The Myth of American Productivity
1. WWII left the world without the means of production. Germany, Japan, Europe were all bombed flat, with mandates of no military and other postwar demands that made rebuilding GDP from scratch a reality, leaving the sole production advantage with the USA.
2. WWII also marked the effective beginning of women's rights. They worked while men were at war.
3. A 1942 coincidently marked the bottom of all financial leverage in the United States which had been contracting annually since its prior peak in 1929, a precursor to the Great Depression.
4. Typical that American economists only like to use economic
data beginning 1942 to 1945 when American had women now working, men coming back from WWII matriculating back into society. War based GDP was replaced with real individual contributor, GDP, without government ownership. In other words, the government was not spending money to fight wars and instead the productivity was based on individual people. So the GDP drained of war become a powerful GDP for gross domestic product positive with accelerating labor/work force participation.
5. Versus item number 4 and reference number 1. The USA with WWII win, we won WWII and came out ahead of Europe and obviously Japan and Germany; and with support of Europe the USA lent billions of dollars. Europe was financially in shambles after the war. The USA had capacity to produce what the world was physically incapable of producing for itself. USA had vast stores of gold, political favor post WWII to fund an expanded military and aerospace effort which added significant economic and political clout and contributed to a strong dollar through the year 1972.
6. President Nixon in the early 1970s realized that the United States would be trade impaired on a global basis in lose its trade advantage and political advantage with respect to foreign policy and trade with the then socialized austerity measures in place at the time. Nixon thus removed the gold standard from the United States Department of Treasury and the Federal Reserve System thus devaluing the US dollar. This in an effort to spur an reaccelerate US exports, reviving the economy in the depths of 1972-1975. “Our means of production and taxation from that moment on became the real backing of the United States dollar” and thus fed policy with Nixon and Carter, after Nixon, embarked upon an inflationary policy which was not arrested until 1981 under Volcker and with Ronald Regan in office with yet another Fed induced recession to deal with.
7. The myth of American productivity--- with booked value of assets inflated way and Volcker’s "breaking the back of inflation" through increased short term interest rates, the Regan\Thatcher agreement for deregulation seemed the only way to reignite productivity that was not inflation-induced. A new policy of laissez-faire capitalism and free-marketry was in place, the deconglomeratization of the Americas began in earnest as private markets were allowed substantial policy control and the private market became unusually powerful, taxes dropped, the velocity of capital increased and in the USA embarked upon a 30 year process of leveraging itself and we leveraged what we will call excess productivity vis-a vis the hiring and extension of the productivity benefits of each individual USA worker that were then coming to market. Simply put, labor force participation increased, leverage increased, cost of debt service decreased, commodity input costs decreased, and that became what we now call “The Myth of American Productivity” --- We rather would refer to this as an accident of history.
8. The enhanced productivity was not actually enhanced at all, it was leveraged. Cost of money descended from 18% interest rates in 1981 and 30-years later, (from 1981 to the year 2010), interest rates dropped in 2-3 year rolling periods, descending to down to (current) 3.6% long-term interest rates; thus, dramatically lowering the cost of leverage and dramatically increasing America’s ability to create financial leverage which in turn served to increase human leverage, thereby magnifying the learning curve associated with increased economic output. A biological (bio-economic) transformation in the United States, not due to the innate superior ability of a certain race of people. Human capital (in aggregate) is as uniformly productive as that of horses, cows or chickens. Repeating the above items, and the true source of excess productivity was
A. Lowered credit cost.
B. Lower commodity input cost as commodities had declined in price for approximately 25-years, bottoming in the area of 2006.
C. Massive leverage of human capital and the b balance sheet capital as leverage became a religion which became a belief and it became part of our political economy.
9. This mythical, American productivity is a false reality which continues today.
A. USA and European banks remained over leveraged.
B. USA and European countries as sovereigns remain wildly over leveraged and they have agreed to borrow from one and another, have agreed to back all measure of corporate and municipal debt, all of this while China and India and Korea maintain support of "two bankrupt brothers writing checks to one another".
10. Currently some 75% of the world assets are denominated in either USA dollars or Euros. Interestingly enough, almost 75% of the worthwhile political and commodity assets are legally and/or politically and/or militarily tied up by the same two countries. The collective populations of the US and Europe are well under 600,000,000 and yet 10%, that means 10% of the population of the planet, control some 80% of the worlds key assets and the owners have no capacity to service their current liabilities in real terms. Meaning they cannot service obligations without some measure of inflation or excess money printing. From a competitive standpoint, the USA and Europe would like APAC to watch them inflate their debts away without their demanding more in the form of global political, economic and legal infrastructure with which they may empower their own nation-states. The “push-pull” is that the USA and Europe resisting this necessary rebalancing and so the rebalancing becomes one of give and take, with the USA and Europe clearly attempting to cling onto assets and power positions that from an osmotic (an osmosis-like process) process, things must necessarily flow from areas of higher concentration to areas of lower concentration. Bio-economics rears its head again!
11. Without the capacity to provide debt service in real terms, these SOLES, the “super over leveraged sovereigns” must inflate. Their religion of leverage permeates state and local governments as well as households and many corporations within their restrictive countries who have continuously had greater access to credit, greater access to lower borrowing costs and a “the rate of the rate of velocity, cost, and availability of capital” increasing from 2004-2007 created the fat-tail that we are now working through today. They all thought that this type of trend was a birthright when in fact it was simply a very long-term trend that has now ended.
12. Example, we have the hyper leveraged American economy: $14 trillion dollars of which 40% of the economy is represented by financial leverage. The USA collects only $3 trillion or so in annual taxes. They have $5 trillion in annual budgetary expenditures and on top of that, they have an additional $5 trillion dollars of roll-up expenses in the form of Social Security, Medicare, Medicaid, transfer payments with respect to government pensions which accumulate annually on top of the $1-$2 trillion dollar annual budget deficits. These are huge numbers and they are unequivocally and undeniably true. Without leverage, now “outed” as the key component to the so-called American productivity myth, GDP falls to just $8.4 trillion. Mort alarming is that current budget ($5T) plus roll-up liabilities ($5T) plus deficit spending ($1-$2T) add up to an astonishing 137% of “leverage-adjusted” GDP!
13. Some 50% of GDP, in the United States, is in the form of deficit and/or debt or future liability spending (non-leverage adjusted) which rolls up annually without any ability to incrementally tax the system. This means the government is in fact incapable of pulling cash back into the treasury that it is currently spending in the deficit scenario as we discussed. Without serious damage to a high unemployment system and without means to create incremental economic benefit with the leverage currently enjoyed and they are trying to do this currently with yet more leverage. Yet they are doing it anyway and aggressively so because the world has a religion of dollar superiority, again it is backed by the myth of American productivity suggesting that the productivity myth is still alive and well despite clear and concrete evidence that we have no such negative incremental returns with each incremental dollar of stimulus and/or credit and the current credit trajectory is extraordinary.
14. Without massive excess leverage, the GDP output should be somewhere around half of the business we used to do in America. Without benefit of stimulus this is precisely where we are at; and GDP today is a product of simply more pumping of money versus organic growth coming from an increase in population or an increase in general productivity: biological phenomena which occur naturally in the system that we have today. Post-crisis, the only thing “real” that still remains is the debt and it remains today that this is the only true equity in American since the paper money is now fundamentally without value. In a corporate bankruptcy, the owners of the debt become the new equity owners. One might consider taking residence at his new second home in Washington, DC on Pennsylvania Avenue.
15. An Army of Dollars: The emergence of the United States in WWII as a net creditor nation and as such a global reserve currency and with luminous positions and a victorious position in WWII, USA and Europe worked together to become with Europe with huge sums of money and with the Americans, Europe's global assets to the United States in the process of repaying its extraordinary indebtedness after WWII which garnered the United States position of enormous political and military favor around the world which again, for certain reasons, continues today. In many ways this is how global rebalancing happened between WWII and the current day with respect the USA and Europe, this we feel is how the global rebalancing will happen today between the United States and the Asian Pacific region countries. We will begin to see global assets because we simply do not have the capacity to repay what has been borrowed. Without capacity for repayment of liabilities in real terms, the Americas and Europe will, as happened with Europe versus the USA post WWII, the USA will have to cede assets in legal infrastructure on a global scale in order to satisfy Asian-Pacs obligations in real, meaning inflation adjusted terms. Asian countries are acutely aware that they are 3 trillion dollars of safe and FX foreign exchange reserves are merely ownership of someone else's money. As the wealthiest men in the room who is incapable of spending his hard earned accumulated savings, the USA and Europe control the keys to the global assets. They have the military and political legal infrastructure for that control and Asia as a result is sitting on money that is being aggressively devalued to the money printing mechanisms of the European Central Bank and the Federal Reserve Bank of New York, essentially destroying the value of the currency and bonds held by our largest trade partners. Partners who also represent some of the largest pools of human that is intellectual capital on the planet, mainly countries, India and China.
16. When knowledge transfer is not enough. Knowledge from on nation to another is the primary source of a nation's wealth. Just as one university to another knowledge transfer permeates tremendous impact, tremendous productivity with students when parents transfer knowledge to their children. This is how human beings learn. This is how people have been able to improve the human condition for centuries today and now just for decades, the Asian Pacific regions have tolerated being shut out of the global political economic system and being shut out of the ability to spend their own and deploy their own FX reserves at will. The reason was because necessary diplomacy, necessary diplomatic action, through which these smaller countries could expand their economies through crisis, rebuild governments, rebuild infrastructure as well as global trade, manufacturing, outsourcing in order to effectuate the knowledge transfer of their own and the knowledge transfer was from western nations, from Europe to the Asian Pacific regions. As we see, the East is now relatively rich and measured, in only dollar terms at least, it has some policy in place and the policy here, the policy of knowledge transfer is in the rear-view mirror to a certain extent and from a trade perspective. Asia-Pac now rightfully demands a large number of seats at the Global Trade and Political table in the world and as a producer and as the world's largest creditors.
16. As I have previously advised, World Bank officials and political leadership in Europe and Asia-Pac, we have talked about the fact that Europe gained its global power in getting some 300 years ago with global military activity on behalf of the crown, the Queen of England, they would claim lands on behalf of the crown and that creation of global base of assets which they could not manage, effectively could not manage, Hong Kong, Africa, just to name two countries, were given back to the respected constituencies to a series of missteps, excess leverage and mismanagement. Great Britain benevolently gave back what they simply could no longer hold or control through military occupation; 200 years of accumulation lost gradually over 50 years from roughly 1950 to the year 2000. Again neatly coinciding with the bottom of the last credit cycle, directly after WWII.
17. Asia-Pac now sits on trillions of dollars in foreign exchange resources with trade partners who must inflate away what they cannot and frankly are impotent to tax away from their citizens and while the Euro-American construct which has previously held the keys to all the positions again, legal, physical and military infrastructure around the world, those days of growth are over and the days of transference are ahead of them.
18. An army of dollars and a Japanese solution to global trade imbalances are what we are going to discuss as a potential solution. As with Great Britain, China-A-Pac has no significant military but A-Pac does have 3 trillion of foreign exchange reserves. This army of dollars must then be deployed to acquire real assets around the world as we have demonstrated, that the real value of someone else's money is being strategically and aggressively destroyed out of some religious Keynesian pipe dream that the US worker productivity myth is somehow possible, and it isn't. In the absence of massive and self-fulfilling leverage, leverage that continues today in earnest; leverage which has ended badly and continues to worsen through the religion of current monetary policy, these trends may fearfully come to a violent end. As a result, Asia-Pac is demanding a greater seat at the global table, sensing that the true underlying value of it’s FX reserves are numbered.
19. A wise, and potential systemic fix, as observable from the “Great Britain of the Orient” A Japanese Solution. A true fact remains today, that at one time the stock market value of the Nikkei index, the stock market in Japan, could have bought 100% of North America, the United States of America, four times over. The year was 1981. The question should not be whether or not this was rational. The question should be how was it made possible.
20. Japan had few people, no land, and great export products without the means for production vs Human Capital. What did they do? Capitalized verticals around the world, partnering with foreign countries in order to produce abroad that which it had no ability to produce itself. This required acquisition and capitalization of these new global assets with foreign exchange. Japan had no land mass of its own. It set up a global based manufacturing. It brought the knowledge transfer directly from Japan to the United States, to Europe, to different areas of China to different areas of India, etc, etc, etc, and it used its knowledge transfer plus local manufacturing to make its trade partners rich. As those factories did well, it turns out that they repaid trade of large quantities of capital back to Japan and that outsource model of technology and partnership is exactly what created the wealth in Japan that still to a large extent continues today. The Chinese model is going to be the Japanese model but they are going to export their human capital in addition to their foreign exchange reserves deploying the Japanese model of partnership that should be balance the economy effectively creating partnership around the world. In short, bring your people in for management in equally trade partners, immediately surrounding these new verticals, allowing your trade partners to become rich and to the inevitable socialization that happens when you bring another 2000 Chinese people into let's say Peru for mining or to copper in Afghanistan or farming in central United States. This socialization will occur at the local level and as a natural multiplier effort of racial, cultural, capital exchange to create the powerful environment from productivity and a very high level socially which will serve to empower citizens in a harmonious, stable way which actually becomes a net positive for respective governments who benefit from global taxes, benefit from increased bank rolls, benefit from increased trade and local traffic and who allow these key verticals to be acquired and capitalized from abroad in the spirit of global partnership. Japan had no land so it set up global manufacturing. Asian-Pac has no commodity resources but it does have an enormous mass of people. Its human capital is huge, well-educated and its foreign exchange and its debt holdings of the United States and Europe allows them a key role in capitalizing these verticals for many, many, many years to come.
We therefore feel compelled to short the US credit system via a structural short position in US corporate and Sovereign debt with long positions on the equity side as the government cannot support its current indebtedness through tax revenue. The Myth of American Productvity has created a self-reinforcong trend whereby foreigners have progressibvely lent Americans more and more capital while returns on capital have declined materially and are now NEGARIVE yet the trend continues, despite the technical insolvency of the United States of America.
http://www.linkedin.com/pub/shawn-mesaros/2/410/3b7
Shawn Anthony Mesaros
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
Additional disclosure: Currently the source material for a same-named book published in Asia on behalf of Comway Group through research fellowship.