Memo to emerging markets: Buy, consume, spend

By Money Matters Editors

One of the major problems in our current economic age concerns consumers. Or, rather, the lack of consumers.

The U.S. consumer has adopted a ‘frugal consumer’ stance, and it's not going to be a short-term trend. After more than a decade of unsustainable over-consumption – spending fueled in many cases by home equity loans and mortgage refinancings – U.S. consumers have reached the time where they have to pay the bill, and they’ve been paying-down debt at an impressive rate.

Not only that, U.S. consumers have increased their savings and are currently saving about 3% of their income.

The problem the above? It’s taken the world’s No. 1 shoppers out-of-the-mix, and in the process eliminated a major source of GDP growth for the world.

The solution to the above is obvious enough, but it’s not that easy: citizens in emerging markets have to consumer more. Emerging market zones with expanding middle classes such as China, India, Brazil, Argentina, Mexico, and Russia/Eastern Europe have to make up for the decline in U.S. consumer spending with some sustained spending of their own. Some nations, who follow large-export, low-consumption models, are reluctant to see domestic consumption increase, but from an economic growth standpoint, they’ll have little choice.

Further, the above is part of the elimination of structural imbalances that led to the global recession in the first place. It was unreasonable to assume that consumers in the $14 trillion U.S. economy could perpetually sustain the $61 trillion global economy. But so long as Americans spent, emerging markets didn’t heed the call to increase their consumption.

Now there is no other choice: the U.S. spending binge is over, and emerging market citizens must pick up the slack. Without the latter, it’s highly unlikely the global economy will be able to grow at an adequate 4.5-5 percent rate in the years ahead.