Friday, October 24, 2008

This Ain't No "Credit Crunch." This is Total Economic Meltdown

This Ain't no "Credit Crunch." This is Total Economic Meltdown

When the economy is growing, it's because there are a series of cycles that overlap and are re-inforcing an upward spiral. Wages go up and spending goes up. Spending goes up and wages go up. But just as this spiral can continue despite significant obstacles, it can also go down. Which is what's happening now.

Wages stagnate, spending (after borrowing every last available cent) drops. Spending drops, companies lay-off, and there's less income, and less spending. And so on and so forth. Chinese steel orders are cut because the manufacturers perceive that demand for their products is down, so steel tanks (as do stocks as traders think the Chinese manufacturers' point-of-view is an insider's (i.e., accurate and not already in the markets' prices).

Corporate earnings are declining, and that feeds the downward spiral. The question on everyone's mind is, "when do we hit bottom?" My view is that we've still got the worst ahead of us, and that it will take a decade to dig out.

Far too many companies have spent the last 25 years not innovating. Car companies are everyone' favorite whipping boys these days, but the same can be said for many others. From technology to food production, from health care to energy, we have failed as a society to invent the future, instead simply mining the past for current profits.

Almost all our economic sectors have their assets badly misallocated. Many people talk about the need to re-invent energy as a renewable resource not just to replace imported oil but as a sort of jobs program. But the same is true for almost every sector.

I live in NYC so I see a growing retail space vacancy problem. Owners of stores are holding them empty because they cannot find credit-worthy tenants. There are of course lots of people who need jobs and could make a go if it in a storefront, but they lack the credit. So we end up with idle assets: empty stores, which over time will lose their value as the street becomes less vibrant and a poorer retail environment, and the under-utilized people, who will not contribute to society at a level of which they are capable. I give this example as a short-hand way of illustrating what I take to be the central problem in our economy.

We have so mismanaged our assets that we have severely damaged the ability to produce jobs and income. Our leaders have frittered away our opportunities for many, many years. The phrase that seems to come to mind over and over is "eating the seed corn." (See? I did too grow up on a farm!) I have not clearly understood for a decade what, exactly, many companies did. Dell computers makes computers, and for a while will have crazy growth as everyone needs one. It can even extend that growth as they introduce ever-faster machines. But a day arrives when the need for a new computer just isn't there, and Dell is in trouble.

We're not entering a period when there are no jobs, and no business has success. But it will be a period when there are many fewer jobs, many more unemployed, and many businesses will fail. Government has been starved of resources for so long it will not be able to help much. In fact, all of our "safety net" mechanisms have been starved for resources and overburdened with demand, it's hard to see how we don't end up with Depression-like work camps and the like before we're done.

In fact, perhaps just to provoke a bit, I wonder where it's written that the Depressions is some kind of floor of economic misery. Who says it can't get worse than that? Surely not I.

This is going to be an ugly ride, rife with tragedy, suffering and despair. Of course there's a chance that I'm wrong, and of course I hope I am. But when I look at most companies in the US, I don't see a lot of reason to hope.

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