A few months ago, some Rogue Economists were suggesting that this economic slowdown around the world may not be caused by the current financial crisis… but something more fundamental like the lack of ‘innovation’ in the last 50 years. Now, more and more Economists are suggesting that this slow down may not be temporary. Instead, the days of high economic growth around the globe may be behind us.
Between 1891 and 2007, the US achieved a robust 2% annual growth rate of output per person. Unfortunately, now the evidence suggests that future economic growth will achieve at best half that historic rate. The old rate allowed the American standard of living, for example, to double every 35 years; for most people in the future that doubling may take a century or more.
Research shows that the innovations that allowed such high rates of growth in the 20th century happened a long time ago… and refers to running water, electricity, central heating, airline travel, the telephone and other technological advances.
They were already in place when we were a child. Since then, there have been substantial refinements. But the basic components of modern life are the same as they were 50/60 years ago.
We drive automobiles. We live in houses with thermostats. We talk on the telephone. We watch TV and listen to the radio. We now have computers in our houses. But the biggest innovation of the last 30 years; Internet does not seem to have made much difference to the material side of our lives. It is more like a two-way television: a rich source of entertainment, information and useful communication device… but not much more than that.
Nothing much really new has come along in the last 30 years. We eat the same food. We wear the same clothes. We drive the same cars (though they are much more likely to have been made overseas). We even listen to the same rock and roll groups that were performing in the 1960s.
So, where will the next breakthrough come from?
Fracking? Biotech? Google’s driverless cars?
Not likely, says Professor Robert J. Gordon, writing in The Wall Street Journal…
“New inventions always introduce new modes of growth, and history provides many examples of doubters who questioned future benefits. But I am not forecasting an end to innovation, just a decline in the usefulness of future inventions in comparison with the great inventions of the past.
Even if we assume that innovation produces a cornucopia of wonders beyond my expectations, the economy still faces formidable headwinds. The retirement of the baby boomers and the continuing exodus of prime-age males from the labor force, sometimes called the “missing fifth,” are reducing hours worked per member of the population.
American educational attainment continues to slide ever-downward in the international league tables, due to cost inflation at our universities, $1 trillion in student loans, abysmal test scores and large numbers of high-school dropouts.”
For us, the analysis is simpler. What powered the high-growth rates of the 20th century?
“… the energy from the sun, compressed, over millions of years.”
When mankind figured out how to use that energy in machines─ planes, trains, factories and automobiles─ it got a burst of economic growth. But these machines were all in place by 1950. And the growth spurt began to slow down in the 1970s. Since then, growth rates have declined, by fits and starts, to where they are now… down to nothing.
Is there a new breakthrough on the horizon? Will we figure out how to use even more energy to produce even higher standards of living? Who knows? But ultra-low rates of GDP growth are the rule, not the exception.
Slow rates of GDP growth cause higher rates of sustained unemployment and that cause permanent consumer demand destruction for products and services.
When you permanently destroy huge demand [by the consumer], the supply side [businesses] make adjustment to their business model by cutting production, cutting CAPX, cutting operating cost and letting employees go. In this scenario when there is less demand from consumers [and businesses] for both cash and credit… the risk of Bond bubble bust is delayed if not mitigated altogether. The argument in favor of consumer driven demand destruction is as follows…
The consumer of today recognizes that the trillions of dollars poured into the US [from all over the world] and that is what supported their credit binge to spend and spend. The [almost] free money pushed the consumers to rush into buying products and services they did not really need, rush into tech stocks, then the rush into real estate, then the rush into commodities, and then rush into U.S. government bonds.
Over the years all of these asset classes [except the U.S. Government Bonds for now] have blown-up in the consumer’s face. Not only that, the financial machinery that funneled trillions of dollars of the free worlds savings [from across the globe] into the US financial system has now blown-up as well and the money velocity has come to a screeching halt. Banks are over leveraged, they don’t trust each others financial health and they are not lending.
Consumers are not borrowing either; they are downsizing and cutting cost…
· Banks are not lending to qualified consumers… but that could change;
· Consumers has little or no equity to borrow against… not going to change anytime soon;
· Days of free money are gone forever… because the savers from all over the world are now wise to the financial shenanigans of American financial wizards and are not looking to send their life savings to America any time soon;
· Consumers are now motivated, by the blow-up of almost all asset classes in their faces, to start saving money for their future commitments and retirement… going from negative savings to almost over 6% now;
· Consumers finally realize that they don’t really need three of everything [homes, cars, jewelry, minks/furs, TVs, cell phones, computers, and electronic gadgets].
· Consumers finally realize that they don’t need to buy a Hummer or new model car every other year;
· Consumer finally realizes the rising cost of energy for driving, heating and cooling… the present drop in cost is temporary we all know;
· Consumer finally realizes that the increasing cost of real estate taxes even though their homes are 40% less in value to-day… taxes always go up and not down;
· Consumers finally realize that they don’t need to re-model every five years and buy new appliances every three years;
· Consumers finally realize eating home can save them thousands of dollars over the course of the year;
· Consumers are loosing jobs left and right in all sectors of our economy… there are no safe heaven… not even in the health and consumer goods;
· Consumers are de-leveraging en-masse and there are no asset classes worth investing [speculating] at this time… and perhaps for a long time.
The studies indicate that by the end of year 2012, there will be over 2.5 billion Internet users. That means, most all of the educated population of the world, will be globally connected by the Internet. And the boundaries of time and space will disappear. People will gather in public forums of their common interests to network and share information. These people will be the consumers, investors, vendors, partners, friends, enemies, management, or employees of the public companies. In a public forum like this, that allows us to maintain our anonymity, there will be no place to hide for the incompetent or the unscrupulous.
Add to this Internet phenomenon the instant communications afforded by the TV, and its producer’s desire to provoke debates on issues, that in the end, when all is said and done, informs and educates the public at large. What you have is a well informed, wiser and more responsible consumer that is all set to “destroy demand” for the un-necessary, unscrupulous and the irrelevant.
Permanent Businesses Credit Demand Destruction…
Businesses now see this consumer demand destruction as a clear reality and are adjusting their business models accordingly by cutting production, cutting CAPX, cutting operating costs, de-leveraging finances and letting employees go. And as such, eventually, after the initial denial period to accept demand destruction, there will be less demand for cash and credit from these businesses.
The speculation of wide spread “demand destruction’ has become a reality. The reality of demand destruction is apparent in thousands of employees being laid-off by bellwether companies like Microsoft, Google, JP Morgan and the like.
Granted, that in due time the wealthy consumers and businesses will come back into the credit markets to borrow so they can speculate in products, plants, production, stocks, commodities and real estate. But that time is years away, when there are clear signs of stability and growth in any of the known asset classes for investment.
Permanent Destruction of Collateral Asset Values at the Financial Institutions:
To this witches brew, let’s add the cause of our current credit crises and see what it means for the free supply of money in our financial system. I’m sure you and I both have our own set of facts, analysis and opinions. But the core fact that no one denies is: “the leverage used at financial institutions world-wide and lack of regulatory oversight was the main cause for this global credit crises.”
The regulatory oversight, or lack of it, will be debated and there will be rules and regulations in-place to prevent future systemic melt-down and risks. In the meantime, however, either because of banking laws or because of banks own desire to mitigate risks in this financial environment, the banks and financial institutions out there are busy trying desperately to de-leverage. This means banks [and financial institutions] will first try to shore-up their equity/debt ratios before lending out the money received from TARP and other Fed bailouts. There is, by the latest estimates, over $3 trillion dollar in systemic losses in the US alone. The money losses did not change hands… it just vanished in thin air. What are left behind, however, is the un-acceptable levels of leverage, collateral risk and vastly impaired equity/debt ratios at US financial institutions.
In summary, before we see inflation we will first see some degree of deflation due to permanent demand destruction for products, services, and credit. If we are lucky and the trillions of dollars in Fed money do work, in the best case scenario, we may see Stagflation and not reach full-fledged deflation. That is our hope!
Limited amount of bailout funds for our financial institutions is, perhaps, the right thing to do. However, excessive amount of bailout funds will only attract the unscrupulous and not bring the consumer demand [and the GDP] to the levels of recent past. In all probability, these bailout funds will not reach to those intended and only line the pockets of the same greedy, unscrupulous, and self-centered tarts that got us in this financial mess in the first place.
All these Fed bailout and stimulus measures are designed to encourage consumption… in order to support the old structures. But more consumption is just what the economy doesn’t need. It is in trouble because people have spent too much already and are in debt to their eye-balls. Now, they have to cut back and save… and when they do, every enterprise, speculative investment, and household that depended on excess consumption is in trouble.
And that’s where we are. In trouble!
At the beginning of a period of depression! The old structures must be swept away to make way for new ones.
Change! Can it be stopped? No we can’t!
“So, what’s the solution?”
“The solution to a depression is a depression.”
The message for those businesses which are dependent on the US consumer:
“… your world is going to be smaller for a long time.” We are in a period where the economy is going through what economists call rationalization. We are going to have to reduce the number of retail stores, coffee shops, automobile plants, fast food restaurants, car dealerships, etc., until we get to a level that makes rational sense for the size of the economy. We just built too much stuff, launched too many stores, and created too much capacity for almost everything.
The idea for the business person today is to still be standing when we get through this, as we will. That is what free market economies do. The day will come when we get back to over 2% GDP growth. But it will be a rational growth based on real fundamentals, one that will last a long time. So hope is not a business strategy. You need to be planning for a lengthy recession [perhaps depression] and a very slow recovery.
And if your business is one that helps the producers cut costs… or improve production… then this is your time to shine? It is now clear what the stimulus plans are like, if there is something you can do to get in the flow of that money… there are opportunities out there.
Please, for God sake, don’t be the consumer or the business that goes back to the old ways of borrow and spend… and live beyond your means. No society or civilization that lives beyond its means has ever survived. History is our witness!
God bless America.
Producer CEO – RKNet Studios
LinkedIn Connection: http://www.linkedin.com/pub/anant-goel/47/526/328
News Article: http://www.prweb.com/releases/RKNet_Studios/Bollywood_Movie/prweb9897532.htm
Blog Article: http://mirro7.blogspot.com/2009/01/open-letter-to-president-obama.html
[Based on excerpts from posts, blogs, media articles, and sponsored research]