Wednesday, March 11, 2009

Where We Stand Today, March 11, 2009

National – lead, follow or get out of the way: "It’s the economy stupid," has been the political cry from the Democratic left for over two decades. It got Bill Clinton elected and it got Barack Obama elected. Back in the days of Ozzie & Harriet, the 1950’s, America really was built on one income families. Mothers in the 1950’s were happy to be at home. Many of them had worked during World War II and were happy to be "just homemakers." The tax rate on the wealthiest individuals in Post-War America was 90% and everyone (except perhaps the newly wealthy) was happy. America prospered even while fighting a "cold war."

During the Nixon administration our national philosophy changed. We often credit Ronald Reagan for America’s sharp turn to the right but it was the centrist Nixon who brought tax relief to the wealthy and deregulated everything under the sun. It was Nixon’s inflation that paid off the Vietman War and put Jimmy Carter in office and Jimmy Carters efforts to fight inflation that put Ronald Reagan in office. Somewhere in that period the two income family became a necessity for the Middle Class.

Things have changed, we can feel it. Where do we stand? Economists have identified at least four cycles governing the world’s economy:

1. The Business Cycle, also known as the Kitchin inventory cycle – a 4 to 7 year oscillation between excess inventory and excess labor. If you have too much inventory you don’t need anyone making new things and vice versa. This cycle normally governs the boom and bust of a Bull or Bear market.

2. The Juglar fixed investment cycle of 7–11 years –Is just like the Business Cycle but governed by the stock of "durable goods" and other longer term assets. Think of how long an automobile or dishwasher lasts on average.

3. The Kuznets infrastructural investment cycle of 15–25 years – Think of our inventory of roads, bridges and housing. The boom years from 1990 till roughly now overbuilt our infrastructure. We have more houses than we can sell, more office space than we can fill and more capacity to build more automobiles than we need.

4. The Long Wave also known as the Kondratieff wave or long technological cycle of 45–60 years – defines what we normally associate with "Depressions." The same principles apply. In the Long Wave the growth of a new technology spends itself until it becomes ubiquitous. In the early Industrial Revolution there was a sudden need for dams, water wheels, tool smiths and other professionals who could build the factories that produced the goods. Eventually almost everything was industrialized and the need for large numbers of new factories diminished and the resulting unemployment caused a Depression. The initial crash traditionally has been triggered by the "last man in" going broke and unable to pay back debt needed to build the long term infrastructure.

Our current problem appears to be the unfortunate congruence of multiple cycles. The collapse of the automobile industry (and they were in trouble well before the housing bubble burst) signals Juglar cycle while the housing bubble signals a trough in the Kuznets cycle. Unfortunately we appear to be at the confluence of a Long Wave as well as the great Electronics Age wave has crested and is coming to an end just as the age of steam did. In case you haven’t noticed most of the electronics firms that made Route 128 famous are gone. DEC is gone, Data General is gone Prime Computer is gone … and the list goes on and on and on.

Since we’re postulating that this is going to be a bad one it will require a name. Periods of economic upheaval acquire names like "Tulip Mania" or "The Great Depression," "The Long Depression" of the 1830’s and "The Panic of 1873" which lasted 65 months. Go back far enough and you find references to "Goldsmiths crises" in the Middle Ages. We would like to propose a name for our current troubles: "The Great American Transfer of Wealth."

The early 20th century economist Vilfredo Pareto once said, "History is a graveyard of aristocracies." Pareto suggested that for stable economies there is a golden income ratio of the richest to the poorest and whenever the income ratio becomes too low as in socialist countries there is a middle class revolution (Think post-Soviet Russia) but if the ratio is too high there is a revolution of working people (Think French Revolution).

The collapse of the stock markets has eliminated massive amounts of wealth, most of it owned by the rich and super rich. It’s a sign of the times that the U.S. government has attached strings to bank bailouts that allow stockholders to vote on executive compensation. An article in the March 11 2009 New York Times (Some Banks, Feeling Chained, Want to Return Bailout Money) suggested that bank executives are having second thoughts about accepting bailout but the choice for many is accept the funds and strings or be taken over by the FDIC. If the solution to the survival of General Morors and Chrysler is bankruptcy then while labor contracts will be voided, stockholders and bond holders will be wiped clean since the loans made to these companies by the U.S. government takes precedence. Barack Obama is talking about universal health care. Whatever form it takes it will likely reverse the policy of deregulation of the insurance industry by Richard Nixon, the health care will become a non-profit industry again.

By all measures we are in the middle of "The Great American Transfer of Wealth." What it will look like is that the claim on Americas output will shift toward the middle and working class and away from the rich. No doubt it will swing too far. It’s just the nature of all economies.

No comments: