The American Economy Is Spent

Okay, after Monday's market drop many may be a bit more than a dollar short, but my point is that this post is a day late. I promised a follow-up piece over the weekend and it never materialized. My apologies.

Any hoot, back to the chase. Now the market over the past week has been down more than up, Monday somewhat significantly so. Bloomberg blamed it on the World Bank revising its forecasts for this year and next to be more pessimistic. I scratched my head reading this, thinking I had already read that tidbit of information some time ago. Turns out, I was right.

So why is Bloomberg blaming Monday's drop on this week-and-a-half old news? Guess they have to blame it on something. I blame it on people waking up to reality.

Missing TARP Dividends - Not a Good Sign
Some banks seem to be failing to make their TARP dividend payments to you and me. Now this could be due to various factors because the TARP agreement allows them to miss six before being in default. It could be they have better ways to make money from the money, they have better uses for the money or, maybe, just maybe, they do not have the extra cash they need to pay the dividend and still make ends meet. You decide.

Retail Woes
I mentioned over the weekend some reasons for retail to suck wind for a while. Well, here is yet another reason from Calculated Risk. They note some pretty solid evidence that the housing boom created a false wealth effect and led to consumers spending money they did not have. Now that the opposite is in place on housing, the opposite is in effect on consumer spending. Go figure.

Calculated Risk has another rather entertaining piece on what the brains at Harvard were saying about housing in 2005. Apparently everything was coming up roses and the risks were quite minimal. Glad I am not smart enough to go there.

Now I am returning to my old drum beat; we have been living above our heads off massive debt and this has helped support and stimulate a world economy. We are now in big trouble because:

• we still have record levels of debt to pay down;
  

• we have no economic model in place in the U.S. to provide the jobs to pay off this debt (our GDP is 30% based on a financial sector, which was built on a house of derivative cards) and fully two thirds of our GDP is based on consumer spending, which is a bit circular in terms of helping to support further consumer spending;
• we have an aging population of baby boomers that just lost 40-50% of their retirement and significant home value but they are going to be retiring beginning in a year or two, with increasing percentages over the next 10-15 years;
• our government cannot fund its upcoming Medicare or Social Security obligations, much less fund the current multi-trillion dollar bailout - which in time could/should lead to a severe weakening of the dollar; and
• we have more than twice the retail footage per person here than in nearly any other country and there is no way for us to support this much retail.

And at least one Nobel Prize winning economist says it will take us a while to regain our lost wealth. He is not saying this will be a lost decade. He is saying it will be a lost decade and a half. Tell that to those baby boomers. Wait a second, I'm a baby boomer!

Spent

I do not like to say it but we Americans are, in a word, spent. Our savings are spent, our retirement is spent, our future - at least for the short term - is spent. Neither we nor the world should be looking to us to spend our way out of this mess. We did so the past couple of recessions but now we are spent. We do not have the means to fund our way out of this recession despite our government's desire that we do so . And we shouldn't in any event. Spending and creating new bubbles got us into this mess. So what might happen here?

There are a whole lot of possibilities, but one is that some other country takes up the spending mantle. I do not see any easy candidates as the world is in a mess, but we Americans are spent and someone else has to take our place, perhaps several other countries have to do so. Between that and a dollar about to become toast, our products - what few exist - might become competitive, even cheap, so - ironically - we may return to a country based on exporting our stuff elsewhere. Okay, I doubt it. We are too spoiled for our children to return to blue collar jobs. Our children are too spoiled from our spending ways to live within the means of a blue collar wage. They will not be able to afford all the big screen TVs, cars, computers, cell phones and other niceties we have made them accustomed to. We will see. I don't think they will have a lot of choice. I don't see a lot of high-paying financial sector jobs in our future.

Yet let me mention this. At the height of U.S. manufacturing and exporting several decades ago, before the jobs floated elsewhere, Americans were making more - adjusted for inflation - than they are today. Despite us shifting more of our economy into services and financial, we made less more recently. I do not have the answer here but I suspect we had a lot of people working retail selling to that two thirds of the GDP tied to retail and retail does not pay a lot.

Personally, I worked a number of factory jobs in Indiana growing up during summers while in college and I enjoyed it. There is a certain satisfaction from building something. I was not good at it, but I enjoyed it. And it paid the most money I made for that period and for many years into my professional career. Many of my high school classmates were making more at factories than I did as a lawyer out of law school. When you consider my seven years in college and law school and the costs of same, it undoubtedly took me 12-15 years after high school just to break even with those who went into factory work straight out of high school. So factory jobs are not a terrible place. I am not thinking we are going there just yet, but we should become more competitive in the years to come, so it could become part of the dynamic.

So where does this lead us - I have no idea. Truth is, as you should know by now, no one does. The next few decades for this country are, in my opinion, going to be something totally different than what we have grown up with the past few. My fear is it will be a rough time for all.

The China Syndrome

I read an interesting piece last week and for the life of me cannot find it. It noted that while Chinese officials are bashing the dollar a bit and calling for a new reserve currency, this seems to be a distraction from what they are really doing. They are quietly reducing their purchases of Treasuries (and domestic demand is so far filling the void) and they are buying commodities. This is significant for a few reasons. First, it shows that our biggest foreign buyer of Treasuries is now not so hot on doing so. With dollar devaluation likely, China is not going to hang around for it. Second, they do not need the commodities now but commodities are a nice place for China to put its reserve dollars for future keeping. After all, the dollar can get toasted and Treasury reserves follow (and why buy Treasuries when the U.S. is not buying your products much), so better to use the money to buy copper, zinc and the like. The commodities are in limited supply and eventually everyone will need them. So China has been putting increasing dollars into purchasing ore companies and the like. I think it is a brilliant move on their part, yet you need to realize that this is part of what has been driving up commodities lately. It is not like China needs these now, it just is buying while the price is low and while the old investments make no sense, so the rebound in commodities seems to be a false indicator.

Disclosures: None.

Comments

[Dave Wrixon:]

"Glad I am not smart enough to go there."

They should bulldoze the joint.

Jun 23 05:27 AM

[peterthepai...:]

big trouble in little America...

but how can the tail wag the dog?

yes...the future is not what it was...

Jun 23 06:49 AM

[doubleguns:]

Twice the retail as the rest of the world.

Demolition should be a growing industry over the next few years.

Jun 23 08:29 AM

[yellowhoard:]

In ten years China will be the largest owner of natural resources in the world.

And, they will have a military second to none.

This does not bode well for our children.

Jun 23 08:43 AM

[User 357705:]

Time to start making nice with them and the rest of the planet. Rather than using your military to take what you won't pay a fair price for and your CIA for regime change when its too dangerous to use your military US needs to learn from the Chinese who are making deals, doing business and friends world wide. Nah, wishful thinking.


On Jun 23 08:43 AM yellowhoard wrote:

> In ten years China will be the largest owner of natural resources
> in the world.
>
> And, they will have a military second to none.
>
> This does not bode well for our children.

Jun 23 08:56 AM

[enigmaman:]

Good read, makes sense, but thats the problem,it makes to much sense. Its that logical thinking that has kept me very cautious and not participating as much as I could have in this 3 month run up, my thinking was based on the Wall Street belief that" The stock market doesnt like uncertanty" something it has had plenty of the past six months, still the market rose I suppose based on the belief " The Stock market climbs a wall of worry" so I guess I chose the wrong sentiment to follow, I didnt get the memo.

Jun 23 09:14 AM

[johnbee:]

huge money has been injected into the system and more can be if it doesn't work out until there is enough to get it all going again just as in every time the banks squander people's money twice a decade except people have short memories. Money doesn't disappear unless you invested with Madoff and his like as it went into their pockets and not yours, but its still around to invest and it keeps coming into pension funds every day for investment from the millions who are still in work and want a home for their savings. Sure the young will need adjust. They will do as they have before in war time or any bad times as there is no alternative.

Jun 23 09:14 AM

[Roger Knights:]

"commodities are a nice place for China to put its reserve dollars for future keeping. After all, the dollar can get toasted and Treasury reserves follow (and why buy Treasuries when the U.S. is not buying your products much), so better to use the money to buy copper, zinc and the like."

"The like" hasn't yet included comparably significant amounts of gold, during the past year, but it might, once China's warehouses get filled up with everything else.

Jun 23 09:20 AM

[CautiousInv...:]

I think the market was looking for a reason to correct and it found it in the World Bank economic forecast.

Today, with the futures holding steady, the problems posed by the report have either gone away or investors believe yesterday's sell-off brought valuations into line.

I don't believe either to be true and the fact that the US can no longer be the engine of global growth will haunt this recovery for some time.

Jun 23 09:33 AM

[notsosmart:]

ok author.go back to making something instead of word production. set a good example for your family & friends.other than for food,drugs & car services,most folks have enough stuff so that they dont have to visit a store for months. will the dumb-dumbs learn? i doubt it.how much chinese "junk" does one need?

Jun 23 09:54 AM

[a. palmer jr.:]

Something I don't understand about the stock market....The market hears of bad news on Sunday, so on Monday the market takes a huge dive, but on Tuesday the market has a huge upswing. My question is this: Did they forget about the bad news that quickly?
As far as our youth having hand-held computers they call cell phones; they'll get over not having them if it comes down to having a cell phone or having a place to stay and something to eat!

Jun 23 10:09 AM

[Ferdinand E...:]

If the American people don't elect people like George W. or Sarah Palin, the next few decades could turn out fine. The truth is that the great American voter is the main man in the international macroeconomy. I hope that my repeated skepticism about the two geniuses mentioned above does not engender any bad feeling. In a comment yesterday I was graded -33 - minus thirty-three - by my peers, but that number didn't worry me at all. The last two numbers in my army serial number were 33, and that number has always mean good things for yours truly.

Jun 23 11:02 AM

[User 357705:]

Don't worry about the -33. Its so 7th grade if you get my meaning.


On Jun 23 11:02 AM Ferdinand E. Banks wrote:

> If the American people don't elect people like George W. or Sarah
> Palin, the next few decades could turn out fine. The truth is that
> the great American voter is the main man in the international macroeconomy.
> I hope that my repeated skepticism about the two geniuses mentioned
> above does not engender any bad feeling. In a comment yesterday I
> was graded -33 - minus thirty-three - by my peers, but that number
> didn't worry me at all. The last two numbers in my army serial number
> were 33, and that number has always mean good things for yours truly.

Jun 23 11:07 AM

[Trane250:]

We rested on our laurels, bought into nutty ideas like the "new economy" and "supply side" economics, borrowed and spent like there was no tomorrow and voted for politicians who promised the most goodies. In short, we lost our way.

Jun 23 11:18 AM

[MudEngineer:]

Complaining about Republicans who spent too much money is fine. I agree with that accessment! But, how do you think that electing a Democrat who is now spending at five times their rate is a solution for the future. God Help Us when the Dollar goes to worthless! Oh, by the way, Sarah Palin has more common sense in her pinky finger than Obama has in his entire body and his entire cabinet.


On Jun 23 11:02 AM Ferdinand E. Banks wrote:

> If the American people don't elect people like George W. or Sarah
> Palin, the next few decades could turn out fine. The truth is that
> the great American voter is the main man in the international macroeconomy.
> I hope that my repeated skepticism about the two geniuses mentioned
> above does not engender any bad feeling. In a comment yesterday I
> was graded -33 - minus thirty-three - by my peers, but that number
> didn't worry me at all. The last two numbers in my army serial number
> were 33, and that number has always mean good things for yours truly.

Jun 23 12:04 PM

[snagglesnarf:]

The World Bank estimates are a joke. We are halfway through the year and they revise their estimates. I suppose they'll revise them again on December 31st and then we can marvel at how right they were.

Jun 23 12:24 PM

[WS1835:]

Perhaps you may want to consider the possibility that we are all well beyond "7th grade", and the -33 grading is a reflection on the poor quality of your economic education and comments. In case you hadn't noticed, Palin never got elected and G.W. was not involved with the latest federal budget. It was Obama, Reid, and Pelosi who championed deficit spending at levels that blow G.W.'s budget numbers out of the water. And all of this comes on top of decades of irresponsible spending by both political parties.

In point of fact, the spending and business nationalization being proposed by the current administration is simply unprecedented in American history. However, I do not perceive that as the specific fault of a political party (i.e., the Democrats). Instead, the issue in my mind is a toxic combination of the general public's entitlement mentality and Washington DC's "tax and spend" habits. That combination is recipe for disaster.


On Jun 23 11:07 AM User 357705 wrote:

> Don't worry about the -33. Its so 7th grade if you get my meaning.
>

Jun 23 12:49 PM

[User 357705:]

"There is no more fundamental axiom of American freedom than the familiar statement: In a free country we punish men for crimes they commit but never for the opinions they have." HARRY S. TRUMAN

Jun 23 01:01 PM

[user396040:]

I think we have to face the possibility that the "unusual" or "anomalous" period in American history was the 1950's-1970's when factory workers made more money than lawyers, and that we have returned to a norm of income distribution, etc, more in line with the pre-WW 2 experience of the country. I am not completely happy about this but I think there is a fair amount of evidence to support it. High factory worker wages are very hard to sustain in a world with free trade. Of course, if we run persistent deficits, the dollar should decline against other currencies and US workers should be able to compete on more equal terms. The problem today is that the Chinese currency is grossly undervalued against the dollar. I believe that the Chinese have been trying to "talk down the dollar" because they are stuck with a dollar peg which has driven their currency up and has made Chinese exports more expensive in Canada, Mexico, Europe, etc. I don't think we can return to the 1950's - I think we have to create a new golden era on our own. My guess is that it will be the product, not of politicians or bureaucrats, but of entrepreneurs who develop new energy strategies and a continuing roll out of new information and communication technologies as well as our continuing dominance of the entertainment industry(for some crazy reason, the rest of the world finds it fun to watch us),

Jun 23 01:49 PM

[user396040:]

I am not making any moral judgment on which group "should" make more - however, over any period of time, if factory workers make more than lawyers then the only group that will elect to attend college and law school and pay seven years of tuition for the privilege will be a group of severely mathematically challenged individuals. If these are the only lawyers, we will soon have a legal system which strangles the economy. I am not going to comment on bankers except to say that they are a necessary part of any capitalist system. I am not happy at the way things have developed. In the 1950's when I was growing up, a factory worker could support a family of five with a stay at home mom, send the kids to a good state university, buy a second home and retire comfortably. I wish and hope that we can return to that situation but I am not optimistic. We have taken certain public policy steps which have probably made the income distribution worse ( the tax system used to be much more progressive, social security taxes are regressive) but that is only part of the story. In a world with free trade, you cannot support wages here that are much, much higher than in countries which trade with us. Ironically, the legal profession is now subject to competition with ourtsourcing to India of legal research and document search work.


On Jun 23 02:15 PM User 357705 wrote:

> Factory workers should make more than lawyers and the even more detested
> banksters! Duh! The factory worker actually makes something. The
> lawyer and bankster are parasites!

Jun 23 03:14 PM

[Great Swami:]

this article goes to the core of our problems...i.e. we are bankrupt.economicall, politically, and in character. We are eating our young....most of those commenting seem to have missed this point

Jun 23 03:27 PM

[User 357705:]

You do realize you're going to get flamed for this comment don't you? Not from me mind you. No, for the temerity to speak truth to ideologues.


On Jun 23 03:27 PM Great Swami wrote:

> this article goes to the core of our problems...i.e. we are bankrupt.economicall,
> politically, and in character. We are eating our young....most of
> those commenting seem to have missed this point

Jun 23 03:32 PM

[Great Swami:]

its amazing to me what tunnel vision we have collectively. The Pols of all stripes have been serving up Kool Aid for 50 years and we keep drinking it....I'm trully afraid we are in our end days....


On Jun 23 03:32 PM User 357705 wrote:

> You do realize you're going to get flamed for this comment don't
> you? Not from me mind you. No, for the temerity to speak truth to
> ideologues.

Jun 23 04:01 PM

[Paul in Texas:]

On Jun 23 11:02 AM Ferdinand E. Banks wrote:

> If the American people don't elect people like George W. or Sarah
> Palin, the next few decades could turn out fine. The truth is that
> the great American voter is the main man in the international macroeconomy.
> I hope that my repeated skepticism about the two geniuses mentioned
> above does not engender any bad feeling. In a comment yesterday I
> was graded -33 - minus thirty-three - by my peers, but that number
> didn't worry me at all. The last two numbers in my army serial number
> were 33, and that number has always mean good things for yours truly.

I wish you had also included such notables as Jimmy Carter, Bush 1, Bill Clinton and B. Obama in your list, as all have promoted this financial disaster.

Jun 23 04:36 PM

[notsosmart:]

its the dumb-dumbs in the good ole usa that keep electing the same fools that have to take some responsibility for this disaster.like it or not times are a changing.

Jun 23 06:08 PM

[User 357705:]

You might want to be careful. SA staff are wont to remove comments of this nature. They hate us for our freedoms though don't they!


On Jun 23 06:08 PM notsosmart wrote:

> its the dumb-dumbs in the good ole usa that keep electing the same
> fools that have to take some responsibility for this disaster.like
> it or not times are a changing.

Jun 23 06:32 PM

[Frohickey:]

Yeah. But Sarah Palin was also stupid enough to pay her taxes on time, instead of getting a 'loan' from the federal government... at least until they were nominated for a federal post by Obama.


On Jun 23 12:04 PM MudEngineer wrote:

> Complaining about Republicans who spent too much money is fine. I
> agree with that accessment! But, how do you think that electing a
> Democrat who is now spending at five times their rate is a solution
> for the future. God Help Us when the Dollar goes to worthless! Oh,
> by the way, Sarah Palin has more common sense in her pinky finger
> than Obama has in his entire body and his entire cabinet.

Jun 23 08:37 PM

[mlonz:]

I am shocked that nobody commented on what I consider to be the most important line in your article:

"When you consider my seven years in college and law school and the costs of same, it undoubtedly took me 12-15 years after high school just to break even with those who went into factory work straight out of high school."

The benefits of a 4 year undergrad education are illusory. Couple this with the fact that the debt accumulated for achieving this can never be discharged via bankruptcy, and we have a big problem.

BIG PROBLEM

Jun 23 11:00 PM

[Boxed Merlot:]

On Jun 23 08:43 AM yellowhoard wrote:
In ten years China will be the largest owner of natural resources
in the world.
And, they will have a military second to none.
This does not bode well for our children.

On Jun 23 08:56 AM User 357705 Replied:
Time to start making nice with them and the rest of the planet. Rather than using your military to take what you won't pay a fair price for and your CIA for regime change when its too dangerous to use your military US needs to learn from the Chinese who are making deals, doing business and friends world wide. Nah, wishful thinking.


I used to laugh about the financing of our housing market through debt securities paid for by Chinese investments in US treasuries. I mean, what are they going to do if we decide to quit paying our mortgage, repossess our home and take it back to China? (Now there's a commodity for ya.)
We’re a Republic, a nation where the rule of law Rules, and we tend to honor the commitments we make, so they were content to invest in our country. Funny how much of that money we borrowed however didn’t actually go to mortgages or even our military but flew out of our nation to nations around the globe in (evidently futile) attempts to demonstrate our friendship and assuage our guilt for being so “prosperous”.
Now as it turns out, we’re being told and led to believe we’ve not been prosperous after all. We just had good credit. In fact, if not for the benevolence of China, we couldn’t have supported our evil military, CIA or attempts to buy favor from poor nations with gratuitous gifts to their ruling elites. China should’ve known that’s what we’d be spending their money on. Or maybe they did, and they were just using us as their schill. Ah, the plot thickens.
Yes, I too hope we learn from this debacle.

Jun 23 11:02 PM

[hanumanhojo:]

Or you can view the opposite. That during the romanticized "golden age" of the US factory worker, those factory workers were actually paid way too much.

Consider the situation at the time. 1) the rest of the world was in shambles thanks to WWII and the Iron Curtain so little foreign competition 2) racist unions prevented US blacks and Latinos from getting factory jobs thus driving wages up by limiting workforce supply 3) women also haven't enter the workforce in bulk again capping the labor supply 4) China hadn't opened itself up to the world yet and neither had India; both were starving from ill advised social engineering experiments gone haywire 5) Japan was only beginning to get its bearing on the world manufacturing stage and so was Taiwan; both had the rep of producing "cheap junk" at the time.


On Jun 23 11:00 PM mlonz wrote:

> I am shocked that nobody commented on what I consider to be the most
> important line in your article:
>
> "When you consider my seven years in college and law school and the
> costs of same, it undoubtedly took me 12-15 years after high school
> just to break even with those who went into factory work straight
> out of high school."
>
> The benefits of a 4 year undergrad education are illusory. Couple
> this with the fact that the debt accumulated for achieving this can
> never be discharged via bankruptcy, and we have a big problem.<br/>
>
> BIG PROBLEM

Jun 24 12:42 AM

[User 357705:]

I spent thirty-three years in the marines, most of my time being a high-class muscle man for big business, for Wall Street and the bankers. In short, I was a racketeer for capitalism.
~ General Smedley Butler, Marine


On Jun 23 11:02 PM Boxed Merlot wrote:

> On Jun 23 08:43 AM yellowhoard wrote:
> In ten years China will be the largest owner of natural resources
>
> in the world.
> And, they will have a military second to none.
> This does not bode well for our children.
>
> On Jun 23 08:56 AM User 357705 Replied:
> Time to start making nice with them and the rest of the planet. Rather
> than using your military to take what you won't pay a fair price
> for and your CIA for regime change when its too dangerous to use
> your military US needs to learn from the Chinese who are making deals,
> doing business and friends world wide. Nah, wishful thinking.
>
>
> I used to laugh about the financing of our housing market through
> debt securities paid for by Chinese investments in US treasuries.
> I mean, what are they going to do if we decide to quit paying our
> mortgage, repossess our home and take it back to China? (Now there's
> a commodity for ya.)
> We’re a Republic, a nation where the rule of law Rules, and we tend
> to honor the commitments we make, so they were content to invest
> in our country. Funny how much of that money we borrowed however
> didn’t actually go to mortgages or even our military but flew out
> of our nation to nations around the globe in (evidently futile) attempts
> to demonstrate our friendship and assuage our guilt for being so
> “prosperous”.
> Now as it turns out, we’re being told and led to believe we’ve not
> been prosperous after all. We just had good credit. In fact, if
> not for the benevolence of China, we couldn’t have supported our
> evil military, CIA or attempts to buy favor from poor nations with
> gratuitous gifts to their ruling elites. China should’ve known that’s
> what we’d be spending their money on. Or maybe they did, and they
> were just using us as their schill. Ah, the plot thickens.
> Yes, I too hope we learn from this debacle.

Jun 24 06:09 AM