American Economy: R.I.P.

Discussion in 'Business & Economics' started by kmguru, Sep 11, 2007.

  1. kmguru Staff Member

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    Is American Economy heading underground? Read below the effects and think about the causes....and comment with ideas to prevent the slide down. Thank you. - KMG

    American Economy: R.I.P.

    By Paul Craig Roberts

    09/10/07 "ICH' -- -- The US economy continues its slow death before our eyes, but economists, policymakers, and most of the public are blind to the tottering fabled land of opportunity.

    In August jobs in goods-producing industries declined by 64,000. The US economy lost 4,000 jobs overall. The private sector created a mere 24,000 jobs, all of which could be attributed to the 24,100 new jobs for waitresses and bartenders, and the government sector lost 28,000 jobs.

    In the 21st century the US economy has ceased to create jobs in export industries and in industries that compete with imports. US job growth has been confined to domestic services, principally to food services and drinking places (waitresses and bartenders), private education and health services (ambulatory health care and hospital orderlies), and construction (which now has tanked). The lack of job growth in higher productivity, higher paid occupations associated with the American middle and upper middle classes will eventually kill the US consumer market.

    The unemployment rate held steady, but that is because 340,000 Americans unable to find jobs dropped out of the labor force in August. The US measures unemployment only among the active work force, which includes those seeking jobs. Those who are discouraged and have given up are not counted as unemployed.

    With goods producing industries in long term decline as more and more production of US firms is moved offshore, the engineering professions are in decline. Managerial jobs are primarily confined to retail trade and financial services.

    Franchises and chains have curtailed opportunities for independent family businesses, and the US government’s open borders policy denies unskilled jobs to the displaced members of the middle class.

    When US companies offshore their production for US markets, the consequences for the US economy are highly detrimental. One consequence is that foreign labor is substituted for US labor, resulting in a shriveling of career opportunities and income growth in the US. Another is that US Gross Domestic Product is turned into imports. By turning US brand names into imports, offshoring has a double whammy on the US trade deficit. Simultaneously, imports rise by the amount of offshored production, and the supply of exportable manufactured goods declines by the same amount.

    The US now has a trade deficit with every part of the world. In 2006 (the latest annual data), the US had a trade deficit totaling $838,271,000,000.

    The US trade deficit with Europe was $142,538,000,000. With Canada the deficit was $75,085,000,000. With Latin America it was $112,579,000,000 (of which $67,303,000,000 was with Mexico). The deficit with Asia and Pacific was $409,765,000,000 (of which $233,087,000,000 was with China and $90,966,000,000 was with Japan). With the Middle East the deficit was $36,112,000,000, and with Africa the US trade deficit was $62,192,000,000.

    Public worry for three decades about the US oil deficit has created a false impression among Americans that a self-sufficient America is impaired only by dependence on Middle East oil. The fact of the matter is that the total US deficit with OPEC, an organization that includes as many countries outside the Middle East as within it, is $106,260,000,000, or about one-eighth of the annual US trade deficit.

    Moreover, the US gets most of its oil from outside the Middle East, and the US trade deficit reflects this fact. The US deficit with Nigeria, Mexico, and Venezuela is 3.3 times larger than the US trade deficit with the Middle East despite the fact that the US sells more to Venezuela and 18 times more to Mexico than it does to Saudi Arabia.

    What is striking about US dependency on imports is that it is practically across the board. Americans are dependent on imports of foreign foods, feeds, and beverages in the amount of $8,975,000,000.

    Americans are dependent on imports of foreign Industrial supplies and materials in the amount of $326,459,000,000--more than three times US dependency on OPEC.

    Americans can no longer provide their own transportation. They are dependent on imports of automotive vehicles, parts, and engines in the amount of $149,499,000,000, or 1.5 times greater than the US dependency on OPEC.

    In addition to the automobile dependency, Americans are 3.4 times more dependent on imports of manufactured consumer durable and nondurable goods than they are on OPEC. Americans no longer can produce their own clothes, shoes, or household appliances and have a trade deficit in consumer manufactured goods in the amount of $336,118,000,000.

    The US “superpower” even has a deficit in capital goods, including machinery, electric generating machinery, machine tools, computers, and telecommunications equipment.

    What does it mean that the US has a $800 billion trade deficit?

    It means that Americans are consuming $800 billion more than they are producing.

    How do Americans pay for it?

    They pay for it by giving up ownership of existing assets--stocks, bonds, companies, real estate, commodities. America used to be a creditor nation. Now America is a debtor nation. Foreigners own $2.5 trillion more of American assets than Americans own of foreign assets. When foreigners acquire ownership of US assets, they also acquire ownership of the future income streams that the assets produce. More income shifts away from Americans.

    How long can Americans consume more than they can produce?

    American over-consumption can continue for as long as Americans can find ways to go deeper in personal debt in order to finance their consumption and for as long as the US dollar can remain the world reserve currency.

    The 21st century has brought Americans (with the exception of CEOs, hedge fund managers and investment bankers) no growth in real median household income. Americans have increased their consumption by dropping their saving rate to the depression level of 1933 when there was massive unemployment and by spending their home equity and running up credit card bills. The ability of a population, severely impacted by the loss of good jobs to foreigners as a result of offshoring and H-1B work visas and by the bursting of the housing bubble, to continue to accumulate more personal debt is limited to say the least.

    Foreigners accept US dollars in exchange for their real goods and services, because dollars can be used to settle every country’s international accounts. By running a trade deficit, the US insures the financing of its government budget deficit as the surplus dollars in foreign hands are invested in US Treasuries and other dollar-denominated assets.

    The ability of the US dollar to retain its reserve currency status is eroding due to the continuous increases in US budget and trade deficits. Today the world is literally flooded with dollars. In attempts to reduce the rate at which they are accumulating dollars, foreign governments and investors are diversifying into other traded currencies. As a result, the dollar prices of the Euro, UK pound, Canadian dollar, Thai baht, and other currencies have been bid up. In the 21st century, the US dollar has declined about 33 percent against other currencies. The US dollar remains the reserve currency primarily due to habit and the lack of a clear alternative.

    The data used in this article is freely available. It can be found at two official US government sites: http://www.bea.gov/international/bp_web/simple.cfm?anon=71&table_id=20&area_id=3 and http://www.bls.gov/news.release/empsit.t14.htm

    The jobs data and the absence of growth in real income for most of the population are inconsistent with reports of US GDP and productivity growth. Economists take for granted that the work force is paid in keeping with its productivity. A rise in productivity thus translates into a rise in real incomes of workers. Yet, we have had years of reported strong productivity growth but stagnant or declining household incomes. And somehow the GDP is rising, but not the incomes of the work force.

    Something is wrong here. Either the data indicating productivity and GDP growth are wrong or Karl Marx was right that capitalism works to concentrate income in the hands of the few capitalists. A case can be made for both explanations.

    Recently an economist, Susan Houseman, discovered that the reliability of some US economics statistics has been impaired by offshoring. Houseman found that cost reductions achieved by US firms shifting production offshore are being miscounted as GDP growth in the US and that productivity gains achieved by US firms when they move design, research, and development offshore are showing up as increases in US productivity. Obviously, production and productivity that occur abroad are not part of the US domestic economy.

    Houseman’s discovery rated a Business Week cover story last June 18, but her important discovery seems already to have gone down the memory hole. The economics profession has over-committed itself to the “benefits” of offshoring, globalism, and the non-existent “New Economy.” Houseman’s discovery is too much of a threat to economists’ human capital, corporate research grants, and free market ideology.

    The media has likewise let the story go, because in the 1990s the Clinton administration and Congress overturned US policy in favor of a diverse and independent media and permitted a few mega-corporations to concentrate in their hands the ownership of the US media, which reports in keeping with corporate and government interests.

    The case for Marx is that offshoring has boosted corporate earnings by lowering labor costs, thereby concentrating income growth in the hands of the owners and managers of capital. According to Forbes magazine, the top 20 earners among private equity and hedge fund managers are earning average yearly compensation of $657,500,000, with four actually earning more than $1 billion annually. The otherwise excessive $36,400,000 average annual pay of the 20 top earners among CEOs of publicly-held companies looks paltry by comparison. The careers and financial prospects of many Americans were destroyed to achieve these lofty earnings for the few.

    Hubris prevents realization that Americans are losing their economic future along with their civil liberties and are on the verge of enserfment.
     
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  3. desi Valued Senior Member

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    No wonder Chuck Hagel is throwing in the towel.
     
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  5. Billy T Use Sugar Cane Alcohol car Fuel Valued Senior Member

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    Minutes ago, in Berlin Germany, Bernanke said:
    "foreign investors would ultimately become satiated with dollar assets, and financing the deficit at a reasonable cost would become difficult,'' - not news to me, but what I have been saying for few years now.

    Read more of his talk at:
    http://www.bloomberg.com/apps/news?pid=20601087&sid=aWBSdublJ814&refer=home

    Amazingly Bloomberg has it available as he speaks (got an advanced copy?)!
     
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  7. quadraphonics Bloodthirsty Barbarian Valued Senior Member

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    Other things Bernanke said in that article:

    "the ``global saving glut'' is still helping to keep interest rates low, and they may not rise much in the event that the pool of excess capital dwindles in coming decades. "

    "He urged an increase in domestic saving to help pare the shortfall, a process that ``will have both real and financial consequences'' though there's little sign now that the gap hurts the American economy, he said. "

    ``Term premiums appear recently to have risen from what may have been unsustainably low levels,'' Bernanke said. That's ``in part because of the greater recent volatility in financial markets and investors' demands for increased compensation for risk-taking,''

    ``Although the U.S. current account deficit is certainly not sustainable at its current level, U.S. liabilities to foreigners are not, at this point, putting an exceptionally large burden on the American economy,''

    "Should the U.S. deficits stay near current levels, ``foreign investors would ultimately become satiated with dollar assets, and financing the deficit at a reasonable cost would become difficult,''"

    As yields on longer-term U.S. Treasuries failed to climb even as the Fed started raising interest rates in 2004 and 2005, Greenspan called the development a ``conundrum.'' (you omitted the bold part of the sentence in your quote).

    "Bernanke in a March 2005 speech offered an explanation: the ``global saving glut.'' A ``combination of diverse forces'' spurred emerging-market nations in particular to save more than they invest, he said. That helped explain the widening U.S. current-account gap and ``relatively low level of long-term real interest rates'' worldwide,"
     
  8. Billy T Use Sugar Cane Alcohol car Fuel Valued Senior Member

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    Yes I did. for two main reasons:

    (1) The US is not likely to change significantly it deficits because:
    (1a) Iraq war will cost at least 1 trillion dollars.
    (1b) Oil hit all time high today and demand for it in US will continue to grow as the alcohol from corn is a political scam, not a serious effort to reduce oil demand. At $100/ barrel the deficit will get much higher, not drop.
    (1c) Wealth is being concentrated into the hands of thealready rich (who will continue to drink their French wine, drive their imported cars etc.)
    (1d) Saving will continue to fall as more baby boomers retire.
    (1e) Congress is likely to "bail out" some of the 200,000 sub-prime mortgages holders who have their "teaser loans" RE-SET IN NEXT 12 MONTHS.
    (1f) As foreiners buy more real assets of US (instead of Tresury bonds) the earning of these assets (companies etc) LEAVE the US as dividends to their new froeign owners. (Once the US owned much more in foreign lands, but no longer They now own more here.)
    (1g) Once US was world's largetest creditor, now is the world's largest debtor - paying more interest on the growing debt ever year.)
    (1h) Outsourcing will continue (even accelerate until most good jobs are gone) and this will boost profits falsely adding to computed domestic GDP and thereby keeping the debt to GDP ratio not too unreasonable for several years, but this is now being realized as a "book-keeping trick" -see post 1.
    (1i) etc. but that is all that comes quickly to mind.

    SUMMARY of (1): There is zero chance that the debt will be significantly reduced - thus the part I admited is like omitting the assumption that the sun will rise tomorrow - not a need qualifier.

    (2) I was in great hurry - the news was only minutes old - so I gave just the "bottom line," without any comment even - perhaps a first for me.

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    Last edited by a moderator: Sep 12, 2007
  9. quadraphonics Bloodthirsty Barbarian Valued Senior Member

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    You mean 1 Trillion more than it already has or... ? Odds are that spending for Iraq is going to come down quite a bit in the next couple of years.

    Okay, but $100/barrel oil is not imminent. OPEC just agreed to boost production to stabilize the oil prices.

    I don't think there's any reason to think that the rich are any more likely to buy imported goods than anyone else in this day and age. Poor and middle-class people shop at Wal-Mart, which is largely stocked by Chinese imports.

    I don't see how this directly affects either deficit...

    Also not clear on what bearing this has on the deficits...

    Again, I don't see what this has to do with either deficit. The profits from the US companies in question will still be taxed by the US government, so it won't be negatively affecting the budget deficit.

    The growth of the debt has not been significantly larger thant he growth in GDP, so it's more correct to say we're standing still on this one.

    Probably this one didn't deserve a heading.

    Which has nothing to do with the point Bernanke is making. He said we can't continue to run both a trade and a budget deficit for ever. No longer running a budget deficit does not necessarily mean that the debt will be significantly reduced; it just means that it will cease to grow. Moreover, note that the budget deficit has seen sharp reductions during each of the past few years. It has reduced by almost half in the last couple of years. Moreover, even if the budget deficit doesn't go away, Bernanke's statement was about BOTH the budget AND trade deficits. Even if the budget deficit doesn't go away, reduction of the trade deficit would be sufficient to obviate his concerns. Note that the trade deficit is already showing signs of slowing amid the depreciation of the dollar with respect to the currencies of major trading partners.

    It was dishonest to remove the first portion of the sentence. It's as if I'd said, "If I win the lottery, I'll buy beers for everyone on SciForums." and then you quoted by as saying "I'll buy beers for everyone on SciForums."
     
  10. Billy T Use Sugar Cane Alcohol car Fuel Valued Senior Member

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    23,198
    I posted the following:
    (1) The US is not likely to change significantly it deficits because:
    (1a) Iraq war will cost at least 1 trillion dollars.
    (1b) Oil hit all time high today and demand for it in US will continue to grow as the alcohol from corn is a political scam, not a serious effort to reduce oil demand. At $100/ barrel the deficit will get much higher, not drop.
    (1c) Wealth is being concentrated into the hands of thealready rich (who will continue to drink their French wine, drive their imported cars etc.)
    (1d) Saving will continue to fall as more baby boomers retire.
    (1e) Congress is likely to "bail out" some of the 200,000 sub-prime mortgages holders who have their "teaser loans" RE-SET IN NEXT 12 MONTHS.
    (1f) As foreigners buy more real assets of US (instead of Tresury bonds) the earning of these assets (companies etc) LEAVE the US as dividends to their new froeign owners. (Once the US owned much more in foreign lands, but no longer They now own more here.)
    (1g) Once US was world's largetest creditor, now is the world's largest debtor - paying more interest on the growing debt ever year.
    (1h) Outsourcing will continue (even accelerate until most good jobs are gone) and this will boost profits falsely adding to computed domestic GDP and thereby keeping the debt to GDP ratio not too unreasonable for several years, but this is now being realized as a "book-keeping trick" -see post 1.
    (1i) etc. but that is all that comes quickly to mind.

    SUMMARY of (1): There is zero chance that the debt will be significantly reduced - thus the part I admited is like omitting the assumption that the sun will rise tomorrow - not a needed qualifier.

    And quad commented on each as below:
    1a
    I did not realize that 1 trillion was spent already. I though it was "only" $10 billion / month cost. (Perhaps that is man-power cost alone) - I.e. it is worse than than I realized. Cost will not go significantly down, if history is any guide. The cost of the veterans hospitals, rebuilding the supplies of munitions, replacing the wear and tear of ships and planes, paying the psychiatric care and the disfunction cost of its non-productive victums, etc will go on for many years. - For example, the cost of WWII was only about half occured during the war. (and I do not think that includes the interest on the war induced debt as that is too hard to separate out from the general debt, as it makes the interest rates higher etc.)

    1b
    Surely you joke! The market reaction was: "That is much too little an increase to do anything!* - Immediately when the disapointing magnitude of the insignificant PROMISSED increase was announced, it cause the price of oil to spike to an all time high! It may be impossible to even sustain this tiny increase for long - Saudis have promissed increases before they could not deliver. - Their production capacity is the highest state secrete, but many are coming to believe their mature field can not produce any more without very significant self damage (Too rapid an extraction causes the oil porious rocks to collapse and seals the remaining oil in. They know this and have not delivered on their promisses since the fields were hurt in the production surge that punished Saddam by driving price to $10/ barrel under the first Bush. This tiny increase is probably all they can deliver without more damage to the fields.)
    -------------------------
    * " ... market judged this week’s move by the Organisation of the Petroleum Exporting Countries to increase production as “too little, too late”."
    From: http://www.ft.com/cms/s/0/cf2af3b2-6107-11dc-bf25-0000779fd2ac.html {The Financial Times}

    1c
    The deeply in debt people must eventually tighten their belts (as their credit cards "max out") but not the rich. I was really just counter the presumption that dropping purchasing power of the dollar would drastically cut imports - that is true in part. I was pointing out that it is less true than normal as Bush has pumped tax money to the already rich who will either (1) spend more as good investment opportunities in US become more rare; or (2) invest over seas. In either case there is money exiting US and that adds to the deficits.

    1d
    Then you must be blind!!! BABY BOOMERS were recently working in their peak tax paying years - now they have become "negative tax payers" as the collect their Social Security - If millions of very positive tax payers become negative tax payer does not increase the budget deficit, I do not know what would! As they are also becoming "negative savers" their investment earnings will also decrease as cash is taken out and thus the taxes on these earnings will also decrease. If I should have keep these two baby boomer effects more clearly separate - you may do so and increase the length of the list by adding one part of the baby boomer effect separately from the other.

    1e
    Well, then I will spell it out for you, but first let me correct my error. It is 2 million loans, not only 200,000 that reset within the next year (again more serious than I stated.):
    Where do you think the money to pay off these defaulting mortgages will come from? Santa Clauss? No, it comes out of the special suplimental appropriation if the current budget is not flexible enough, increasing the domestic budget deficit. Note I am reasonably sure it will happen as the Rebublican congress men do not want the bankers to get stuck with worthless paper and the Democrates do not want people put out of thier homes. No body wants even more homes on the market which has already the highest backlog of unsold home in 26 years. Obviously, almost all of the Republicans also do not want voters thrown out of their homes, even if they must blame the "rating agencies" and "the bankers" who fund their campaigns. (The bankers are 'big boys" and understand this political necessity to be a scape goat for foolish voters who signed on the dotted line of their own free will.)

    1f
    Yes that is true, perhaps even increased or some of the benefits (special tax treatments domestic companies had) will be cut, but that was not my point. The foreigners are getting out of Treasury bonds and into real assets, which give better yields (capital gains instead of losses in purchasing power). Really I should have noted that the money leaving increases only by the difference between these two yields. But any money leaving adds to the non-domestic deficits I am not sure it is technically called balance of payments deficit, but again, I am not too concern by the name -only by the total magnitude of the flow of funds out of the country (except when they are FDI of US investrors as those should eventually return net funds flow TO the US). If you prefer, call this increase of funds leaving the US (maninly as dividends) "negative US FDI" - name is unimportant to me, as it is an increase in the "dollar hemorage." (same as my buying ADRs or converting dollars into Brazilian Real causes)

    1g
    Perhase almost true, historically, if you neglect the effect discussed in post one, which is a "book-keeping trick" associated with how the outsourcing's increase in productivity is counted to artificially increase the GDP. However, true or false this history is, my main point was same as Bernanke's bottom line (and what I have been telling you for years), about the future. -I.e. the foreigners WILL demand higher interest rates to persuade them to buy Treasury issue. (Fools if they do not, as they should have learned by now that the dropping dollar value has caused them to lose purchasing power for couple of years now on Treasury bonds they hold.) These higher rates will of course make the debt increse faster as the total interest paid on the old debt increases, causing the US borrowing to pay it to increase etc - a "visious circle" ending in "printing press money" and stagflation, turning rapidly into deep depression.

    1h
    Possibly not needed as the effect has been already mentioned when explaining how part of others work, but I like it explicit as the ratio of debt to GDP we both argee is the relivant number, not the debt alone, when deciding the "soundness" of the dollar. Why any slow down in US economy (GDP) while debt continues it upward climb is so dangerous.

    Quads final comments (and my rejoiners):
    Yes it was and that is still going up and appear to be trying to do so "forever" but of course he is correct, it can not when no one will lend at rates the US can pay.

    Yes it has slightly decrease from the recent all time highs - I do not expect a steady monotonic upward ramp. The debt is no longer in the 60+ billion per month as at the peak but still in the mid 50s. Even getting it down to half that level would not make me happy as the long term trend is for interest to rise, so rather than the debt, lets agree to watch the interest paid on it. - I will not hold my breath until the COST of the debt comes down. -That is still much higher than a year ago and is headed up still.

    May I mention that Clinton had a balanced budget and then the cost of the debt was coming down. (Oh - I guess I just did.

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    )

    No that is dishonest because "Winning the lottery" is NOT a likely precondition but the US continuing run net defficit IS highly probable, so it is you, not me, who is being dishonest.

    If you want a example more in parallel to mine consider:

    The full statement:
    "If it snows in Minosota in 2008, Quad will buy beers for everyone on SciForums."
    being replaced by:
    "Quad will buy beers for everyone on SciForums."

    Poster here can be nearly sure that you are offering free beers even if the initial, highly-likely, qualifier is not present in the second shorter statment. Likewise, when I, in haste to post news only minutes old, omitted an initial, highly-likely, qualifier, I was neither dishonest nor distoring the meaning, which in the specific case is that it is likely that foreigners will grow tired of financing the US debts.
    In fact, they already are. - The four biggest holders of Treasury bonds were net sellers in August 07 - latest data available) Japan, China, S.Korea and I forget the fourth, but I recently posted them and the net amount sold in some thread just after reading Bloomber's report with the actually net value sold.
     
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