Sunday, June 12, 2011

What Lies Ahead?

Don’t look for housing to rise out of the ashes and get back to 2006 production levels any time soon. The housing bubble was all about greed. Getting a bank loan, was robbery without a gun. While the drunken real estate orgy was in full swing, nobody bad mouthed bankers by calling them banksters. In this country, making a lot of money is a sign of intelligence, inversely, poor people are considered stupid. So if you are poor and not stupid it has to be somebody else’s fault.

From there we could claim that the large unemployment numbers are the result of the poor economy, but the problem is far bigger. The Information Age has bloomed and left many people unemployed. Back in the early 1900’s banks employed thousands of accountants to tally their books from day to day. The invention of the Burroughs adding machine made about half of the banking work force redundant.

In the early 1900’s, the agrarian (farming) economy employed 41% of the population. By 1930 it had dropped to about 21%. The mechanical combine harvester and the tractor changed farming forever. At the same time, the assembly line production increased worker efficiency and output. It was this shift in technology that added to the unemployment of the Great Depression.

Today, one computer and an excel work sheet can eliminate the bean counters in a large retail firm. Stores no longer need to check the shelves when ordering inventory. Theirs scanned sales totals give them the numbers for their replenishment orders. The gas and electric companies don’t employ meter readers any more, each residential unit is in direct communication with the utility. Today we have 20 million unemployed people that need to be retrained, in order to secure a new job. For a lot of these people, their old jobs no longer exist.

There is a question to ask yourself when you go into a retail store,” How many of the items on the shelf are made in the United States?” A future Smoot-Hawley type tariff could be used to entice offshore American corporations to return to the USA to produce their wares. Of course your flat panel TV produced in the US would be of low quality and probably triple the price of anything made in China.

Over a span of 60 years, the shifting of American production overseas has been so gradual that it was not noticed. The companies that used to be US based, don’t need the added aggravation costs of health care and retirement benefits. They can survive very well outside the US. These labor jobs are not coming back.

Bernanke’s quantitative easing is a method of paying back for what we have already borrowed; with no tangible results that I can see. Whereas government program to improve the infrastructure of the country (roads, sewage, etc) would be a positive step in the right direction. Plus it would be something that they have to do anyway no matter what the economy is doing.

The aspect of whether we are facing inflation or deflation has been a rather active topic on this blog lately in the remarks section. I didn’t get a pay raise this year (government pay freeze). My wife got a 10% pay cut and all of our household bills went up (gas, electric, water cable and trash). My son’s tuition went up $1,200. If this is deflation, why am I paying more and getting less in return? The real irritating thing about the increase in the water bill was we had to pay more for consuming less (there was a push by the utility to conserve water and they accomplished their conservation goal). Unfortunately they didn’t sell enough water to cover the fixed costs, so we got a rate increase. This points out the vulnerability of large companies trying to down-size from a drop in consumer consumption. Fixed costs don’t disappear overnight.

I went to Starbucks this morning for a large Coffee (It’s probably been about 4 months since I was last there). The price has gone from $1.80 to $2.15. At the Supermarket, my favorite candy bar is still the same price, only it’s about half the size it used to be. Gasoline has dropped 15 cents this month (of course it’s still a dollar more than it was last year).

So what lies ahead? Hard times. Of course, that doesn’t sell newspapers does it? Don’t expect a government solution; our government is a consumer of wealth, not a producer. We are earning less, spending more and getting less in return. I guess inflation is when the size of the product you buy stays the same, and the price increases. Deflation must be where you (cough, cough) get less for the same price ;>)


Tyrone said...

Well said, Jim.

Is this where TPTB reduce the population by 80%?

Today we have 20 million unemployed people that need to be retrained

I'm going to give some thought to what they could be trained for. In just a few minutes, I came up with nothing, aside from bringing mfg jobs back to our shores.

Also, I happened to catch a few minutes of home show, where the host mentioned how the couple qualified for an FHA loan, requiring only 3% down. I just shook my head.

Jim in San Marcos said...

Hi Tyrone

I deleted part of what I wrote about bringing mfg jobs back to the US.The article was getting a tad too long. The American consumer isn't willing to pay $50 for an American made shirt. So clothing manufacturing isn't coming back.

The news is pretty low key on FHA loans requiring 3% down. Congress wanted to raise it to 5% but adversary's claimed that people couldn't come up with the extra 2 %. I thought that's what caused the original problem, no money down. Here is a link to a similar case I wrote about in 2008. This couple got closing cost plus 16K for repairs (a motorcycle, pickup and TV).

They are still writing these loans, what ever happened to 20 percent down? I'm shaking my head also.

Sackerson said...

Excellent post, Jim. Leaves us trying to square the circle. Since that can't be done, what do you see happening after the hold-it-back attempts finally fail? It won't be the Apocalypse, but what?

Joseph Oppenheim said...

The housing bubble was all about greed.<<<<<

Yes, but the greed goes deeper than that, it infects our whole society. America is just not a very moral society.

I could write more about that, but I just finished the book, "High Stakes," which goes into how our nation is in the midst of a mania in gambling, an addiction which even the states are among the addicts, expanding casinos, etc, with the social costs (crime,bankruptcies, etc) outweighing the revenues, jobs created, etc. Voters and politicians are so afraid of taxes, even though the taxes would be cheaper than using gambling. Plus, illegal gambling increases when legalized gambling is made available in an area.

So, yes it is greed, but the greed goes deeper than just housing, plus all kinds of other immoralities. Of course, there are also a lot of Americans who are moral, but they are overwhelmed by the immoral, sometimes even wanting to compromise with the greedy, etc.

frakrak said...

Innovation has fuel productivity in western economies since way back when, nothing new here. My point would be do you see the American economy as a free enterprise system? Where's the enterprise now? I would disagree with the gradual outsourcing Jim of the U.S. economy, I would call it a flood gate phenomenon from about 96 - 97, it has only taken that long for China to come on board and take the largest share of your economy.
As for Banksters, well that's another story, no point crying in your beer here, I guess if the American public can tolerate it then thats gotta to be OK also.
We have one of those curbside garbage pickups happening in my neighbourhood at the moment, never seen so many late model Chinese Tv's thrown out, got to be some sort of testimony for their production quality:)
I see this and I can't help but think that we would have all been better off producing expensive home grown items that lasted, we would have consumed less wasted less, borrowed less, and not given rise to a state that is rivaling your own. I believe all your cash for clunckers has given the Chinese a lot of steel for their pacific fleet build up, seen some pictures, nice looking ships Jim:)
So long as some one is turning a profit, then there not stupid eh?

frakrak said...

Joseph I totally agree, America can and should do better, turning a quick buck has nothing to do with the Americans I know! You wouldn't think that your country could have fallen so quickly, the trouble here is we are ringing the plug hole with you!! Is there any democrat or republican left that has a heart for your country anymore?

Anonymous said...

You're all talking about how stupid it is for our leaders to be steering the boat in the dark and fog without enough precaution for icebergs. But you are all standing on that Titanic too. You're not taking action or doing anything different than all the other passengers who are enjoying dinner and dancing. Thus, you will wind up at the bottom of the cold ocean with the rest of them.

Anonymous said...

ANON 11:25

these guys are apparently going to do something about it;;; hope they do;;; i'd love to see a digital war waged on IMF IBS FR and all the rest of these groups that are causing us nothing but trouble;;;

frakrak said...

Anonomous 11.25pm, I think that is the point, I meet Americans over here every day, they do not reflect your government in anyway shape or form (personal integrity), I would call it the great disconnect between the people and the government! No one knows what to do!
Here's the thing with utility companies, over the last decade its all been sold off down under, now we like America consumers struggle to pay for water and power. Its all been done on the proviso that private enterprise can deliver a cost effective product, well it would seem not to be the case!! I would say that it is this fundamentalism with profit at all costs that in a strange twist of irony will be the death knell for capitalism.
Your CPI had housing taken out of the mix a decade or so ago, (like here), the figures with house prices in your CPI would qualify your economy to be in depression, NOW.
Your right we are all on the Titanic, and it #@#*ses me off greatly!!

Anonymous said...

Anon at 11:25,
Individually, we cannot change the course of the ship. Collectively, I'm still not sure we can effect change, given we have a government that will not obey the will of the people.

That said, I would like to think that I have a few life preservers and a wetsuit in preparation for the wreck. Will it work? Only time will tell.

Jim in San Marcos said...

Hi Sack

Welcome back. Thanks for the compliment.

I think that our worst fears of what will happen will never come to fruition.

The weak links are in Europe, the PIIGS.

Possibly our world wide credit card system could completely shut down. The world banking structure is not credit oriented, but rather debt oriented.

It's my contention that the last to fail in this mess, suffers the least damage. That's what makes me think that Bernanke kind of knows what he is doing. If a country goes broke, don't their loans to us go up in smoke also?

I also look for a US currency reissue. Your old dollars will be no good unless you are in the US. God knows how many pallets of 100 dollar bills are in South America.

The thing that bothers me, is that the people in charge can rewrite the rules after I have thrown the dice.

Jim in San Marcos said...

Hi Anon 11:25

Your right, but this time,we may be able to launch all of the life boats instead of just half of them.

We've already hit the iceberg. It is either eat the seven course meal or stand in line for a life boat. I know I don't want to be as cold as the sea food I am eating so I'll be in the lifeboat line.

Cheers and bottoms up (if your not a boat)

Jim in San Marcos said...

Hi Frakrak

In the 1960's when I was a kid, everything that was good, was either made in the US or Germany. We use to joke about stuff made in Japan as being junk. TV's and Stereo systems were made in the US.

In the meantime, we have shifted to cheaper producers, we went from Japan to Taiwan to China.

What has happened? It is cheaper to make it somewhere else. And as you point out, it is all about profit.

Anonymous said...

Jim --

Could you expand on your comment about the last to fail


Anonymous said...

You sure said it when you wrote that the government is not following the will of the people.

We are at war in Afghanistan, Iraq, Pakistan and Libya. Flushing hundreds of billions of dollars down the drain. We don't belong in any of those places as there was NEVER A THREAT TO OUR NATIONAL SECURITY. Being involved in these wars (and having military bases all over the planet) is now causing A HUGE THREAT TO OUR NATIONAL SECURITY!

Congress and Treasury are refusing to trim the budget and cut spending and are destroying our credit rating and our currency.

The government is in bed with big corporations and banksters who are almost running the country (this is why OUR government isn't following the will of its citizens).

We're not drilling here in our oceans and country where there is plenty of oil. We keep importing.

We are not maintaining and improving our infrastructure, nor are we putting a rail system into our country.

The military-industrial complex is running the show.

I hope that our youth rise up as they are doing in the Middle East, Greece and PIIGS.

The youth need to tear this system down and get back to small government and the systems necessary to guarantee a prosperous nation.

Joseph Oppenheim said...

frakrak: You wouldn't think that your country could have fallen so quickly<<<<<

Not quickly, the tipping point was 1968; it has been downhill from there.

Anonymous said...


The tipping point was when the secret plot to steal our currency was enacted and The Federal Reserve was created in 1913.

Jim in San Marcos said...

Hi Anon 3:02

What I meant by the last to fail, has a lot to do with currency exchange rates. As a country's currency goes to hell, foreigners can buy into the country at very favorable exchange rates.

Pretty much every currency in the world at present, has a value set by price and demand. There is a lot of faith backing up these currencies. A lack of faith can render a currency worthless.

When we look at the PIIGS, it is a pretty sure thing that they can't repay the debt. The stronger currencies will shop the weak ones for value purchases.

Then if we take an imaginary case of say Deutsche Bank in Germany. What if that bank went into bankruptcy? They probably have title to half of the home loans in Michigan. Would there be a fire sale at pennies on the dollar to clear the books at Deutsche Bank of American real estate?

Almost every country has screwed over the banks by issuing more currency except the Euro Union. This is pretty much a legislative way to increase taxes without having people to mail in their tax payment. The world currencies are facing massive internal inflation one country at a time.

In my opinion, the country left with a functional currency that people still desire will set the standards for the new monetary policy to follow.

From there we enter into uncharted ground. Our next currency (if we went into hyper inflation to get rid of the national debt) has to have the politicians removed from the printing presses. Gold and Silver seem to have a place here.

There are a lot of "what if's" here, this is just my train of thought on the issue.

Anonymous said...

"Where's the enterprise now?"

Interesting thought.

There is no inventive to start a new business though, at least in California. Setting business aside, individual liberty is under question as well. The perception is we are not free anymore. That does not work well for innovation. We are as free as our next tax payment, registration renewal, or insurance company payment. Coming soon: mandatory dog walking insurance payments. At least we still have roped off "Free speech" zones, at least when the signs are up.

You want innovation that will drive the economy? Go find it in a tin can buddy, I already paid.

Anonymous said...

Sorry, I meant there is no incentive. Perhaps it was a freudian slip.

Anonymous said...

If it was a Freudian slip it would have been... "There is no contraceptive"

Mojo Mellow said...

This is my favorite blog for economic insight.

I read all the dry blogs first, with their endless charts, numbers, and statistics ... blah blah blah, but then I come here for the commentary.

Thanks for the discussion all, but more than that thanks for adding a little humor to the mix.

Freudian slips ... hah!

It is a breath of fresh air to smile a little while trying to adapt to our dire econimic situation whenever possible, and here THAT is possible!

Anonymous said...

Hey, the boat is sinking. Might as well laugh and drink some champagne. Our days are numbered.

Who woulda thought... a major economic crisis, depression and global economic unraveling in my lifetime.

Who knows what my fiscal condition will be 5 years from now.

Lose half my assets, cash and net worth?

Lose everything (my USDs worthless)?


Jim in San Marcos said...

Hi Mojo Mellow

Thank you for the compliment. Glad you enjoy the column.

We may get a Keynesian slip here pretty soon-- that's where Uncle Sam steps on a banana peel.

Jim in San Marcos said...

Hi Anon 10:14

I think that it won't be as bad as it seems. Wiping out the currency could be a good thing.

We could then see deflation where only one member of the family needs to work to support the whole. That would represent an increase in our standard of living. Of course if you are super rich, you'll have a rude awakening.

There will be no one, with the luxury of gobs of cash in the bank. You work if you want to eat. Productivity would increase.

There would be no free ride from accumulated wealth. Prices would have to become more reasonable. Football ticket might drop to $10.

Let's wait and see, I think I have a bottle of "Haute Ripple" here somewhere--I'll put it in the fridge to cool.

Take care