Thursday, June 23, 2011

USA Boom or Bust: The Next Decade

Hooverville of the 21st Century

Will the U.S. economy ever recover?

"I'm a huge bull on America" declared Warren Buffett in September 2010, while ruling out the possibility of a double dip recession.

But 48% of Americans think America is already entering the next great depression.

And they, according to Bill Bonner, are optimists who have failed to notice that America has been in a recession for the last ten years, with no sign of a letup for many years to come.

Who to believe?

Perhaps everyone's right.

Bonner appears to be correct in saying the US GDP has gained flip all in the last ten years.

Self-employment: USA 2011

Meantime, unemployment, homelessness, and outright poverty have become widespread features of the American economic landscape.

And as millions of the unemployed run out of unemployment benefits, while losing hope of reemployment, and as millions more illegal immigrants flood in, the outlook for tens of millions of Americans becomes increasingly grim.

But on the bright side, corporate profits have never been higher. Since the low of 2002, IBM's share price is up 300%, Apple's is up 3000% (yes that's right, three thousand percent), and even the Dow and Buffett's stodgy Berkshire Hathaway are up 50%.

So what is going on, and why?

Two words that I've never heard Warren Buffett use explain it: "outsourcing" and "off-shoring".

What these words mean for the American economy I have already discussed in Why China Booms While America Slumps. But the chief point is made in two sentences:
In 1993 Chinese wages were about 3% of those in America.
and since 1993,
Chinese manufacturing wages have been driven up only marginally, reaching US$134 per month in 2004 or just 4.9% of the US rate of US$2732 per month.

Here lies the answer to the dichotomy of view between Buffett and the common man.

As David Ricardo explained:
As the wages of labour fall, the profits of stock rise, and they be together always of the same value...
Cheap labor in China and throughout the developing world means mega profits for American business and poverty for a tens of millions of Americans, and the hardship for millions of Americans is made worse by minimum wage laws that prevent those with skills of limited value from competing on price with Asian, African or Middle-Eastern labor.

Corporate profits hit a record high in 2011

How will this end?

Two possibilities:

(1) Revolution.

(2) Wage equilibration in the tradable goods and services sectors of the economy between America and other Western economies, on the one hand, and the developing world on the other hand, which would mean a fully globalized economy with American living standards more or less matching those in Shanghai, Mumbai, Istambul and Cape Town.

The second alternative is clearly the objective of the ruling elite. So how will the transition be accomplished?

Wages, as Lord Maynard Keynes observed, are sticky on the downward side. Inflation is therefore almost certainly necessary to achieve the transition. This cuts real wages without lowering the dollar amounts paid in wages. It is achieved by printing dollars.

The printing press provides a technology that Ben Bernanke's Fed is proud to possess. We have seen QE 1, aka Money Printing 1, and QE 2. In due course expect to see QE 3, 4, 5 ...

As dollars spew out, the exchange value of the US dollar will fall. It has been falling for years, but now it should fall faster. The result should be a fall in the price of American exports in terms of other currencies and a rise in the cost of America imports in terms of dollars. The net effect should be a gradual restoration of American manufacturing with increasing exports and declining imports.

Trouble is, China, now the workshop of the World, is inflating as fast as Ben Bernanke can crank the press at the Federal Reserve. Net result? Chinese imports remain just as competitive in the American market as before.

What to do? Print even more US dollars.

This will be bad for China, since it will depreciate the hoard of dollars they have accumulated to prevent the Renmimbi from rising against the dollar. It'll serve them right.

Chart source: Shadow Government Statistics
But it will be good for many US equities, though not necessarily for those in the consumption sector, since American consumption is about to undergo a permanent decline.

And it will be very bad for those with cash.

Is gold an alternative?


But remember, gold is not money. No one is promising to pay the bearer any particular number of dollars for an ounce of gold.

The price of gold is the creation of market psychology. At six times the price of only a decade ago, the price of gold could crater anytime.

See also:
Why China booms while America slumps
America's inflationary depresssion


  1. Consistent with my expectation that the US Government will drive down living standards through a long-term program of inflation, here's a chart from Shadow government Statistics that shows US price inflation at an annual rate of up to 10% -- depending on how you calculate it.

  2. Alfred, You have published some contentious but interesting economic articles in recent weeks. If the blue-line CPI index you refer to was more accurate than the official inflation statistics used to calculate real economic growth rates, then it would suggest that (in real terms) the economy has actually been in economic decline for much of the past 20 years. Certainly my wife (who does the shopping) has been telling me for some years that our official inflation rates don’t reflect the price movements she has been seeing on mainstreet.

  3. The American oligarchs don't care about the ordinary Americans.

    - Aangirfan

  4. Roderick, My wife agrees with your wife!

    And that may provide us with as good an idea about the state of the economy as we can hope to get.

    For not only does the composition of the output of the economy change continually, which makes comparisons difficult, but the value of the output in constant dollars must be adjusted for the inflation rate, which can be calculated in different ways with different results.

    Overall, though, it is hard to believe that the US economy is really growing. Car sales are down and the proportion of imported cars sold in America is up.

    And the local content of cars has been falling for years. When Detroit had a population of two million it had a thriving car parts industry. As Detroit's population declined, currently to 800 thousand, car parts have increasingly come from low wage competitors, first Canada, then increasingly from Mexico, now in huge quantities from China.

    The same hollowing out must affect most industries. I see that Dell computer, who used to snap together Asian components at their own US factories, are now outsourcing assembly to Asia.

    And the price competition is only getting fiercer. I was in Canadian Tire today to get batteries. Nine volt Duracell batteries made in Japan, two for $8.69, Energizer batteries made in the US, same price, Likewise brand batteries made in China, four for $4.29. And given the way retail markups work, if the retail price of the Chinse batteries was only a quarter of that for the US and Japanese competition, pretty certainly the wholesale price was proportionately even less. With competition like that, it seems inevitable that the US manufacturing economy will continue to shrink.

    So what's growing in its place? Homeland Security!

    Several other considerations support the notion of a long economic contraction. During the early 2000's the US economy spluttered along as people acquired increasingly horrendous debts. But the debt simply brought forward consumption from the future. Now that consumers are being forced to deleverage, the economy will take a further hit.

    And as the economy contracts and unemployment stays high or even rises, consumption has to fall further.

    So, yes, I think if one's analysis is not contentious, it cannot be correct!

  5. Aang said: "The American oligarchs don't care about the ordinary Americans."

    That's true for sure. Question is whether ordinary Americans will make them care.

    I guess having weirdo people from the TSA feeling up yer crotch at the airport, shopping center, high school prom., wherever, is supposed to keep folks off balance.

    But if the American people ever realize how they're being taken for a ride, the reaction could be spectacular.

  6. I've added the chart from Shadow Government Stats that Roderick Russell mentions to the body of this post.

  7. Talking of keeping people off balance, Winter Patriot's 90+ Part story Sherlock Holmes And The Alderney Street Mystery, which examines the extraordinary and unexplained murder of British cryptanalyst Gareth Williams, provides highly informative, and hugely readable coverage of the evidence suggesting that most if not all US and British terror events have been stage managed, as part of the soft tyranny that now governs those countries.

    This work deserves wide notice.