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US economy

128shot

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What’s wrong with America today, Mon., August 15, 2005


Americans have to recognize that what is happening today is the greatest transfer of jobs and wealth from one nation to other nations in the history of the world. This has been very costly to the American worker, and the economic pain will get worse.

In the face of rising costs, when America’s consumers are increasingly only able to find low-paying part-time jobs they are discovering a new economic paradigm (i.e., “end of the week and a dollar short”), which I have been calling “no tickee for laundry”.

Actually, what I see happening in America today is what happened in Britain and Europe in the last century as wealth transferred from those places to America, i.e., massive immigration of people who are prepared to take low-paying jobs that governments tax in order to keep their spending game in motion as domestic capital was fleeing their country.

In fact, that’s how Western Europe was built many centuries earlier. You see; people and money go to where the best opportunities lie.

But in the context of today, the new economic reality in America may be an unhealthy situation because soon there will be social and worker unrest, and wage inflation, based on my assessment of how events since 9/11 have further divided the haves and the have-nots.

But back to the financial problem facing Americans today, which is that, debts in the country are rising faster than productive assets. To compensate, an inflation cycle has started, with the result that assets are becoming unrealistically valued in the securities markets, if they are not already.

Over-valuation has already happened in real estate markets in the U.S. A house that ought to be priced at $200,000 is now $400,000, or one at $2 million is now $4 million.

Governments don’t mind, of course, because they tax these higher values. So, for the privilege of calling your house twice the price that you know it ought to be, you pay more taxes, and you take on more mortgage debt, which has to be serviced and repaid, and so you demand more top-line revenue (i.e., gross income) to compensate.

You are now on a treadmill.

A treadmill, btw, is defined as putting in a lot of work to go nowhere. And that’s what’s wrong with America today.

The capital markets have ways of adjusting to inflation. Bond traders simply demand higher interest yields, and equity traders compensate by ratcheting PE’s down as interest rates rise.

However, as interest rates rise, many homeowners – especially the new ones who have little equity invested -- will find themselves unable to meet the added costs, and will walk away from the asset. They usually do when they realize the related debt is greater than the real value of the asset.

I have seen three periods of that happening in the past 40 years. I think there will be another one within a year, possibly 18 months.

And as more Americans see that they are working for, and fighting wars against, what is really nothing more than organized gangs in other countries, they’ll start to become unsettled in their thoughts. Particularly so, if house prices fall.

They’ll start to demand to have government address the problems, and not just the symptoms.

And, at difficult economic times like this, as they experience an average annual $500 cost increase to fuel up their automobile, and as they see that they are paying increasing mortgage payments to banks like Citigroup and CIBC that are in large measure owned by Saudi’s and Chinese, they’ll become even more unsettled.

Americans will want to know why they are working for foreign investors, while American financiers are taking their savings and investment capital and sending it abroad, where every few years – like Mexico, or Brazil or Argentina or Russia – there are massive defaults on the obligations to the American capitalists.

Matters like wars and capital defaults of nations are hugely expensive. In a word, they are the prime causes of inflation.

So the problem that must be addressed by every American today – and not just the Federal Reserve Bank – is inflation, which in my simple mind is best explained as being the difference between the price and the use of assets like money and real estate.

I wrote about this problem some time ago, using southern California as a case study.

A California landowner, who has been biding his time for price appreciation to kick in (so he can make a real estate killing), has used that land to grow tomatoes. But Americans won’t take those low-paying and backbreaking tomato pickers’ jobs, so Mexicans are brought in.

Americans would prefer to be financiers – like the ones who take the savings of other Americans and invest it in modern plants in Mexico, for example, that manufacture food products and glass containers for those food products, which are high value-add industries that pay their workers well.

These plants then import cheap California tomatoes, picked by cheap Mexican labor in California, and produce in their factories a variety of value-added products like salsa and tomato paste, which are then exported and sold back into California as high-cost staples.

At the same time, Americans are inflating the real estate price of the tomato fields in California, which are going to be developed for houses, for which there is additional demand to meet the needs of the immigrant Mexican community. So when the house is actually built and sold, it is now very expensive because of the higher cost of the land and imported building materials.

This is one vicious circle of transferring wealth abroad and building higher economic cost locally, which will continually pull down the price of the USD, or at the least work against those who are working hard to build it up.

To get off that treadmill, America has to stop financing wealth-creating capital expenditure abroad, and start doing it at home. For as long as they continue to invest in foreign plants and equipment, then traders like you and me have no option but to invest in emerging foreign economies because that’s where the wealth is going to grow fastest.

As a consequence, what will happen in America in the next 50 years will be similar to the death, in the past 50 years, of the once great northern industrial cities, and the simultaneous birth of the Sunbelt in America. By that I mean, the American economy (and military power) will subside, and certain foreign economies will grow strong.

China and India will become the next Florida-Texas-California.

It’s happening today, as you know.

It’s happening because the price of land in America today is too high relative to the income it yields. If, as the situation exists today, many American landowners are prepared to accept returns from real estate of just 2 pct, in expectation that the sale of that land will give much higher (inflationary) gains, then that – inflation – is what will occur.

Either that or deflation, which would occur if, as and when the same landowners get tired of earning 2 pct returns, and start selling their real estate and start buying securities of corporations – domestic or foreign – where the real returns are much greater.

On that, the jury is still out.

Government, however, could do two things to solve this problem.

On American capital that is exported (i.e., Foreign Direct Investment), government could place a higher rate of tax on FDI than on U.S. capital that is employed domestically.

And, elected representatives to federal, state and local government could enact balanced budget laws, which would serve to support the USD in the long run, thereby helping to keep inflation under control.

In spite of relatively much bigger health and social welfare budgets, it is a fact that the Government of Canada has had budget surpluses for eight straight years. Moreover, the Minister of Finance, in giving this year's budget, opined that the country would have budget surpluses for at least the next five straight years.

If American politicians could manage the same effective fiscally prudent result, then the current War On Terrorism could be prosecuted without such a destructive impact that the twin deficits have on the USD, as is seen today.

So, yes, there are problems with America, and mostly it has to do with the use of capital, and the value of the USD. But these are problems that can be fixed if the American public and their elected representatives stop making decisions that lead to inflation.

And it would help if government and media would stop telling Mom & Pop that inflation does not exist, when, irrespective of the numbers being reported, we know exists.

I know this is suppose to go in economics forum, but I think this is more of Us issue over all, so i put it here.
 

nkgupta80

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good summary of some of the major problems with our economy.
 

DeMaxx

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I agree with what you have to say. Now the question is what can we the people do about it. When our elected officials do what big business wants rather than what the majority of the people want them to do. The central American free trade agreement comes to mind; I live in North Carolina, immigration is high and job loss is high due to companies moving to other counties. In a poll 85% of North Carolinians were against CAFTA yet our elected officials voted for it. So how do we fight back. DeMaxx
 

128shot

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protests, demonstrations,


lets not forget bargaining, we're going to have to learn, as american citzens, we are not entitled to anything.
 
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