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First Anniversary of the Decoupling Theory Ridicule Attempt

Apparently, one year ago there were vociferous arguments that Decoupling is simply a self-deceipt. There were countless arguments why global economy should be viewed as a solid, undistributable thing: Chinese (BRIC) demand claimed to be disproportionately insignificant to weigh on the global GDP factor, let alone offset for the falling G-7 demand. Alternative financial markets seemed to be some kind of clown in the pocket - with their low transparency, unclear policies and regulations, etc. But when we talked about decoupling phenomenon, we mostly attributed it to real economies, rather than financial and stock markets, which could be long in denial.

Presently, voices of decoupling theory opponents slowly but surely are being disseminated. The problem is that few actually dispute that decoupling proved to be existing, but its toll of the world economy, as well as future performance remain a highly speculative matter lacking any comprehensible studies or even brief surveys.

World Bank today issued its forecast on China's GDP growth at 8.4% in 2009. Why skeptics were so brutally wrong? The fact is that all financial crises in the past, including Great Depression, have many similar prerequisits. One appealing one is growing unequality of incomes, which causes consumer demand to suddenly wane among otherwise healthy economy. "Income for the rich, credit for the rest" is the uniform slogan causing, again and again, periods of world economy's dramatic tailspin. Again, in all preceding episodes such fatal disproportion planted in the States and then gradually spread to all other countries belonging to the system. Thus, during the 1920's, years preceding the Great Depression, in USA wages grew more slowly than output per worker, which suggests that corporate profits were rising. This change shows up as rising dividends, which constituted 4.3% of GNP in 1920 and rose to 7.2% of GNP by 1929 (G. Soule). Since 82% of all dividends were paid to the top 5% of income earners, that clearly helped contribute to the change in income inequality (J. Potter). Following the underconsumptionist school of thought, higher income individuals have lower average propensities to consume and higher investment capacities, which ultimately causes disproportion between consumption and direct investments aimed at matching ostensibly growing consumption. When this unfortunate finding is made, investors are trying to make up for missing demand by offering higher credit. Invariably, again and again, booming credit markets signified the last stage before the market collapse.

But this time is different. Direct investments were applied to another domain (a country, a geographical zone) not belonging to the credit system. As a result, credit market crunch should not necessarily cause drama of real economy: epicenters of financial markets and real economy were spread apart by hundred thousand miles! This is why I personally eagerly joined the camp of decoupling followers. I only argued that China's economy should wane in case it doesn't take advantage of collossal hidden consumer demand of a low-income nation. This fear did not materialize: with huge $780 bn stimulus package, China managed to prop up organic growth of demand associated with transfer of low-income nation into mid-income nation. At the same time, collapse of credit markets elsewhere (preemptively, in the States) for the first time in history left the financial sector manage its disproportions on its own, without it being able to unload part of its problems onto real economy shoulders. I call it a credit market "short circuit".