It's a STRUCTURAL problem
not a CYCLICAL problem!
It's a DEMAND problem not a
SUPPLY problem!
I gave President Barrack Obama
six months to roll-out his doomed Keynesian policies, twelve months to
discover they were flawed and eighteen months to realize that the solution to
America's problems must lie within a different economic framework. I had
hoped by the end of twenty-four months to see new policies closer to an Austrian
economic philosophy emerge. I was wrong.
Though, even the Wall Street
Journal recently featured an article on the re-emergence of the Austrian
School of Economic philosophy, it would appear that President Obama's
administration still neither gets it, nor I am afraid ever will. Key
defections by his leading economic advisors, talk of the need for QE II and a
Stimulus II, and a political collapse in public confidence suggests a growing
awareness that Keynesian policies are not working, as many predicted they
wouldn't. Obama's exciting rhetoric of Hope and Change has left myself and
the majority of recent polled Americans disillusioned and disappointed. What
I see the administration failing to grasp is twofold:
I-America has a Structural
problem, not a cyclical business cycle problem. Though the cyclical business
cycle was greatly worsened by the financial crisis, I would argue that the
structural problem facing the US is actually a contributor to what caused the
financial crisis.
II- America has a Credit
demand problem, not a Credit supply problem. It isn't that the banks won't
lend, but rather that few can any longer afford or qualify (on any reasonably
and historically sound basis) to borrow.
A STRUCTURAL PROBLEM
1) Trade Balance:
Insufficient Export/Import Ratio
We are all painfully aware
that the US has not produced sufficient exportable product to support its
standard of living for many years. Manufacturing in the US has been in steady
decline since the 1960's and the excess spending during the Vietnam War. It has
been 50 years since the US had a balanced budget (forget Clinton's social
security slight of hand). Over the last 10-15 years the US has seriously
compounded this problem by accelerating the de-industrializaton of America
without a strategy to replace salable export product. Corporate industrial
strategies of outsourcing, downsizing, and off-shoring were never countered
other than by an excess consumption splurge which fostered massive real
estate and retail expansion distortions.
Simply said: A US Service
Economy that is based on 70% GDP consumer consumption does not pay the bills!
For a brief period of time
following the dotcom implosion, the US operated as a mercantile
"Financial Economy" that turned out to have been nothing more than
a historic illusion.
1999
2009
As the graphs below clearly
show, since late 1999 with the surge in the adoption of the internet,
unemployment in the US has spiked. Clerical, manufacturing and almost any job
that could be further automated through networking advancements were
replaced.
2) Creative Destruction:
Slowing Innovation Rate
In my recent paper INNOVATION:
What Made America Great is now Killing Her! , I described how the dotcom
bubble ushered in a change in America that is still reverberating through the
nation and around the globe. The Internet unleashed productivity
opportunities of unprecedented proportions in addition to new business
models, new ways of doing business and completely new and never before
realized markets. Ten years ago there was no such position as a Web Master;
having a home PC was primarily for word processing and creating spreadsheets;
Apple made MACs and ordering on-line was a quaint experiment for risk takers.
In 1997 prior to the 'go-go'
Dotcom era unfolding, America's unemployment was less than half of what it is
today at 4.7%. At that time the US added 3 Million net jobs which reflected
the creation of 33.4 Million new positions while obsolescing or cutting 30.4
Million old positions. Job losses occurred in old vocations such as typists,
secretaries, filing clerks, switchboard operators etc. Hired were new
occupations such as C++ programmers, web masters, database managers, network
analysts, etc.
As our research chart above
however illustrates, the additions have fallen off precipitously while the
job losses have stayed relatively flat. In 2009 job losses were 31M and only
slightly larger than 1997, which would be expected with further internet
application development. New job creation however was only 24.7M which is
dramatically lower than the 33.4 in 1997.
Over 98% of all jobs created
in America have traditionally been created by companies with less then 500
employees. Recent research by the
Kaufman Foundation shows that in fact new start ups versus existing
businesses dominated the creation of new positions.
America's slowing ability to
innovate which is reflected in published research papers, patents issued and
numbers of college graduates with advanced math and science degrees has
seriously fallen behind. I laid out the seriousness of this problem in my
early 2010 paper: America
- Innovate or Die!
It is more than a little
disconcerting that after 13 Trillion in stimulus measures we see business
spending on capital investment STILL shrinking in the US.
It can't be any clearer, the
US has a structural problem. The administration can not possibly fail to
realize this. My sense is they just don't know what to do about it.
A DEMAND PROBLEM
1) Credit Available -
Demand Flat.
According to the Federal Reserve's
latest quarterly survey of banks' lending practices recorded during July
2010, "for the first time since 2006, banks are making commercial and
industrial loans more available to small firms, with about one-fifth of large
domestic banks having eased lending standards. This offset a net tightening
of standards by a small fraction of other banks." Also, for the past six
months, banks have continued easing lending to large and mid-sized firms.
What's more, banks also reported that they stopped cutting existing lines of
credit for commercial and industrial firms for the first time since the Fed
added the question in its survey in January 2009. As for consumer loans,
banks also reported easing standards for approving loans.
Credit is available, but
demand remains flat.
Asked in the July survey how demand for commercial and industrial loans has
changed over the past three months, 61% of banks responded "about the
same," while 9% said "moderately weaker." While it was good
news that 30% responded "moderately stronger," it's not exactly a
surge in demand. Even in a slowly recovering economy, the growing distaste
for credit among our debt-weary public has hampered the way for new purchases
and investments.
This isn't all that is
surprising. The latest economic indicators paint a very exhausted consumer:
In the years leading up to the financial crisis, he bought too much house and
too many cars. The consumer is in burn-out mode, more focused on either
saving or paying down credit card debt than buying more appliances and
gadgets.
The amount consumers owed on
their credit cards during the three months ending in June dropped to its
lowest levels in more than eight years, indicating that cardholders continue
to pay off balances in the uncertain economy, according to TransUnion's second
quarter credit card statistics.
The average combined debt for
bank-issued credit cards fell by more than 13% to $4,951 over the previous
year. This represented the first three-month period where credit card debt
fell below $5,000 since the three months ending in March 2002. Meanwhile,
personal savings have risen to 6.4% of after-tax incomes, about three times
higher than it was in 2007.
Perhaps what the Fed's
quarterly report is really saying is this:
"There's a growing
distaste for credit. The American consumer is the child who ate too much and
spoiled his dinner. And even if you hand him his favorite meal on a silver
platter, he's just not that hungry."
2) Shifting Demographics
Another obvious but seldom
highlighted factor affecting demand is shifting demographics. The Baby Boomer
generation is no longer the consumption engine it has been to the US economy.
We have a generation that, as
has been predicted for some time, is reducing its expenses but it may be even
more dramatic than forecasted. With home housing prices no longer being the
wealth generation vehicle they had expected it to be, stocks not delivering
the returns they had been told to expect for the 'long term' investor and
medical expenses climbing above their worst budgeted targets, the baby
boomers are being forced to cut back even further than the expected
demographics were warning about.
The demand for credit to
finance new acquisitions is not the same priority it was only a few years
ago. Harry Dent's extensive demographic
research lays this out in indisputable detail.
All Federal Reserve and
Government actions are about increasing credit supply. None effectively
address demand.
THE RESULT
40.8 Million Americans on
Food Stamps
Employment at unprecedented
lows
Expect it to get worse until
the administration finally realizes that we have both a structural and demand
problem facing America, not a cyclical business cycle and credit availability
problem. I personally don't believe for a minute that the Obama
Administration haven't come to realize something is wrong. The White House
simply doesn't know what to do about it. They are doing the only thing our
Washington political machine knows what to do - throw money and credit at the
problem, which is precisely what got us into this problem in the first place.
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