first published this essay in the Summer of 2009. At that time the whole
world believed Obama’s Stimulus Program was working at that the stupid
greenshoot recovery was underway. Today I’d like to reprint this essay because
the same structural issues that plagued the US in 2009 are still valid and
because this piece proved, two years ahead of time, that the US would suffer a
massive economic collapse.
The seeds of today’s
crisis were first sown in 1971 when the US formally opened up trade with China.
In an effort to boost profits, large scale US manufacturers and other
multinational firms began outsourcing their manufacturing jobs to the People’s
Republic soon after.
When other industries
realized the kind of money that can be saved by sending work overseas, they
soon followed suit. Outsourcing moved up the corporate food chain until even
R&D jobs and other high-level, high-skill set jobs were shifted to Asia.
This, of course, diminished the number of these positions in the US. Thus began
three major trends:
The US’s economic shift from
manufacturing to services (mainly financial)
The massive drop in US incomes
The beginning of the debt bubble
Nothing illustrates the
first point like the rise of the financials sector. From 1970 until
2003, financials’ market capitalizations as a percentage of the S&P 500
rose from less than 5% to 22%. Over the
same period, financials’ earnings as a percentage of the S&P 500’s total
earnings rose from less than 10% to 31%.
Put another way, by 2007 one in
every three dollars of corporate profits came from the financial sector. Meanwhile, China was experiencing an
unprecedented level of growth thanks to our renewed trade: Chinese per-capita income doubled from 1978 to
1987 and again from 1987 to 1996.
Now, fewer jobs in the US
means lower US incomes. Going by the Federal government’s official (inaccurate)
data, weekly US incomes peaked in October 1972 and have since fallen 15%. Of
course, these numbers are based on official inflation data which is horribly
under-stated. According to John Williams of www.shadowstats.com,
if you were to go by real inflationary data, US incomes have fallen more like 40%.
This fact stares us in the
face everyday, though no one really notices it. In the early ‘70s, typically
one parent worked and the other stayed home. Today, BOTH parents work and most
Americans are barely getting by.
The reason we didn’t
notice the dramatic drop in quality of life in the US before is because of one
Credit cards had been in use since the ‘50s, but they had yet to catch
on, largely because banks couldn’t make obscene profits from them (the interest
rates they could charge were limited on a state-by-state basis).
Then, in 1978, the Supreme Court passed a law stating that banks could
charge their cardholders any rate
allowed in the bank's home state. With this ruling, credit cards suddenly
had the potential to become a major profit center for banks. Major banks immediately
shifted their credit card operations to states where there were no limits on interest rates (Delaware and South Dakota).
Credit creates the illusion of wealth (or in the US’s case for the
last 30 years, the illusion of maintaining the same standard of living) because
you’re able to spend more than you make or spend money without paying upfront.
Americans, earning less and facing rising costs of living, gradually began
their descent into indebtedness: between 1980 and 1990, credit card spending average household credit card balances
In this manner, the average American didn’t notice that his or her
quality of life was deteriorating at a rate of about 2-3% a year. Similarly, he
or she didn’t notice that more and more jobs (of greater and greater technical
expertise) were shifting overseas.
And thus began the epic shift in American wealth to Wall Street (the
rise in the financial industry) and China (the producer of cheap goods we had
to buy due to the drop in incomes).
Because of this,
incomes fell in the US forcing consumers to start using credit to maintain
their living standards. The same practice occurred in the public sector as
well. Adjusted for inflation, gross tax receipts have only risen 40% in the
last 39 years. However, over the same time period, total government spending
To fund this
insanity, the US issued debt in the form of Treasuries. Foreign governments
(most notably China) which were generally getting richer selling us stuff
loaded up. The whole scheme is similar to buying a toy from the store, then
having the store lend you money to buy another toy… ad infinitum: hardly a
sensible long-term plan for financial solvency.
Now, everyone knows
we run deficits. But not everyone knows that the deficits we publish are
unbelievably understated. Corporations, in order to qualify for generally
accepted accounting principles (GAAP) have to count their pension and
healthcare expenses for retirees.
Uncle Sam doesn’t.
John Williams of www.shadowstats.com notes that official
US deficit statistics do NOT include net present value of unfunded social
security OR Medicare expenses. A lot of folks have made a big deal about the US
running a $1 trillion deficit this year. Well, if you included the net value of
those unfunded Social Security and Medicare expenses we cleared a $1 trillion deficit in 2007, a $5 TRILLION deficit in 2008
and are on course to clear a $9 TRILLION deficit this year.
To give you an idea
of how big a problem these deficits are, consider that the US government could
tax its citizens 100% of their
earnings and NOT have a balanced budget.
In light of these
issues, the government’s $787 billion stimulus package doesn’t exactly breed
confidence in an economic turnaround. Incomes have lagged inflation in this
country for 30+ years. Creating a bunch of temporary positions related to
construction and the like is NOT going to alter this in any significant way.
Moreover, most of
the job growth in the last 10 years has come from Bubbles: two out of five jobs
created between 2002 and 2007 came from the housing industry. The irony here,
of course, is that the Stimulus Plan is merely following this trend, creating
jobs from our latest (relatively unreported) Bubble: the bubble in government
spending and employment.
Bottomline: the US
needs to create sustained job growth involving skilled professionals with high
wage earning potential, NOT more guys laying concrete. We need fundamental
structural changes to the US economy, NOT temporary positions resulting from
one-time government projects.
And with a $9
trillion deficit in the works, $787 billion doesn’t really mean much in terms
of increased tax receipts. Also, and this is bit of a personal aside, it’s hard
to believe that throwing $787 billion towards creating jobs really shifts our
economy away from financial services when we’ve thrown $2 trillion+ towards
Wall Street and the banks (via direct loans and lending windows).
The US has a MAJOR debt
problem. Including future social security and Medicare expenses we owe $65
TRILLION. Because we live in a world in which the words, “billion” get thrown
around with too much ease, I’d like to put that number into perspective.
Let’s say you have a stack
of $1,000 bills. $1 million would be a stack eight inches high. $1 billion
would be a stack 800 feet high (think the Washington Monument). And $1 trillion
would be a stack 142 miles high. Total US debt, if laid on its side, would be a
stack of $1,000 stretching more than 1/3
of the way around the earth.
Ok, so where is the US
economy REALLY at right now?
Year over year real
employment, real industrial orders, real housing starts, and real retail sales
are all posting their largest drops since the production shutdown following
WWII. Put another way, the last time the US economy fell this hard this fast, we were intentionally shutting down the
monster than was the US war machine in WWII.
This is no recession. We are
already on our way to a Depression (a GDP contraction of 10%) possibly even
another Great Depression. One in nine Americans are currently receiving food
stamps. Real unemployment (without birth/death seasonal nonsense and all the
other Federal gimmicks) stands at 20%.
So I don’t buy the “green
shoots” theory at all. Having things get horrendous at a slightly slower rate
is NOT a sign of a recovery. Green shoots can pop up anywhere including the
asphalt in the parking lot outside my office. That doesn’t mean the parking lot
is about to become a lush meadow.
No, the US is heading for a
really, really rough time. The US monetary base has doubled in the last year.
We owe $65 trillion in liabilities. The US government could tax every company
and every American 100% of their annual incomes AND NOT PAY THIS OFF. The Feds
will have to inflate this mess away. And they’ve got a master money printer Ben
Bernanke overseeing this situation.
Now, I cannot foretell
precisely how this will all play out. Typically when a bubble bursts it takes
10+ years, possibly an entire generation, before the assets that participated
in the Bubble return to new highs (sometimes they NEVER do).
Now, we just got off the
biggest credit/ debt bubble in the world’s history. I’m talking about 30+ years
of spending money we don’t have culminating in a period in which Americans were
speculating in the single largest asset they ever purchase (a house) without
putting a cent of their own money at risk (0% down NINA loans).
We also saw a bubble in
stocks, Treasuries, and most every other asset you can invest in. So the idea
that we can recover from this in a couple of years seems over enthusiastic to
say the least.
Remember, Japan experienced
a similar Bubble (though they had higher savings than we did) and “lost” a
decade of economic growth. It’s worth noting that Japan WAS NOT an Empire like
the US. Japan did not have with
bases in 170 countries, a world reserve currency, and a crippled job market
(history rhymes, it does not repeat).
So in terms of the real US
economy, I don’t foresee a recovery anytime soon. The stock market may soar
thanks to the Fed’s money printing, but a jump in financial speculation is NOT
an economic recovery. If the S&P 500 goes to 20,000, but we’re drinking
$1,500 beer and wiping ourselves with $100 bills, we haven’t gotten richer
(nevermind the fact that an S&P 500 of 20,000 DOESN’T create jobs).
So how will we know when a
bottom is in and the economy will recover? I’ve postulated a few signs (some
humorous, others not so pleasant). Bear in mind, much of this in tongue in
cheek. But like all sarcasm, there’s a grain of truth.
We will bottom WHEN:
CNBC and Bloomberg
start firing anchors and cutting their coverage time by hours, not minutes.
Maria Bartiromo and Jim
Cramer start telling investors to short the market with all they’ve got.
Questions like “do you think we’re heading for a recovery”
result in the questioner getting punched in the face or ignored like a loony
People HATE stocks and stock
ownership has plummeted back to one in ten Americans (the pre-401(k) levels).
Investing is no longer a
hobby and people fight tooth and nail to retain their nest egg (honestly what
the hell is “play” or “speculative” money?)
The number of mutual funds
has fallen by at least half (why are we paying fees for people who can’t beat
People no longer want to get
an MBA to become a broker or a financial advisor.
Our economy is based on
“making something,” not “offering advice.”
Books about Warren Buffett
no longer comprise an entire publishing industry (seriously, Amazon lists
5,000+ books on him).
The Richest 500 people in
the world are no longer all billionaires (never happened before in history…
how’s that for concentration of wealth?)
Then… we will have probably
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