which approximate quantities are estimated (see next paper on “Probability Factors of Quantities Proximity”)

The Global Economy prompts Radicalization

The technological advance in all spheres and the Internet keeps people around the globe informed, while the economy underperforms in most global markets. The ideology of trickle-down Capitalism could not prevent or shorten the 2007-9 recession, neither it can boost the anemic post-recession recovery in the European Union, the Middle East, Africa or South America, (if realistically, a recession with limited less than 1% growth constantly sinking underwater markets could be considered over). Simultaneously, the growing inequality concentrates the highest percentage wealth into a smaller number of ultra-rich ravaging the middle-class, wherever it is succeeded, or not providing a condition for establishing one.

What the researchers find is that global wealth has increased every year since 2008, and that personal wealth seems to be rising at the fastest rate ever recorded, much of it driven by strong equity markets. But the benefits of this growth have largely been channeled to those who are already affluent. While the restaurant workers in America struggled to achieve wages of $10 an hour for their labor, those invested in equities saw their wealth soar without lifting a finger. So it goes around the world.

The bottom half of the world’s people now own less than 1 percent of total wealth, and they’re struggling to hold onto even that minuscule portion. On the other hand, the wealthiest 10 percent have accumulated a staggering 87 percent of global assets. The top percentile has 48.2 percent of the world wealth.

Under such conditions, it becomes natural for the dark human forces that prompt discrimination, nationalism, and narcissism to bloom. There is plenty of economic data to support appointed statements; however, the effect of these developments on the rising radicalization is not researched to its full extent. The world media tends to politicize global instabilities: the Arabian Spring, the ISIL, the Crimea’s take over, e.g. are either associated with harsh regimes such as the Mubarak’s in Egypt, Khadafy’s in Libya, or the US war on terror in Iraq and Afghanistan, or the religious fanaticism such as ISIL and Al-Qaida, or the Mr. Putin policies in Russia. However, very few journalists or economists attempt looking beyond the obvious into the fundamental reasons for such profound radicalization of religious, nationalistic, and other ideas that remand such disharmony instead of the prevailing ideas that the world is a better place, where generally, genocide, cruelty, aggression are attitudes of the past of a matured humanity.

Even when US-led Coalition waged war on Saddam Hussein in Iraq, or on Al-Qaida in Afghanistan, the idea was to instigate “good” over “evil”, democracy over dictatorship. Certainly, the ideas of liberties, human rights, and righteousness were the Coalition’s standing-points in decision-making: from the political to down on the field strategic ones. Humanitarian approach, even in time of war was considered paramount.

The cruelty with which ISIL treats their enemies, chopping heads and raping girls even when many well educated and “civilized” ISIL participants came from all over the developed world, or the self-centered Russian aggression by occupying Crimea and by provoking unrest and mingling with their neighbor Ukraine’s territorial integrity that already cost thousand of killed are considered uncivilized and unthinkable; The widely accepted noble ideas: obviously, are not the status-quo,

Historically viewed: a Half-Century bettered economically world created for themselves an illusion of invisibility, but when the global economies slammed causal the last 2007-9 Recession and the following slow recovery (if such could be called recovery) by bringing insecurity and poverty to many, the world remands aggression and radicalism to hound our sense of justice.

The recession slam was instigated by the:

1) Imbalance in real estate overcapitalized prices;

2) Slow down in industrial production and related industries causal of the ongoing globalization and rising productivity;

3) China’s super-industrialization and the outsourcing and moving of industrial production from the developed economies to elsewhere;

4) Internet and Twitter, Facebook, and etc networks;

5) Earth pollution that affected weather-prompting extremities.

The developed economies from UK and US to China and Japan dealt through unorthodox economic policies of quantitative easing, subsidies, fiscal stimulus, targeted investment packages into infrastructure and business development to boost their growth, and with idea that their success will improve the global economy. Many of Emerging Markets (China not included) were constrained from pursuing counter-cyclical measures by the WB and IMF, or by the European Union in case of their members and associate members. EU, under Germany, followed and continues the trickle-down budgetary economics of austerity measures (pro-cyclical by nature) resulting in prolonged in-and-out recession and a very limited “recovery” (as the data shows).

Domestic US timeline The domestic US timeline begins in June 2007 and shows the lead-up to and development of the crisis, as well as subsequent US government responses. The timeline is divided into three sections: Federal Reserve policy actions, other policy actions, and market events, to enable users to view Federal Reserve and other policy actions in the context of major market events.

International timeline

The international timeline provides a thematic and chronological ordering of the many programmes announced by G7 countries since the intensification of the global financial crisis in the fall of 2008. It organizes announcements into four general categories: bank liability guarantees, liquidity and rescue interventions, unconventional monetary policy, and other market interventions. The entries are color-coded to allow users to follow the developments of each country individually.

What the global market experiences, because of these pro-cyclical policies, is extreme stagnation, lack of growth, high unemployment, and solid retraction from the humanitarian values that had been built for a Half of Century, up to the beginning of this one. The discriminatory immigration policies loomed in the US, France, UK, e.g. steering nationalism,“Racism and xenophobia, intolerance and Islamophobia are on the rise,” warns José Manuel Barroso, President of the European Commission. “They foster division and create suspicion and hatred between communities. In recent years, we have even seen a mounting wave of harassment and violence targeting asylum seekers, immigrants, ethnic minorities and sexual minorities in many European countries.”One need not look far to see that President Barroso has a point. In February 2014, the Swiss population voted – albeit by a tiny majority – to reintroduce stringent quotas on immigration from EU countries. A few months later, in May 2014, anti-immigrant parties made significant gains in the European elections. In July, pro- and anti-immigration demonstrators clashed in Murrieta, a town in southern California, over the arrival of illegal immigrants – mainly children – at a border control station.

However, the most economically affected areas of the Middle East, Africa, and Eastern Europe, e.g. exploded out. When the two Charts/World Maps: the first indicates “People Displaces by Conflict and Violence 2014” and the second indicates “World Wealth Levels 2014” seemingly the data matches indiscriminately. There is a straightforward interrelation between the economic upheavals ravaging most markets around the globe and the forces invoking the dark human sides and the emerging conflicts. Targeted economic actions are required to prevent their expansion, indeed. To continue the business, as usual, seems very dangerous for the entire Humanity!

It is of high importance for the most developed economies and China, WB and IMF to start acting responsibly in promoting global economic development, also environmentally friendly one, but not rely on the “old” system of the so-called orthodox economics.

Joshua Konov 2014