This entry is to describe what is happening (so called Economic Populism) and what can happen to the US (Global) economy. I refer to the reader the following web site: The Great Depression from Futurecast.com
Total US Debt (data from Flow of Funds)
Year - Total Debt in Trillions
1996 14.65
1997 15.2
1998 16.15
1999 17.4
2000 18.35
2001 19.4
2002 20.5
2003 22.4
2004 24.2
2005 26.4
2006 28.35 est.
Linear regression slope 96 to 02 is $1.01 trillion per year
Linear regression slope 02 to 05 is $1.95 trillion per year
Linear regression slope 02 to 05 is $1.95 trillion per year. Using this slope and the 2005 data point, the Total US Debt Burden will be 28.35 2006 est.
Some parallels, my opinion, to the current global situation.
- Germany's reparations obligations parallels US of A’s inability to pay off the massive debt (estimated to be over a trillion $s) owned to China, due to their closed market (a WTO violation).
- Farm output has been exchanged for health-care. The US has a private system while the rest of the world has a public system. The US’s health-care system is under stress and is about to lose critical mass. I know this because I heard a proposal by the system to have the federal government pick up the bill. Health-care rode the housing boom and is over priced, just like housing prices.
- There is also a stealth trade war in progress. Using low cost labor (off-shoring) is a “natural” “trade” barrier. GE’s decision to move their production out of the country is an example (see GE Brings Bad Things to Life). Light bulbs were an export product that was profitable. According to Grossman and Rossi-Hansburg (see The Rise of Offshoring: It's Not Wine for Cloth Anymore), this should not have happen because of the productivity gained by past off-shoring. Their frame is wrong. Wage is not the driving force, its employee value (see The Employment Cost Index, what is it?). GE’s (and other firms) desire to be “closer to their market” overrides any productivity gains.
There are three wrong assumptions.
- Productivity gains do not translate into higher wages. The Census Bureau’s increasing poverty rate and the Bush administration’s classifying hunger as food insecurity are real data that shows this conclusion (assumption) to be false. The Current Population Survey’s wage component is worthless. The Census Bureau’s American Survey has shown an unexpected immigration change that indicates its CPS’s statistical framework has been compromised. The unevenness of the US economy makes it difficult to gain a national trend from the National Compensation Survey (wage data source for The Rise of Offshoring).
- It is not the relative size of countries’ GDPs that is a factor; it is the global supply of labor to its demand.
- Any cost savings due to productivity gains are included in the “return on capital”.
The following cascade failure is in effect. Housing prices has decreased (the trigger). Bad loan portfolios have no bottom (drain of liquidly). Health-care system will lose jobs and no longer be the bright spot in the US’s economy (see Health Sector Indicators). .
From The Great Depression The Collapse of International Finance
Substitute US of A for Germany.
If the devaluation had not been accompanied by harsh austerity measures - if it had been "accommodated" by monetary expansion - the inflation of prices could have continued indefinitely, even with Great Depression unemployment. This is the mechanism of inflationary depression - the worst form of economic collapse - and stagflation - its much milder form experienced in the 1970s in the United States.
A two-tiered wage system never worked. The US airlines developed a two-tier wage when the industry was deregulated. Now pilots are taking pay cuts. The Big Three have $1500 of cost the foreign manufactures do not have because they were not unionized. Globalization has, in effect, structured the auto industry as a two-tier system.
U.S. Steel cut wages 10%, and other steel companies followed as labor leaders and politicians howled. Wages in 1928 had been 160% above pre WW I levels and had fallen little since then, while prices had dropped 30 percent - back to 1913 levels. Those who had steady work were living very well and had no complaints. But many were working only part time. General Motors cut salaries 10% to 20% -- wages were not cut.
Another example of a two-tiered system can be illustrated by government spending. The US government is spending 10’s of billions of $s rebuilding the affected areas of Katrina and Rita. Federal money is going towards training home owners in the skills that will allow them to fix their damaged homes. The people who do this enter the work force (a very good example of the positive effect of tax payers money). A counter example would be the “auto industry” getting no help from Bush.
The above paragraph shows the unevenness of the US economy. Another example of this unevenness is my attempt to start my own company. Silicon Valley manages to fund startups (with Cal. tax and regulatory burdens), but Spokane can not do any better than casino jobs.
At an EFGN workshop; a guest;
LISA BROWN is Majority Leader of the Washington State Senate.
She has an avid interest in microenterprises and is spearheading the push for new legislation that can help improve the climate for new business formation in the state.
She stated Washington State has a business tax burden problem.
(Washington State, along with the rest of the country does have a business tax problem. The source of this problem is the federal government. It is bad enough to compete globally and to go against the tax breaks China offers, but the tax break the US of A gives to off-shore jobs is the straw that broke this camel back‘s.)
My funding problem is encapsulated in this statement: "Angle investors have become bankers". Spokane’s investors have the reputation of being very conservative “bankers”. In other words, startups either “die on the vine or move out of the area” (a recurring statement spoken at EFGN workshops and at a LaunchPad 7.0 event).
People, wanting to buy US Treasuries, are NOT a good indicator of financial expectations.
However, the credit of the U.S. government remained good, so the Hoover administration still had the power to act. On October 6, Hoover announced creation of a $500 million central bank fund to aid banks during "runs" and to relieve them from the growing need to hold increasing amounts of assets in cash and highly liquid assets.
The Bush administration’s over reliance of monetary policy is another connection that is going to fail.
On October 8, the U.S. Federal Reserve Bank admitted that its cheap money policy had failed to end the Depression. It raised the rediscount rate from 1 1/2% to 2 1/2%, and again on October 15, to 3 1/2%, in its efforts to stem the gold and capital exodus.
The financial miss-step that is having to biggest effect was Fannie and Freddy’s accounting fraud. This political motivated fraud allowed the housing bubble (hyper-inflation). See Household Debt Statistics for graphs. One can note the change of slope in the 2003 year of the “Debt Burden-Mortgages” graph. I expect home owners will get their balance sheet in order. I base this conclusion on free-market forces. Housing prices are falling which shows up as an increase in homeowners obligation ratio. I base this on the change of slope at 2005. See Household Debt Service-Homeowning Households Financial Obligation Ratio graph.
The homeowners obligation ratio is at 18.08. Wall Street may over look this, but financial companies do not. The sub-prime mortgage sector has gone into stress. Private equity was buying distressed loan portfolios because they saw value (relatively speaking). Private equity is moving away from this activity. This is an indication of the difficulty they are having in determining the bottom (slow moving train wreck).
A way to measure expectations;
Use convolution (moving average [sort of]) of neighbors’ home values.
Example:
| House Value 11 | House Value 12 | House Value 13 | House Value 14 |
| House Value21 | House Value 22 | House Value 23 | House Value 24 |
| House Value 31 | House Value 32 | House Value 33 | House Value 34 |
| House Value 41 | House Value 42 | House Value 43 | House Value 44 |
Use a kernal:
| 1 | 1 | 1 |
| 1 | 1 | 1 |
| 1 | 1 | 1 |
Your choice for the boundary conditions.
The above can be used to get the neighborhood’s wage and salary. One can make this analysis complete by the inclusion of health-care. A zero entry for those neighbors who have no insurance and an entry of one for those who do. Once one has all of this data, one can use an “expert” application (example; CLIPS) to gain a sense of expectations.
Example;
Rule 1 - House Value less than yours.
Rule 2 - Wage less than yours.
Rule 3 - No health-care insurance.
Output - expect housing values to remain under pressure. Note the phrase “under pressure”. Price changes materialize during the buying and selling. If home owners do not panic and stay in their “primary residence” until whatever economic transitions are taking place around them subside, then the pressure on prices will abate.
