Wealth Watch: Redefining Rich and Poor In a Shrinking Global Economy 27 comments
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I had the opportunity yesterday to attend a presentation by one of my clients to over one hundred people who entrust his firm with the responsibility of managing their investments. As I reviewed the all-too-familiar charts and listened to the questions and my client's responses, I achieved greater clarity regarding my own outlook about the current economic situation. Indeed, this time is very different.
One of the charts that he conveyed and with which you are probably familiar is one that demonstrates the proportion of income earned by the wealthiest wage-earners. The data is part of a long series of work by Emmanuel Saez of UC Berkeley and his French collaborator, Thomas Piketty. As you can see below (click to enlarge), the share, updated as of 2006, most likely exceeded the historical highs during the Roaring Twenties:
I certainly don't intend to use this as some sort of comment on our social structure, as many foolishly think of the pie as fixed, but I do find it interesting to think about why wealthy wage-earners were hit so hard after the Great Depression, seeing their share of income decline so greatly for so long. With the beginning of a new bull market, a disposition towards easy credit, dramatically more lucrative compensation structures and a long-term decline in interest rates, the wealthy have indeed done well over the past 25 years. I believe that the next few decades, though, could see a reversal of this phenomenon as higher taxation (someone has to pay for these government interventions and a populist backlash) hurt the highest earners.
While most people probably don't feel too sorry for these folks, we should all be concerned. Any possible "trickle-down" will flow straight to the sewer. The whole notion of wealth is being challenged. Unlike any time in most of our lives, the very rich have really been hammered. Stocks, bonds, art, homes - pick your poison, as that is what it has been, with nowhere at all to hide. With chopped equity prices, shrinking economic growth, higher taxes likely down the road (especially on the wealthy) and the hand of government more directly in control of "excessive" compensation, the wealthy must be concerned about their shrinking assets given the outlook for their incomes.
What about those who are wealthy in the sense of having a lot of income and assets but are also rich in debt obligations? I believe that even many of those in the top 10%, who make 1/2 the income in our country, have pursued lifestyles well beyond their means. In other words, even the rich don't feel too rich any longer.
What about the other 90%? What really hit me yesterday is that we can look at the "median" when looking at things like income, debt, savings, etc., but, in reality, there are two modes: "haves" and "have-nots". The first group, which is quite large, owns their homes and has limited debt, while the latter, which is quite large as well, is in way over their collective heads. As the economy shrinks, what happens to those two groups?
The "have-nots" are going to struggle to meet their debt obligations. They will have to sell assets (their homes) and sharply reduce debt by cutting down on spending (or face bankruptcy). Loss of jobs will certainly be the icing on the cake for the "have-nots". The "haves", though, are also in a pickle. They are likely to draw a few conclusions:
- Their jobs aren't safe
- They need to save money
- They need to be careful with their investments
So, while a great part of the top 10% and the bottom 90% are indeed fine (as long as they keep their jobs), the "have-nots" in both segments of our population could really bring down the proverbial house. Who is going to buy the assets (stocks, homes) that the wealthy and even not-so-wealthy need to sell? The rich "haves" and the not-so-rich "haves" are unlikely to part with their savings, at least in the near-term or even the next few years. It will be very challenging for both the high earners who aren't as rich as they thought and the rest of the earners who aren't rich at all to fix their financial positions.
We can apply this same thinking to companies, where there are "haves" and "have-nots" as well. While, on average, corporate balance sheets may appear okay, there is a wide range in actuality. Many of our largest and most respected companies have been operating under the assumption that more debt is good, especially if it is used to buy other companies to grow or to repurchase stock. With the full ability to "roll-over" the debt, borrowing short and lending long has not really been an issue. What now?
These companies need to borrow long, if they can, move merchandise and to sell assets, all of which hurts the "haves" to some degree, diminishing the value of their own factories, real estate, equipment, inventories, and receivables (and even cash - the fiasco with auction-rate securities!). Indeed, the lower economic growth that results from the retrenchment of the corporate "have-nots" directly hurts the "haves", diminishing their earnings potential, even as they may pick up market share, by depressing margins in the short-run.
How is this likely to play out? As I listened yesterday, it remains clear to me that most people remain behind the curve. This has been the case since this whole crisis began as "just" a problem in a small sub-segment of the mortgage market that was unfamiliar to most of us but has increasingly spread its viral grip on deeper and deeper levels of the global economy. The genesis of the problems, though, is rooted in decades of attitude changes towards less risk-aversion, an increased willingness to borrow under the assumption that only the interest rate and not the ultimate repayment of principal matters, and a perceived lack of a need to save and a desire for instant gratification (especially after 9/11). Many of these issues are global, compounding the problems. While we can debate semantics, I believe that we can expect more of the same, which, in my book, means a depression.
Many people fear the word depression, thinking back to how bad things were during the Great Depression. From 1929-1933, GDP fell about 1/3, and then it fell from mid-1937 to mid-1938 by another 18%. The worst GDP decline since then was a 6% cumulative loss in the 1974-75 recession. Given the current set of circumstances, it would seem to me that though things aren't likely to be as bad as the Great Depression, they will certainly be worse than the 1974-1975 recession by far.
I expect GDP to decline by 10-15% ultimately. How it plays out will depend on many factors that are unknown, but one that could have the most meaningful impact is the actions of our government and those of other nations as well. We can't count on government to fix this problem, but we can hope that it helps minimize the imbalances without policy errors that lead to unintended consequences and potentially worse outcomes.
It would seem that providing liquidity is a fantastic role for the federal government, using its access to very low borrowing rates (thanks to the "haves" who are willing to lend) to assist those who are effectively shut out. Yes, we are socializing the costs of this liquidity crisis just as we all share in the costs of other things like our defense protection, but, let's face it, this is a war and our very fundamental economic underpinnings are threatened. Building roads and permanently sustaining companies that aren't economically efficient, though, is probably not the best use of the powers and resources of the federal government.
To get out of this quagmire is going to take a lot of time. After all, something that has been in the making for decades isn't likely to be fixed quickly. It's the end of the world as we knew it, but it's not the end of the world. Here is what needs to happen to get out of these challenging times:
- Individuals need to reduce debt and increase savings (ultimately to 5-10% of annual income)
- Housing prices need to continue to realign to their historical relationship to incomes
- Corporations need to reduce debt
- Banks need to raise equity
- Retailers need to dramatically shrink their footprints as we are "over-stored"
- This means we probably need to see lots of companies "go away"
- State/local governments need to reduce debt and realign spending with lower incomes
While it sounds scary to be in a depression, perhaps it is already priced into asset valuations and we have seen the worst, though I doubt this. Here is what I believe is "baked in":
- Unemployment rising to 8-10% this year ( I actually think it could end up closer to 11%-12%, as another 5-7mm jobs are lost unless government incentives are put into place)
- Negative GDP for the full year, though perhaps a pick-up late in the year
- Continued need for deleveraging by individuals, companies and local/state governments
- A marked increase in savings
- Continued pressure on housing prices
- Continued low Treasury rates and high spreads for other borrowers
Just evaluating these factors, I would expect to see stocks do no better than tread water. They are most likely going to do worse, though, as at least some of the following risks aren't fully incorporated but may come to fruition:
- Increased nationalism and potential instability (Russia)
- Plunging commercial real estate values
- The BRICs are "bricks", with China losing any remaining long-term luster
- More sovereign defaults
- A surprise "wealth tax" to encourage consumption
So, my expectations are that borrowing costs remain quite elevated for everyone but the federal government (or those whom it "assists"), though even there, rates could possibly rise on the long-end (not short-rates, though).
Quite simply, the "haves" will be extremely reluctant to part with their cash, requiring continued government intermediation to sustain or unwind in a stability-preserving manner the "have-nots".
Stocks are likely to be like other assets: available for sale and cheaper than we can imagine. Part of that cheapness will be illusory, as the low PE is distorted by the fantasy that there will be much of if any of an "E". Housing prices are likely to overshoot to the extent the government doesn't start actually buying houses and renting them out. The supply of homes (which is much bigger than what's currently for sale due to so many owners being locked into high borrowing costs or negative equity) is significantly ahead of the demand. Corporate bonds should remain very cheap. While spreads may have hit their limits, defaults will rise dramatically. Commodities will remain under pressure, even gold.
The fear of inflation is almost laughable to me, as if we are already buying Propecia since we know that if we survive the chemotherapy we will have to treat our loss of hair. Much of the demand for gold is rooted in a fear of the world economic order changing, but this isn't necessarily the case. In the end, the attractiveness of gold will be overwhelmed by increasingly higher potential returns in other assets (outside of Treasuries). It won't lead the way down, but it will be dragged along with everything else.
Indeed, inflation is not likely. Those who claim that the government is "printing money" miss the bigger picture. The reality is that we are replacing the equity and debt of individuals, companies and soon local governments with federal debt. While ultimately this can end up as inflationary, it is not a foregone conclusion.
Between now and then, unless one assumes that indeed there is a quick-fix (there's not), deflation is the greater risk. As the economy eventually recovers, we will see hopefully a repayment of the loans that the government has advanced (which will keep that recovery quite anemic and keep a huge discount store of stock for sale by issuers open and corporate spreads wide). Maybe the government ultimately makes some return on its equity investments and warrants too (yeah, right). Otherwise, we will see higher taxes. In any event, the resolution is likely to keep a lid on economic growth and stock prices for many, many years (think Japan).
While I know that my views are pessimistic, I don't believe that they are consensus at all, though increasingly many are arriving at similar conclusions. While I was extremely bearish in the summer of 2007, I succumbed to foolish optimism last May and stuck to it stubbornly even as we fell off the cliff late in the 3rd quarter, because this time wasn't different. Fool me once, shame on you. Fool me twice, shame on me.
As I stated in December, we can't both "save and spend" our way out of this economic crisis. The challenges will continue for quite some time and most likely intensify. So, as we redefine wealth in the context of a deleveraging global economy, I encourage you to consider the views of Henry David Thoreau:
A man is rich in proportion to the number of things he can afford to let alone.
Disclosure: None
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This article has 27 comments:
You hear a lot of talk about gub/ment scratching their heads, how can they force banks to lend? Not much talk about the other side of the equation, how can you force individuals and companies to borrow and/or spend? I don't are how much new money is printed, the market forces have stopped velocity in its tracks, and I don't see how that changes for a long time.
Your comment about gold does assume one thing, I believe, that relative to other fiat currencies the dollar holds its own. We could see worldwide deflation, and also see the dollar devalued. Wouldn't that be special?
On Jan 11 08:46 AM patio wrote:
> Two other comments. After 35 in sales and marketing, bottoms up forecasts
> are the real deal, tops down is guesswork.
> Your comment about gold does assume one thing, I believe, that relative
> to other fiat currencies the dollar holds its own. We could see worldwide
> deflation, and also see the dollar devalued. Wouldn't that be special?
These people as a group don't follow any philosophy other than, get all you can. They've made economic life very difficult for vast numbers of the lower strata with their policies which were supposedly market-based.
There's no end of blame throughout society which has voted the same miscreants in, and, look at teachers unions and the educational beaureacracy. Bad education here is not due to lack of funds.
While I fear any and all big government "solutions," I will put concern for the rich last.
Andrew Mellon's famous quote "Liquidate labor, liquidate stocks, ....” is frequently cited without its better continuation:
"It will purge the rottenness out of the system. High costs of living and high living will come down. People will work harder, live a more moral life. Values will be adjusted, and enterprising people will pick up the wrecks from less competent people”.
* Individuals need to reduce debt and increase savings (ultimately to 5-10% of annual income)
* Housing prices need to continue to realign to their historical relationship to incomes
* Corporations need to reduce debt
* Banks need to raise equity
* Retailers need to dramatically shrink their footprints as we are "over-stored"
* This means we probably need to see lots of companies "go away"
* State/local governments need to reduce debt and realign spending with lower incomes
This will take time to occur as it took many years for us to get to this point. Excellent article and IMO, should be heeded by all.
Thanks for outting this together.
What I want to take issue with is two references in your comment above:
1. ".... I'll vote for the biggest stick (our military)...." I've already made a comment on an earlier SA article today about the growing belligerance of a small minority of posts in the financial blogosphere. Whom, precisely, would you foresee hitting with this 'big stick' and what lasting benefit would it bring to the US economy?
2. "The Euro could actually be destroyed by this crisis if it persists for more than another year." One of the few things the USD has left going for it is that it remains (for the time being) the world's most significant fiat currency; certain strands of opinion in the US establishment therefore have an interest in ensuring that no other fiat currency challenges it, and although the EUR is in many ways a deeply flawed project which is unlikely to rival the USD any time soon it is increasingly common to see it being 'trashed' by US commentators. The problem with the EUR is that for political reasons it has grown to cover too many countries whose economic structures and fiscal policies have insufficient in common; more specifically, institutional (including labour force) rigidities make it very difficult to set a monetary course which is as appropriate to interests in the core of Germany and Benelux as to interests in, say, regional Greece. If when you say 'destroyed' you envisage certain countries dropping out of the EUR, then I would see this as unlikely, eminently difficult at a practical level, but possible; Italy is the most likely candidate. If instead, as I suspect, you foresee a reversion to national currencies across the entire eurozone then I have to say that you do not understand the significance of the single currency to the post-war European economic and political project; whilst nothing is impossible today, because of the vested interests that will fight to ensure it does not happen I would rate a disintegration of the EUR in the next few years about as likely as a balanced budget in the US.
The world may go to hell in a hand basket or it may not and for the record I agree with many of your points except for the depression conclusion. A better question is What can we do now to move ahead regardless of what happens?
It is my recommendation that those with some wealth begin to take a corporate approach to their finances. That is to create a balance sheet, income statement, budget and strategic plan.
If you will take these actions it will be easy to see how to improve and yes grow your wealth. In times like May your rosy outlook may be tempered and in January your depression conclusion tempered as well.
With a well thought out plan most people can move their wealth ahead.
That said I dont think most people understand how hard people in general have been hit in this recession and you do a good job of bringing that out. Let's estimate that all assets dropped in value by 20% in 2008. What was the impact on the person with a 50% debt level vs a 0% debt level?
The average household is roughly 50% debt and a 20% drop in assets implies a 40% drop in wealth for these people.
Thanks for your comments. I would like to share a conversation I had with my wife's uncle this morning. He relies upon me from time to time to share my views on economic and financial matters.
I told him that I expect unemployment could reach as high as 12%, but that his world is actually a better place. As he said, lean times aren't the end of the world. He lives well within his means. His wife's job is at risk, but his is secure. For the 88% who aren't unemployed, there will be challenges, but there are also opportunities.
In any event, your ideas are great. Maybe things aren't as bad as I now fear, but no one will be worse off for doing as you say and rationalize finances. The biggest part to me is seeing what you can do without, seeing where you can "trade down".
Do you really need to order that dessert at a restaurant? Do you really need all those extra channels on cable? All of us has some amount of excess in our lives, and we might find that diminishing the excess actually offers us benefits. Whether it is spending more time with our children, helping our neighbors in the community or enriching our spiritual lives, we can all appreciate that these opportunities will be there for us even if the economy falters.
On Jan 11 11:42 AM jstratt wrote:
> Excellent Analysis - but lets move forward
>
> The world may go to hell in a hand basket or it may not and for the
> record I agree with many of your points except for the depression
> conclusion. A better question is What can we do now to move ahead
> regardless of what happens?
>
> It is my recommendation that those with some wealth begin to take
> a corporate approach to their finances. That is to create a balance
> sheet, income statement, budget and strategic plan.
>
> If you will take these actions it will be easy to see how to improve
> and yes grow your wealth. In times like May your rosy outlook may
> be tempered and in January your depression conclusion tempered as
> well.
>
> With a well thought out plan most people can move their wealth ahead.
>
>
> That said I dont think most people understand how hard people in
> general have been hit in this recession and you do a good job of
> bringing that out. Let's estimate that all assets dropped in value
> by 20% in 2008. What was the impact on the person with a 50% debt
> level vs a 0% debt level?
>
> The average household is roughly 50% debt and a 20% drop in assets
> implies a 40% drop in wealth for these people.
On the "big stick", I didn't mean at all to imply that we will need to use it, but it is an awesome insurance policy for which many forget to credit our financially indebted nation. With that said, I would never rule out the potential for some sort of military need. I certainly can't predict that and pray that it never comes, but hard times around the world certainly don't reduce those wild-card possibilities. So, I mention it really in reference to those who believe that gold is some sort of refuge but don't give the U.S. dollar a similar recognition. In no way do I mean to imply that the U.S. will act as an aggressor, if that is what you are getting at.
On the Euro, I have to admit to not being as informed about the politics of each of these countries as I should be. I do recall it was a bitch to put together! Following my expectations of increased nationalism, I think that it is logical to question whether or not countries try to or succeed in disassociation. You obviously don't agree, and you may be correct. Certainly I don't see this happening unless things get a lot worse. In the bigger picture, there are only a handful of currencies that can serve as global fiat currencies. I would expect all of these to do better in times of global contraction relative to the balance of currencies in the world. My point, then, is that the dollar bashers are probably not correct. Maybe my expectation that the dollar actually is a potential leader is incorrect as well.
On Jan 11 11:28 AM OldLimey wrote:
> Mr. Brochstein: an exceptionally good article - many thanks. I'm
> inclined to think you might be a little overoptimistic on the inflation
> front, but at this point nobody can really know how this experiment-without-a-c...
> is going to work out. (Maybe Germany will be the control 'group'??)
>
>
> What I want to take issue with is two references in your comment
> above:
>
> 1. ".... I'll vote for the biggest stick (our military)...." I've
> already made a comment on an earlier SA article today about the growing
> belligerance of a small minority of posts in the financial blogosphere.
> Whom, precisely, would you foresee hitting with this 'big stick'
> and what lasting benefit would it bring to the US economy?
>
> 2. "The Euro could actually be destroyed by this crisis if it persists
> for more than another year." One of the few things the USD has left
> going for it is that it remains (for the time being) the world's
> most significant fiat currency; certain strands of opinion in the
> US establishment therefore have an interest in ensuring that no other
> fiat currency challenges it, and although the EUR is in many ways
> a deeply flawed project which is unlikely to rival the USD any time
> soon it is increasingly common to see it being 'trashed' by US commentators.
> The problem with the EUR is that for political reasons it has grown
> to cover too many countries whose economic structures and fiscal
> policies have insufficient in common; more specifically, institutional
> (including labour force) rigidities make it very difficult to set
> a monetary course which is as appropriate to interests in the core
> of Germany and Benelux as to interests in, say, regional Greece.
> If when you say 'destroyed' you envisage certain countries dropping
> out of the EUR, then I would see this as unlikely, eminently difficult
> at a practical level, but possible; Italy is the most likely candidate.
> If instead, as I suspect, you foresee a reversion to national currencies
> across the entire eurozone then I have to say that you do not understand
> the significance of the single currency to the post-war European
> economic and political project; whilst nothing is impossible today,
> because of the vested interests that will fight to ensure it does
> not happen I would rate a disintegration of the EUR in the next few
> years about as likely as a balanced budget in the US.
1) "...sustaining companies that aren't economically efficient" wouldn't be at all necessary if we hadn't thrown out the restrictions in effect since the 1930's that would have kept them from getting "too big to fail." Now they're even bigger.
2) As to our "defense protection," I assume you mean our war machine. I have no idea who we were defending ourselves against in Panama, or Iraq, or why we gave $1.1B to the gov of Colombia in the 80's when it was on the verge of signing a treaty with the FARC. If gringo oil interests weren't about to be negatively impacted by that treaty would Wash have parted with the bucks? And were it not for the oil interests disposessing the local farmers, would there even BE a FARC?
I have more to say, but I'm not sure what the point is, because the American people have no power whatever to change things. That could only happen in a democracy w/ a free press. Oh, yeah, might as well throw this into the pot before I go: When will we wise up & take a sledge hammer to the TV-networks/newspaper-... & create several thousand independent entities w/ multiple agendas & perspectives instead of five conglomerates that control all of the above (to say nothing of music & the mfg of TV's & myriad other electronic gadgets) & have been one of the two partners in the government/business complex since Reagan? Don't people recognize propaganda when they hear it 24/7?
Very predictable article re-hashing the conventional perspective. And you could have said it with about 90% fewer words.
Seamus O'Bannion.
prudentinvestor...than... for the Andrew Mellon quote...we miss his guidance..
the only inflation I see is cost of living.....food seems higher by the week...
Humans need to eat and have basic energy needs....so I'm not sold on oil
staying at $30 or fish, fruits, vegetables getting cheaper....
real estate, retail, financials, autos, manufacturing...years for a turn around...
Was this because it was for the SeekingAlpha audience or because you were in a rush due to other commitments?
I assume that anyone subscribing to your service would receive a better analysis both Graphically and Analytically.
Be It as it may. This weekends Barron's Round Table has a comment by Marc Faber regarding the USD:
"Some say the dollar will collapse this year, but collapse against what? The Euro? The Russian rubble? These currencies are even weaker."
He goes on to say (paraphrased) that in the very long run each individual will have to become his own central bank, which would mean the inclusion of physical commodities like platinum, gold and silver,
not through derivatives.
To me, the Key words are "in the very long run".
He has not changed his position on Precious Metals, he has only postponed the timeframe before their emergence as the Leaders of the future.
While you may say that you did not mean to imply that US would Hit anyone Militarily, my own perception is that since it has the "stick", the USD has a War premium reattached to it. One that was not there prior to Russia's invasion of Georgia, but is certainly there now.
IMHO
I do, though, have to consider my audience when I write, but I am not sure what you mean by the details not being honed. I publish my thoughts for free - no one in the world is paying me a penny directly to share the thoughts conveyed on Seeking Alpha, and my public blog has absolutely no revenue generation, so I hope that no one feels like they are getting "ripped off" by my lack of graphics! I tried to share a perspective to which I generally adhere but that I know is very tentative. The main variable that will impact the pace of the decline that none of us can measure is government policy (and external factors). It could help (unlikely) or hurt, but, in any event it could lead to all sorts of timing issues. What if, for instance, before the markets open one Sunday afternoon, the powers-that-be decide to throw this against the wall to see if it sticks and it does: All employers will get a tax refund for FICA payments in 2009 provided the employee remains on the payroll the entire year. Maybe that would change the pace of the decline, but not the ultimate destination (perhaps worse, actually).
Please don't confuse the fact that I recognize that I don't have all the answers with "not having enough time" to think these issues through.
On Jan 11 03:10 PM paultaut wrote:
> Alan: You assembled a rather lengthy Article and then admitted that
> the details were not finely honed.
>
> Was this because it was for the SeekingAlpha audience or because
> you were in a rush due to other commitments?
>
> I assume that anyone subscribing to your service would receive a
> better analysis both Graphically and Analytically.
>
> Be It as it may. This weekends Barron's Round Table has a comment
> by Marc Faber regarding the USD:
>
> "Some say the dollar will collapse this year, but collapse against
> what? The Euro? The Russian rubble? These currencies are even weaker."
>
>
> He goes on to say (paraphrased) that in the very long run each individual
> will have to become his own central bank, which would mean the inclusion
> of physical commodities like platinum, gold and silver,
>
> not through derivatives.
>
> To me, the Key words are "in the very long run".
>
> He has not changed his position on Precious Metals, he has only postponed
> the timeframe before their emergence as the Leaders of the future.
>
>
> While you may say that you did not mean to imply that US would Hit
> anyone Militarily, my own perception is that since it has the "stick",
> the USD has a War premium reattached to it. One that was not there
> prior to Russia's invasion of Georgia, but is certainly there now.
>
>
> IMHO
>
Good job of laying out a glide path scenario. The image I had the other day was: "selling the family jewels at the flea market, not Christie's." We are truly going to learn the meaning of illiquid assets. In the stagflation period, collectibles were one strategy. Now, no one collects. Museums make get a lot of donations, but what income will credits be off-setting?
On inflation, your thought: "The reality is that we are replacing the equity and debt of individuals, companies and soon local governments with federal debt. While ultimately this can end up as inflationary, it is not a foregone conclusion." offers some hope that re-inflation will not lead to hyper-inflation.
Needing to sell good stocks/assets/bets to cover bad investments/bets when there are few buyers is what Jim Cramer said was going on early in the drop of stocks. This increased "gambling for redemption" as Nouriel Rubini characterized it. We little folks were clueless to what was going on behind the scenes, as the leadership said things were fine, its a good time to buy. I wasn't aware of Seeking Alpha at the time, perhaps its readers had earlier information.
Cash is King and those that have it, will keep it. The haves - in your analysis - will have to rescue the have-nots, which I think is a good way to look at it. While this is a difficult situation, its not one of the life-ending earth disaster as featured on the, just finished, History Channel's Armageddon week.
How will we get through it? My faith is in the built-in, human community instinct for cooperation. It will do the job. There will have to be change, even repentance for false doctrines, such as the credit-debt ratio. That 50% of the average household's assets are debt is frightening rate and I hope it is incorrect.
What will our world be? Maybe the 1950's with the Internet and more TV stations. Kids night actually have to wait until Christmas to get the gift they wanted all year. There will be a lot more of working across boundaries, enabled by the communications networks now in place. That will need to become the intent of our communities: local, regional, state and multi-state, national and multi-national, and global. While we might want to retreat to a walled community, it is hard to meet all your needs within a finite geographic space.
Tom
You generalize on the "haves" and "have nots" without differentiating among the various sources of wealth and their societal values. For example, should we treat all wealth equally, among:
a) Corporate executives who climbed the ladder but contributed little or oversaw the failure of their enterprise (e.g.GM);
b) Entrepreneurs who worked 100-hour weeks to build a successful enterprise that provides employment and a useful product;
c) Movie and rock stars, ball players, and like entertainers who produce little of lasting value;
d) Unionized workers who extort incomes well above their competitive worth;
e) Savers who patiently acquire assets and avoid debt.
I believe that use of the tax code to equalize burden is unfair, inefficient, and misguided in terms of incentive or penalty. Better to make use of the market and shareholder votes to rein in excessive pay and reward true value. Heaven save us from a "surprise wealth tax" that panders to the class differentiation that underpins the incoming administration. Let's talk more about a flat income tax rate that requires every citizen to bear a proportionate share of the cost of government.
Making worthless enterprises "go away" in bankruptcy is a great leveler - in the tradition of Schumpeter's "creative destruction". Saving GM from this fate with a taxpayer bailout is an abomination, and I'm sure we'll see more of the same in the coming years as political motives trump economic.
In your first response to a comment, you wrote: "I'll vote for the biggest stick (our military)..." This doesn't need to imply belligerence on your part, or that of your compatriots - just a realistic view of the world around us. Of course the Great Depression didn't end until WW II, but I hope we won't be faced with the same resolution this time. The world is a scary place, though - think of the inevitable proliferation of lethal missiles and the economic catastrophe if the Strait of Hormuz were closed. Expenditures on missile defense and an invincible Navy seem more than warranted. Remember, too, that defense spawned the signature technologies of our time: nuclear power, the computer, and the internet (originally ARPAnet).
GM isn't being bailed out, it is being de facto Chapter 11ed. I wrote upon this subject prior to the deal being announced (check my author page and click the "articles" link) and desrcibed how this is the best solution. It is very sad that the market can't rationally handle the restructuring without government intervention (there isn't enough debtor in possession financing available), but, make no mistake, this is a stop-gap measure aimed not at revitalizing the company as it is but rather protecting its supply chain and other stakeholders from complete chaos.
Finally, thanks for seeing and reinforcing my view. I hope to God we don't break down and destroy all of the progress that we have enjoyed in terms of global cooperation and a relaxation of tensions with some former opponents (Russia), but this is a real risk in times of extreme economic challenges.
Your point I think supports the idea that there will be excess supply at every economic level, not just amongst the wealthy. This is not a haves versus have nots as much as it is a liquids versus illiquids market, as you suggest. The politicians think the way to solve the problem is to take from the liquid and give to the illiquid, but I see this as counterproductive to recovery. If prudent liquid groups cannot gain traction, how can we recover?
Thanks again for an unusually stimulating post.
Tom D
Thanks for your kind words; you stated that well. I have tried to describe a situation that you probably did more eloquently. At different strata, there are different levels of liquidity. The main point I was trying to make is that there could be very extreme pressure on the higher end, which is typically immune from situations like this (hits to income and hits to wealth simultaneously), especially the ones who have weak balance sheets. It's not as simple as Jed Clampett relieving Donald Trump of his burden at some price. This will take a long time to play out and probably won't be as simplistic as "bankrupt the insolvent" or "soak the liquid" but rather a give and take as the entire economy adjusts to a regime of more savings and less borrowing across all aspects of society.
On Jan 11 10:27 PM deuxsous wrote:
> Thanks for a good insight. I live in a very wealthy area but can
> see so clearly the chasm between the spenders and savers even amongst
> this privileged group.
>
> Your point I think supports the idea that there will be excess supply
> at every economic level, not just amongst the wealthy. This is not
> a haves versus have nots as much as it is a liquids versus illiquids
> market, as you suggest. The politicians think the way to solve the
> problem is to take from the liquid and give to the illiquid, but
> I see this as counterproductive to recovery. If prudent liquid groups
> cannot gain traction, how can we recover?
>
> Thanks again for an unusually stimulating post.
>
> Tom D
On Jan 11 09:02 AM Leftfield wrote:
> A good description of our situation. But, trickle-down="str... to
> the sewer?" What are the unaccountable, secret TARP and the $trillion+
> the Treasury and Fed have lavished on the connected so far? These
> rich have apparently bought and paid for a press that long touted
> the societal virtues of rewarding achievement. Theirs has been to
> leverage the use of o.p.m. to previously unreached levels and position
> themselves at the top of this food chain too large to fail, too connected
> to forfeit even bonuses and parachutes.
>
> These people as a group don't follow any philosophy other than, get
> all you can. They've made economic life very difficult for vast numbers
> of the lower strata with their policies which were supposedly market-based.
>
>
> There's no end of blame throughout society which has voted the same
> miscreants in, and, look at teachers unions and the educational beaureacracy.
> Bad education here is not due to lack of funds.
>
> While I fear any and all big government "solutions," I will put concern
> for the rich last.
The Politics of each of the countries within the EU is vital to the value of the Euro on a short, intermediate and long term basis. Political outlooks for their economies united them in the first place.
My contention was that you admitted that:
A. you did not know
B. you should have known
Which led me to believe that the analysis wasn't complete, You are talking about past, present and future US politics and economics but applying them to the Globe without taking into account the Political nature and, therefore future economic venues that the other major industrialized nations might follow.
I wholeheartedly agree with the deflationary aspects of the current situation. The deleveraging process will continue and the economy will get much worse here in the USA.
But I totally disagree with the time frame. And who else will suffer as we go down the tubes.
History may repeat but it does not do so in the exact same way. My contention is that your Chart applies only to the USA and not the entire world.
All of your conjectures as to what could occur may have meaning to what is occuring in the USA, but I do not know how you could possibly forecast the same on a Global Basis.
One of the Biggest differences between the past and now is the reaction time to the unfolding events. What occurred in the 1930s will not occur now because of the ease with which Global events are communicated and the speed with which countermeasures are applied.
In terms of GDP the recession of 74-75 may have exceeded that of 81-82, but the Unemployment Percent in 81-82 was the largest since the Great Depression and approximately equaled the total amount unemployed during the GD, 12%. That recession does not even register as a Blip in your chart.
The US is still a Superpower Militarily. But it is not an economic superpower now, nor has it been for years.
You expect it to play a big role in the Global Economic sense, I don't.
The US wants the Chinese to come to its rescue.
While I believe that the chart says a lot about what is going on here and how it will play out, I didn't mean to imply that it is the driving force behind the economic. The even larger decline in stocks last year in Japan and in some European countries than ours says a lot to me about reality. While the government balance sheets might be better in most of Europe, my observations over the years have been that the same principles that have led our companies to layer on debt to repurchase stock or make acquisitions has consumed the Europeans as well. The UK housing crisis parallels ours - how strange.
As far as making a global statement, again, wealth is being destroyed at rates similar to the United States across the developed world. Growth is slowing as well. The world is much more connected these days in terms of information and capital. It is the very fact that the entire global economy is struggling that reinforces my pessimistic view.
As I said, policy responses by the government will definitely impact the path that you and I agree upon domestically, but I don't expect them to all be favorable (many will actually hurt in the long run). I would never argue as simplistic a model as this will be like the 30s. I actually believe that the huge plunge and continuing weakness or decline won't bring nearly the devestation that GD brought, but maybe I am too hopeful.
Finally, I believe that you delude yourself when you suggest that the U.S is no longer a superpower economically. While China has certainly been a rising star, it has been the driver of the getaway car for the U.S. Consumer. Let's see how that plays out. Their stock market seems to say not too well. In any event, despite their ascendancy, their impact on the global economy (except maybe in terms of pollution) remains lower than ours.
On Jan 12 03:09 AM paultaut wrote:
> Alan: this was your response to a comment... "On the Euro, I have
> to admit to not being as informed on the politics of each of these
> countries as I should be."
>
> The Politics of each of the countries within the EU is vital to the
> value of the Euro on a short, intermediate and long term basis. Political
> outlooks for their economies united them in the first place.
>
> My contention was that you admitted that:
> A. you did not know
> B. you should have known
>
> Which led me to believe that the analysis wasn't complete, You are
> talking about past, present and future US politics and economics
> but applying them to the Globe without taking into account the Political
> nature and, therefore future economic venues that the other major
> industrialized nations might follow.
>
> I wholeheartedly agree with the deflationary aspects of the current
> situation. The deleveraging process will continue and the economy
> will get much worse here in the USA.
>
> But I totally disagree with the time frame. And who else will suffer
> as we go down the tubes.
>
> History may repeat but it does not do so in the exact same way. My
> contention is that your Chart applies only to the USA and not the
> entire world.
>
> All of your conjectures as to what could occur may have meaning to
> what is occuring in the USA, but I do not know how you could possibly
> forecast the same on a Global Basis.
>
> One of the Biggest differences between the past and now is the reaction
> time to the unfolding events. What occurred in the 1930s will not
> occur now because of the ease with which Global events are communicated
> and the speed with which countermeasures are applied.
>
> In terms of GDP the recession of 74-75 may have exceeded that of
> 81-82, but the Unemployment Percent in 81-82 was the largest since
> the Great Depression and approximately equaled the total amount unemployed
> during the GD, 12%. That recession does not even register as a Blip
> in your chart.
>
> The US is still a Superpower Militarily. But it is not an economic
> superpower now, nor has it been for years.
>
> You expect it to play a big role in the Global Economic sense, I
> don't.
>
> The US wants the Chinese to come to its rescue.
>
>
>
> They've made economic life very difficult for vast
> numbers of the lower strata with their policies which were supposedly
> market-based.
>
> There's no end of blame throughout society which has voted the same
> miscreants in, and, look at teachers unions and the educational beaureacracy.
> Bad education here is not due to lack of funds.
Sounds like a bunch of half-baked liberal BS if you ask me. I'll tell you who has made life difficult for vast numbers of the lower strata: the lower strata. There are dozens of other reasons besides "the greedy rich" why the low and middle class in America are hurting. In fact, the popular notion of the greedy rich is mostly a fantasy perpetuated by misinformation about the top 5-10% of this country.
As far as the educational system... we will continue to piss hundreds of billions down the drain every year, each ideological side blaming the other for its failure. Both sides don't realize or don't want to recognize that the very concept of a "public" education system is doomed to failure. The educational prowess of Japanese children is a well known fact. Many don't realize that their public education system is statistically worse than ours at educating their pupils. Japanese juku (cram) schools are the reason that Japanese 10th graders share a lot in common with our college sophomores in terms of expectations, performance, and course work. Public education is good at one thing... social engineering. Ask the Nazis and the Bolsheviks.
On the Economic front, the USA Used to comprise about 40% of the Worlds GDP, now it is about 20%.
The US Economy is declining rapidly in its impact on the world's economies. The US imposition of its Financial GAAP standards on foreign companies has become anathema. The US was decoupling economically from the rest of the World through its "My way or the Highway" policies. So it managed to derail economic growth through the Financial system. We were the leaders in Financial matters, we are now the known as the perpetrators of fraud Globally.
Currently, all we have going for us is our military and the Promise of Change that Obama brings. And, so far the US and Obama are receiving the benefits of that Promise.
My guestimate is that the Honeymoon will be over by the middle of April. What happens thereafter is moot.