Supply: The Key to Growth

By Ramesh Akkineni
from an article in Business Line by Shanmuganathan.N

Ludwig Von Mises in his epic Human Action explains how the entire economics could be explained from the axiom that man uses scarce resources to satisfy his unlimited wants. But even if you do not want to get into too much economics, just think about how man would have needed cars and aeroplanes even thousands of years ago or how all of us needed cell-phones and e-mails even a couple of decades ago.

The demand was always there — what changed in the environment is the supply. We are sure that two billion Indian and Chinese want to have an American lifestyle — of individual cars and annual overseas vacations — but the key is what can be meaningfully produced and serviced. Production is the engine. Consumption follows.

Now let us proceed to examine what would happen if the world allows the dollar to collapse. Think of the goods produced in the world as being delivered to the ultimate consumers through a gigantic auction. All countries of the world participate in this auction and bid using their respective currencies.

The US for the last several decades has received a disproportionate share of this auction because of their currency status. To be fair to the US, at least till the late 1970s, they produced a disproportionate share of the goods on auction, and hence were entitled to a disproportionate share of the sale as well. But that has long ceased to hold true.

Now just imagine that the dollar collapses by 50 per cent against all major currencies. The goods on auction still remain the same — the production scenario itself does not change because the dollar has collapsed. All that the dollar collapse would imply is that the goods get consumed by the other countries that now become relatively richer.

We can enjoy much standards of living as there would be much more cars, oil, vacation trips and food for the rest of the world to consume as compared to what they have today. All these goods would become cheaper in local currency terms (although more expensive in dollar terms) enabling a much higher standard of living for the non-US population.

We can debate about whether the above transition would be smooth. Frankly, we do not know and we doubt if anybody knows. But eventually — perhaps a few days, maybe a few months or even a few years (though we doubt it would take that long), the standard of living would get redistributed through the process of currency realignments.

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