My View of the Economy

I hope there were plenty of presents under your Christmas tree this year. If you go by appearances, the whole nation is richer and getting richer. House prices are still going up. So are stock prices. Shoppers are still spending money. So far, my concerns have seemed pointless.

America is evolving into a new, post-industrial economy, say economists. This new economy can handle far higher debt loads. People can live in bigger houses with bigger mortgages (see below). And the trade deficit really doesn’t matter.

I don’t doubt that some companies, and some investors, can flourish in this new economy. They will come up with new and better products…and outsource the making of them to lower-cost parts of the world. What I doubt is that our economy as a whole can prosper when most of the citizens of the United States have to go further and further into debt to make ends meet.

When people spend money they’ve borrowed – as opposed to money they’ve earned – it has effects that are almost too wonderful. Companies can sell more products domestically without an offsetting labor cost; so they become more profitable (temporarily). And more people go to work in the retail sector (and in housing) helping each other spend their money.

On the surface, it sure looks like the society is richer…more profits…more spending…more sales…more people working…more PSPs under the Christmas trees. But whence the source of this wealth? Is it real?

For some, yes; those of us, and this number is rising fast are close to retirement have now decided that our income producing time is short and we must save to prepare for it. Thus dollars saved in institutions and on the market are on the rise. Some are selling their homes in high priced areas like New York and California and moving to smaller abodes in less costly areas, thus moving the boom. Resort building is gaining speed for some. But will it end? Yes, and what will we have left behind.

Average incomes per hour are not going up – they’re going down. And the average man…as we recall the data…has no more real spending power per hour worked than he did 30 years ago. Is he richer? Hmmm…his house went up in price. His wife went to work. Interest rates went down…finance companies invented new ways to lend him money…so he can spend more. But what is it that brings him the extra spending power? Is he really benefiting from this new, post-industrial economy? Does he get a share of the profits from selling iPods? Does he get royalties on Disney movies? Not likely.

And why should he? Inherently, an hour of his time is no more valuable than that of a Chinese person. Why should he earn more? Why should he be richer? Whence cometh the extra loot? In the past, the answer was simple. The factories – representing huge, fixed capital outlays – were in his backyard, not in China’s. Now what’s in his backyard that makes his labor so much pricier? With the new trade deals, the new post-industrial ‘platform’ companies are freer to move about. He cannot get a grip on them. He cannot force higher wages out of them. Nor is he in a better position to own their shares than an investor from Paris or Manila.

He had a huge advantage when America was an industrial country – the factory could not escape. He and other workers could unionize and exploit the capitalists. No more. Where is his advantage? Is he better educated than the Chinese? Has he more oil in his backyard? Has he more skills? Even if the platform, creative, genius companies were more profitable than the factories…why would they give this fellow a piece of the profits?

Not that I’m getting misty eyed over the fate of this poor man or for myself for I am in the same boat (Industrial Management graduate Masters in Architectural Engineering). We had it good for a while. If it’s not so good in the future, well, that is just the way things work. While I moved into my own private company years age, most have really no way to increase their purchasing power — faced with billions of competitors in the East — how will the U.S. domestic market grow? How will the common man pay back all the money he borrowed? How will he keep up with payments…with spending…with life’s little setbacks…when the credit flows less like Kool-Aid and more like tar?

I don’t know. But I wouldn’t want to hold his mortgage. And I suspect that the performance of the U.S. economy over the last few years is a trap and a swindle. It was caused not by a dynamic new economic model, but an old-fashioned credit binge. One that we can not seem to stay away from.

Happy New Year!

May God Bless and  Keep You This Day Till Tomorrow

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