In the midst of an election year an independent guy like me is afforded the opportunity to just sit back and savor the moment as the arsenal of disparaging facts and selective talking points are used by both sides to gain the advantage. The beauty of the U.S. political landscape is that independents and moderates from both parties - the silent majority - always manage to throw a wrench into the system to stop any runaway agenda that starts to give indigestion.
Yet, the most fascinating aspect of any presidential campaign is that the candidates present themselves as economic leaders when in fact they're nothing more than surfers, riding economic waves wherever they take them. And the problem that all of them face is that citizens expect solutions because that is what they've been sold, and when failure sets in, they're voted out and the game starts anew.
As we know, the American consumer is an avid user of credit instruments and has increasingly relied on debt for lifestyle support, and although banks and Wall Street underestimated risk, so did borrowers. I am never one to defend Wall Street, but nobody mentions the incompetence of the buyers that disbursed good money for toxic assets without due diligence. Ultimately if one cannot understand an investment, please don't buy it, and, yes, it takes two to tango.
The labor force participation rate has, without a doubt, sweetened the current unemployment numbers, and I demonstrated the effect in the article "Why U.S. Unemployment Rate Is 12.1%," although some even went as far as excusing the reduced labor participation on baby-boomer retirement.
But we need to capture the data for the last two decades to get a better view. The chart below shows labor force participation and consumer credit, and I chose these two data series because they go hand in hand: Jobs enable the ability to acquire and service debt, or so goes the logic.
What we see is that the labor participation rate has been in decline since the dot.com era, but the expansion of consumer credit continued unabated until the house of cards came crashing down. The fact that we do have an aging population hardly accounts for the decline in the labor participation rate dating back to 2000, when the oldest boomer was 54 years old.
I used "revolving credit" as a separate data series because "total consumer credit" implies that total consumer credit has rebounded recently, yet it includes student loans, and that credit type alone has mushroomed over 300% between the end of 2007 and 2011 - or from $98.4 billion to $425.1 billion. In addition, another $28 billion in student loans was added to the total in January of 2012 alone, and I doubt seniors are going back to college. Without student loans and between the end of the 2007 and 2011, "total consumer credit" declined by $34 billion. Mortgages are not included, and we know that they have a story all of their own.
Regardless of the reason, it is clear that less and less Americans had a job relative to the increasing population, while it appears that debt compensated for the income shortfall, in a general sense, that is. But I believe that a major contributing factor was the result of unintended consequences created by manufacturing when it relocated overseas in search of cheaper labor. Corporations forgot that the major consumer base was still right here at home, or the proverbial "biting the hand that feeds you." Ultimately those working for $10 a day could not afford their wares, while the only resource to keep up with the Joneses at home was the almighty credit card. Eventually the law of diminishing returns catches up with every myopic economic decision.
Based on data from the World Bank, U.S. exports account for 13% of GDP, while the four largest eurozone exporters depend far more on the foreign consumer than the U.S., and they are Germany (47%), France (25%), Italy (27%), and The Netherlands (78%). The ratio of exports to GDP in the United Kingdom is 29% and China registers 30%.
The American trade deficit data shown in the chart above is a virtual replica of the U.S. labor participation rate, and while the impact wasn't immediately felt until the year 2000 or so, the exponential growth that occurred over the last decade forced the increasing use of credit to support our habits. After all, we always have to buy the latest gadget.
The flip side is that what we are witnessing in the U.S. will have larger repercussions around the globe, and that's where the export dependency answers that question. Considering that we're looking at a slow moving macro picture, the real damage is yet to come, and the argument that the BRICs were the economic saviors will leave a lot to be desired..
Looking at the first chart, I'll close with an independent political thought. If Obama blames Bush for a declining labor participation rate, then Bush blames Clinton, but Clinton thanks Bush Sr for the increase, and Bush Sr. blames Reagan for the decline. It's never that simple, is it? If they were economic leaders, or miracle workers, they shouldn't have to blame the predecessor and just fix whatever needs to be fixed.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
