THE CUPBOARD IS EMPTY (PART I)

The economy is bad and it is going to get worse. Our leaders are attempting 20th century solutions for 21st century problems. They may be forgiven in some respects because I don’t believe there are many solutions to many of our economic problems. There have been large changes to the US and world economy that are both structural and in some cases irreversible. The best we can hope for is that our leaders tell us truth of the situation and do the best we can from there. I believe the truth to be that we are entering a new economic era where the US will no longer enjoy the level of prosperity enjoyed in the past.

The largest reason for this view is the effect of globalization. The first rule of globalization is that work will be done wherever it can be done the cheapest. Outsourcing and offshoring of jobs is here to stay. We can argue whether this is right or wrong. Protectionists will argue it is improper and that American jobs should be saved. Globalists will say that we must suffer these job losses in order to open foreign markets for American goods that will eventually grow the economy (and jobs). The reality is that there is no sense in arguing because, as NY Times columnist Thomas Friedman points out in his book “The World Is Flat”, that ship has sailed and it is not turning around to come back to port. The question is how we adjust from here.

The early returns on globalization produce the following results. Globalization has been great for multinational corporations, for workers – not so much. Real wages for American workers have fallen 6/10% between 2000 and 2007. By comparison real wages for American workers increased:

8.3% 1989-2000
6.5% 1979-1989 (Source U.S. Census Bureau)
4.5% 1969-1979

These numbers actually understate the problem because the top 20% on the income scale had their real income increase by 1.2% during the same time period. The real income of the top 1% grew 50% between 2002 and 2006. The bottom 20% on the income scale had their real income decrease by 6%.

The top 1% held 23% of all income as of 2006. This is the second highest level of income concentration going back to 1913 when records on this subject began. The only year of greater income concentration was 1928 with 24%. You know what happened next.

Why is all this important? The current financial crisis was precipitated in no small measure to the failure of the housing market. The price of homes is determined more than anything else by wages. As you are paid more you can you can afford to pay more for a home. Historically home prices rose when wages rose. However between 2000 and 2007 median home prices rose 64.9% (Bankrate.com). In local markets such as Miami-Fort Lauderdale-Palm Beach median home prices grew 135% during the same time period.
Although home prices have fallen substantially they are not yet back to 2000 levels in most areas and until they are foreclosures will not slow and until foreclosures slow there is no hope of an economic recovery. The Government can enact as many programs it wants to purchase mortgages or work out loans but until wages and home prices are in balance it will not help much.

Even when home prices reach 2000 levels that will not be the end of the problems. Consumer spending has reached 70% of the US Gross Domestic Product (Wall Street Journal). During the period of home appreciation consumers were already tapped out. Due to flat real wages they had no discretionary income but fueled a false economic expansion by spending on credit cards and then refinancing their appreciating homes to pay down the balances, then repeating the cycle. Now that homes are depreciating there is no more equity left to tap. Therefore the one part of the economy fueling growth has ground to a standstill. That piggy bank is closed

The shock of the last few months has also made the average consumer realize that if they are to ever retire they must save whatever income they may have in excess of that which is used to survive and to service the debt they have rung up through credit cards and mortgages. This is especially true now that those who have managed to save at least some for retirement have seen the value of their retirement accounts shrink by 45% or so due to the stock markets decline. (and are likely to decline more)

In my next segment I will explain why foreclosures will continue and why I believe traditional methods used to stimulate out of a recession will only delay further slow deterioration of the economy in the near term. I want to emphasize I am not forecasting a huge crash (though possible) but merely a slow loss of quality of economic life in the US.

TO BE CONTINUED