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Daniel Salt's avatar

Hi Chris

Hopefully this will make sense - let me know if not

Two of the major ways you can suppress demand:

1. You suppress wages which means the labour input (i.e. wage bill) for products is lower - this is basically what Germany did post 2003 and the Hartz reforms - the unions agreed to restrict pay demands at effectively below inflation - German workers got poorer but exports got more competitive

2. You suppress the value of your currency which means people can buy more stuff from you cheaply but it means imports and foreign holidays are more expensive - China currently does this by pegging the Yuan (their currency) to the dollar i.e. they force it to stay at set value versus the dollar unless they want to move it

In both cases it means the population can less afford to consume and this compresses domestic consumption whilst in both cases increasing the profitability of your exporters

Worth noting that Germany and China actually use both models as do plenty of other countries to varying degrees

The end result is a big trade imbalance will build up with you exporting more than you import

This has knock on impacts including:

1. This suppresses over all global demand as you are artificially compressing your own and thus stealing other countries demand - imagine how much better the world economy would be if places like Germany and China consumed at the same level as the rest

2. You will build up increasing amounts of assets from the profit from the trade imbalance which has to go somewhere and this traditionally has flowed into the Anglophone countries but especially US financial assets i.e. the stock market but also the bond market - this causes stocks to go up but bond yields to fall which can helps to generate an even bigger debt bubble

There are also a myriad of other methods used

Just a rough idea though for you

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Chris Gutowski's avatar

Hi Dan, I've been a huge fan of your writing for some time now (years). In this piece there is a sentence I don't understand: "They have for years used policy and currency manipulation to suppress domestic demand in order to promote exports". To understand better, what would be the advantage of supressing domestic demand to promote exports? I mean why would anyone do that? Can you give me an example? The rest of the article is so powerful; we hear nothing now of the Northern Powerhouse. We don't have any capacity for manufacturing steel we may need to make weapons for this phoney war Starmer is edging towards. Please keep up the good work.

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