America's Economic Reset Will Trigger Global Recession, New Crises

Tyler Durden's picture

Submitted by Eugen Bohm-Bawerk

In Episode 1 we showed how the US labour market changed dramatically from the 1970s on back of excess money printing which allowed Americans to buy tradable goods on the international market, hollowing out its own manufacturing base, and essentially creating an unsustainable consumer driven economy where the broad masses get their employment within service sector.

We will now take that a step further and look at what this has meant for the US worker. As our first chart shows, non-supervisory real wages stagnated in the early 1970s and has essentially remained flat ever since.

Measured labour productivity on the other hand continued upward, but its rate of growth shifted down. More on this in our next blog post.

The American middle class, i.e. the non-supervisory workers, managed to grow their consumption in the midst of stagnating wages through

  • moving to two income households (women constitute almost 50 per cent of the labour force today)

  • by increasing debt

It should be clear that when the share of women in the labour force has reached 50 per cent and further leverage of a shrinking household income has become counterproductive the end-game has started. The only way to increase living standards from here will be the old fashioned way; consume less than you produce and productively invest the surplus.

This brings us back to the previous post, where we suggested the end-game will be one where global manufacturing powerhouses such as China, Japan and Germany will discover their overexposure to exports to the same extent that the US is overexposed to its service sector. As Americans start to save more, invest it domestically and rebuild their manufacturing base global exporters will be forced to do the opposite. Needless to say, this change will not come voluntarily, but through recession, financial crisis and necessity. Excesses must be liquidated at some point, no matter.

But why did US wages stagnate? Simple, through  a Faustian bargain they traded highly productive jobs in the manufacturing sector for low productive jobs in the service sector. While it felt great at the time – we are all amazed to see the convenient lifestyle Americans live – it came with long term consequences.

As the US employment changed toward part-time, low benefit, low paid service sector jobs the quality in the overall labour market deteriorated. We have made a job quality index to depict just this. Unsurprisingly, this index, along with so many, peaks right after Bretton-Woods collapses. And the really scary thing is how it has completely fallen off a cliff in the period after the financial crisis.

And while we could conclude this missive here, we will repeat an argument we made in How the FOMC got institutionally corrupt because it is a direct result of the changes that has occurred in the US labour market.

The so-called wealth effect that rules today’s macroeconomic model output brings quacks and charlatans like Greenspan to claim that stock market gains cause economic growth; perversely enough they are semi-right due to faulty concept of  GDP  and the way inflated asset values in the US can be used as leverage to purchases tradable goods on the international market. The last chart today talks volumes about what is going on in US policy circles, and why things have become as confused as they are.

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MagicHandPuppet's picture

Pop! goes the weasel

Doña K's picture

They are Loosing control you say?

Captain Debtcrash's picture
Captain Debtcrash (not verified) Doña K Aug 15, 2015 10:17 AM

The economic reset will come with a monetary reset, and won't occur alongside a recession, but as a result of a recession/depression and crisis that may be intentional.

KnuckleDragger-X's picture

Quite likely, but it won't be isolated, the entire world will get to play. There are far too many drones leaching off of the productive this time around and many of them are being heavily radicalized by our elites. They think they can control the mob, but riots are forces of nature and is about as controllable as a tsunami....

Stevious's picture

Hmmm... hollow point bullets (Homeland security has how many?) controls riots quite handily.

I'm not so sure about your analagy.

Stevious's picture

Hahahah....... sorry, it won't come with a monetary reset.

It'll come with an end to money as we know it. (Perhaps that's what you meant)

Electronic only, for then even black markets are destroyed and the government (whatever that means) contols all.

It is axiomatic that an Empire in decay turns upon its own.

 

And if you think you can bypass it with silver dollars think again, or rather look up the history of the Assignat.  Prior to the French Revolution simply asking what a price was, in anything other than Assignats (the French official paper currency) was punishable by death.

wendigo's picture
wendigo (not verified) Stevious Aug 15, 2015 7:17 PM

And then shit got real and that law, along with all the others, became meaningless.

sleigher's picture

They own the black markets.  It is the source of funding for all their black ops.  You think they will destroy that golden egg?  I have a really hard time believing that.

markpower49's picture

The US needs a civil/race war and a cleansing in blood. Hopefully, this economic collapse comes soon.

August's picture

If Murica gets a "race war", the 0.01% will be quietly chuckling, while their toadies decry the horror.

Murica will be well-served if its remaining productive residents simply Go Galt, each in his own way, and absolutely minmize any skim that the Oligarchy extracts from their life activities.

Sudden Debt's picture

Not in those charts!

Replace productivity by inflation in those charts and you'll see how you and every other American is loosing control against the overlords because you're paying, they're making and nobody knows what happens.

The poor get more poor, the middle class is getting smaller and the rich get a lot richer.

But nobody compalins because rich people are gods in America. Even those who are poor won't ever complain because there's proof in disney movies that they to can become billionaires by doing nothing.

America is on it's way to because what china was 50 years ago. At best they'll recover to a south American level after the reset.

China is becomming what America was in the 40's. They own the factories and in a decade their army will be bigger and better then America's army.

And Europe's economy will crash hard and falls at risk to become a fascist continent.

 

MsCreant's picture

I disagree about China and US but cannot "prove it."

I think everyone is trying to fake it, and hopes they are not the one to fail first. 

China is doing all the same shit the US is doing, but perhaps worse, only because they have more people to distribute the gains to (and they are not distributing them enough, their oligarchs are smuggling the ill gotten gains out of the country back to the US and Canada). Their real estate also is in a bubble with whole Potemkin cities, financed like subprime, then bundled and sold out into their market. Stock markets being bought up, like us, by central bankers directly and indirectly.

I don't think China gets to "take off" like you do. They will collapse in their effort to divert resources into competing with the US, kind of like Russia did.

I think Russia is not in as bad a shape (they already collapsed and cleared the debt), but they too are "hanging on" because of the collapse in oil prices.

I think I could point out this kind of thing with all the playahs!

Europe is the same. Not even Germany is solvent. All of them are smiling, demanding, and pretending when all of them are "bankrupt" after a fashion.

But all of them sit at the table and smile at each other, looking at their losing hands of cards, hoping the other one has even less to work with than they do. 

I give China nothing. I used to be open about their chances, but not with some of the latest news from them. 

Japan, walking dead.

localspaced's picture

I don't agree. There's a strong current of fascism, no doubt. But it's a wave..theyrethe dumb and disaffected few. 

If you take the EU out of the equation what you're left with is a patchwork of independent but heavily intertwined nation states that have no other option but to open up to free trade as much as possible. We can't afford fascism or socialism...and beyond some echoed rhetoric and a few freaks nobody has the stomach for the real thing. Europe is currently a contintent that has no real ideology and no vision for the future...i think that's great, it's an asset. 

Then it's a matter of getting those over land supply lines to China and Russia set up and you can create a beautiful trade circle spanning from China, via Russia into Western Europe, Africa and then back into the middle from.where oil.will flow in every direction. If you like history, like me, you'll know this actually a return to, and expansion of the organic trade routes that have always existed and are the lifeblood of human civilisation. We've lived in anomalous times but don't conflate a system crash with the complete downfall of society. Institutions fails, but they're just paper constructs. Knowledge, contact, relations built through trade and fair, open exchange, means of production...they all remain.

This is very optimistic... I know, but the US seems to think is important enough to stop from.happening, whatever the cost...

Perimetr's picture

"As Americans start to save more, invest it domestically and rebuild their manufacturing base"

 

Sorry, kind of hard to "save" when you don't have a job and your currency is worth less and less each day,

Until it becomes worthless . . .

Introducing . . . the new Treasury Reserve Note . . . which will also be progressively devalued.

 

 

  

 


EurGold's picture

Buy Gold, Silver, Platinum and Palladium with Euro, Great British Pound, US Dollar and Bitcoin.

 

https://www.eurgold.eu

SafelyGraze's picture

factoid:

since the dawn of time, an ounce of gold has been worth the price of a tuxedo and a hooker in a leather dress.

current cost of same can be found online.

e.g., http://www.mensusa.com/products.aspx?id=3565

$199 for the tuxedo.

you pick the price for the escort.

bottom line is, metal still has *plenty* of room to drop further

hugs,
misteryellens 

AnonymousCitizen's picture

I would instead say that an ounce of gold could buy a nice firearm, and an ounce of silver could buy a nice steak dinner. Silver has some room to go up.

And I must question your taste in $199 tuxedos.

Billy the Poet's picture

Not to mention his taste in intimate partners.

Manthong's picture

I am surmising you are not into leather.

Winston Churchill's picture

A black potato sack is not a tuxedo.

The one I have,which mysteriously keeps shrinking between wearings, cost me over a thousand

pounds many years ago on Saville Row.It was on sale at the time.

logicalman's picture

Most of my clothing is functional and not too expensive, but it doesn't seem to shrink between wearings.

I found a pair of my jeans when clearing out my parents' house that were 40 years old and they hadn't shrunk either.

Maybe them fancy suits aren't all they are made out to be!

 

Winston Churchill's picture

My excuse to Lady C as my weight has increased with age, and partial disablement.

.

WillyGroper's picture

@WC,

What no Men's Warehouse/Jos. A Bank in London?  ;)

Winston Churchill's picture

Never mind the quality,feel the vidth.No.

Had made some money very fast at the time,Easy come, easy go, as they say.

Wine,women,drugs and clothes saw most of it, the rest I wasted.

Yen Cross's picture

 Excellent post Winston. ;-)

 Assuming the serfs know what 'Savile Row' is?

Sudden Debt's picture

A 199 dollar suit from wallmart shouldn't be his reference point indeed :)

The price that should be used is a quality tailored suit, that's about 2500 to 6000 euro's and up.

And why pay so much? I have 2 tailored suits and they don't just fit perfectly, those who know, see it. And in some meetings it's needed to wear a suit like this.

If I see somebody with a 200 euro suit... It's a kid and I'll forgive him or I'll pitty him for looking like a beggar.

giggler321's picture

and left hand release as a service must be like ... erm, 25$?

El Vaquero's picture

Come out to NM.  A new-ish pair of blue jeans, shined boots, a nice hat, a nice shirt with a bolo tie and a sports coat is often considered formal attire.  Go to the Santa Fe Opera, which does put on big productions, and there will be people there dressed like that rubbing elbows with tourists wearing nice evening gowns and tuxes.  

Wary Hanger's picture
Wary Hanger (not verified) SafelyGraze Aug 15, 2015 9:59 AM

So basically, these chimps here should have been mining gold & buying tuxedos & hookers?

https://www.youtube.com/watch?v=mM6OIlreneA

I Write Code's picture

Not gold, bitcoins.  Less sodium cyanide involved.

White Mountains's picture

Both are good.  Just like everyone should have some AU and AG, everyone should get themselves a couple of BTC.  Could come in handy.

TuPhat's picture

Bitcoin is fiat without the paper.

arbwhore's picture

factoid:

since the dawn of time, every fiat currency has failed.

The purchasing power of today's dollar is about 2c compared to the dollar in 1913.

bottom line is, the dollar still has *plenty* of room to devalue further

hugs

 

Son of Captain Nemo's picture

bottom line is, the dollar still has *plenty* of room to devalue further

Nice rebut!

Mr. Magoo's picture

factoid:

If the price of gold goes to 199 and silver continues to drop. You will NOT be able to obtain it at that price. But you will be able to continue to buy paper to wipe your ass until we end up like Venezuela

Peter Pan's picture

Factoid: We're fucked.

The simple life may be difficult to achieve but the simpler life is a much easier route to getting there.

I have adopted some rules one of which is to throw out ( or give to charity) a piece of clothing everytime I buy something new.

Resole or reheel my shoes twice before throwing out so as to give shoe repairers an income.

Credit card limit is less than one week's living expenses.

No Christmas presents to adult children. Only to grandchildren. My kids also don't give presents to each other at Christmas. Instead we pool our funds and suuport a charity.

Sold the second car a few years ago. Big savings.

Put on warmer clothing as a first step before turning on the heating as opposed to friends who turn on the central heating but walk around in shorts and t shirts.

My list goes on and I am planning more changes.

The big secret is to live the good life within the biundaries of the simple life.

live free's picture

Very good post.  many of those things were common decades ago, but us young bucks got caught up in the consumerism economy for a bit and took it too far.  Now, guys in my generation are all pulling back and trying to live like your post.

The Old Man's picture

I shop for my work clothes at the Salvation Army Thrift store located in a buzzing wealthy suburb of the Cleveland, Ohio area and get a boatload of nice clothing that I will destroy at work for PEANUTS! I've saved thousands of dollars by doing this because when it comes to pride, I just smile and keep eye contact. The clothes don't make the man. The Man makes the Man!

Totentänzerlied's picture

Articles like these are stunningly asinine.

In 1913 the US was the world's number one oil producer and the EROEI on that oil was about 1000:1 for discovery and 20:1 to 40:1 for extraction. Fast forward to today. The US's conventional production peaked and went into relentless decline decades ago, EROEI on discovery and extraction are below 10:1, and the only way to afford more oil is to expand the credit supply.

As of now the dollar is no longer a proxy for the American economy, it is a proxy for oil. When people begin to realize this, the dollar becomes a hard currency. History is repeating again, except unlike going off metallism, going off crude means going off food and just about everything else. I'm still waiting for the "you shall not crucify mankind upon a cross of crude" speech by the one-in-a-billion politician who comprehends thermodynamics.

boodles's picture

excellent!

Love the W J Byran reference, too.

WOW101's picture

You are correct in your Petro Dollar evaluation.  But, this only holds true as long as the USD is the Reserve Currency.  Oil is starting to be traded in currencies other then the USD.  How long will the USD remain the defacto currency for oil?

messymerry's picture

"How long will the USD remain the defacto currency for oil?" 

Until all the gold has gone East.  When the sovereign buyers of physical have had their fill, they will begin the process of dismantlilng the West...

;-D

InvalidID's picture

 

 Likely after WWIII. Power does not tend to shift peacefully, it must be wrested from the hands of those who wield it.

hound dog vigilante's picture

And if most of the world's oil transactions are settled w/o the $USD, does the dollar remain a proxy for oil?

Or if demand for oil worldwide begins to decline, does such a proxy dynamic continue?

I understand your point (entropy), but the simple/fixed two variable equation you are committed to here is not necessarily accurate anymore. The speech you are waiting to hear becomes moot as the rest of the world trades for oil (and everything else) w/o $USD intermediation. Further, the peak oil dynamic is being mitigated in developed economies... it will be the developing world that will be sqeezed hardest by a dearth of cheap/free energy, IMO.

Kayman's picture

Tot:

EROEI is essentially a meaningless ratio because not all energy is homogenous nor does all energy have the same economic costs. It's a great ratio to try to scare people (with).

     Fixed, non-portable energy like electricity (from the sun- water or solar panels) can be exchanged for portable energy like oil (a relatively convenient liquid). That makes EROEI just another useless bullshit yardstick.

   And since 1913 (your random baseline), economies of scale in the oil business have substantially reduced the cost of production.

   If you want to use a more useful ratio compare hourly wages in the U.S. in 1913 vs a cost of a barrel of oil in 1913 against hourly wages today and a barrel of oil at $40-50/bbl.  2 or 3 hours of work today will buy you a barrel of oil. In other words for 2 or 3 hours of work you can buy the equivalent of over 2000 horsepower per hour. Oil is cheap now and likely cheaper than 1913.

   At the $80-$120 per barrel of oil range there was no more wasteful industry than the oil business. Men were making over $100,000/yr sitting in pickups picking their noses. Cooks in Australia were making $170,000 a year on LNG projects.

  Costs are always a function of how much money there is to throw around. And many in the oil industry are learning that lesson now.

 

El Vaquero's picture

Stationary sources of energy are not readily fungible with portable sources.  The process of cracking coal into shorter hydrocarbon chains to produce something like diesel or gasoline takes quite a bit of energy, not to mention that it would take a lot of infrastructure that we don't have to swap over to something like that.  That means that more coal has to be mined, which means more wear and tear on mining equipment, which means more steel needs to be recycled/mined, etc...  When you start talking EROEI, this is important, because low EROEI translates directly to higher costs in reality, whether you want to measure those costs in joules or in dollars or in ounces of AU.  Don't look to electric cars to solve this either.  We'd have to find much larger sources of the materials used to make batteries than we currently have to convert our fleet of automobiles over to electric, not to mention that we'd need a massive upgrade of the electrical grid to handle the increased loads.  

 

In the case of low EROEI oil, it is lower EROEI because you have to drill more wells, which costs.  You have to use more materials, which costs.  You have to work harder to get the oil to the surface, which costs.  These costs are ultimately in joules, and if you bring the monetary price down below what the costs in joules say things should be, you will break the system.  EROEI is not meaningless.  

live free's picture

I worked at a statup that converts c02 and sunlight using "bugs" that excrete hydrocarbons... They are going big, but not there yet.  When we were there, a russian investor asked what we were doing to "protect" the company from the outside... who knows if it will make it past the current status quo.