Yesterday I outlined how the mainstream financial media is completely overlooking the similarities between this latest rally and the one leading into the summer of 2008. Link Here
Today, I am beginning a three part series explaining why I expect this fall (3Q09) to be as bad, if not worse, than last year’s in real terms, why Obama’s stimulus plan is too small to accomplish anything, why the US is entering a Depression, possibly a Great Depression, and what is the most likely outcome for the US in financial terms going forward.
Today, I’ll be focusing on the issues that brought us to this current mess.
The seeds of today’s crisis were first sown in 1971 when the US formally opened trade with China. In an effort to boost profits, large scale US manufacturers and other multinational firms began outsourcing their manufacturing jobs to the People’s Republic soon after.
When other industries realized the kind of money that can be saved by sending work overseas, they soon followed suit. Outsourcing moved up the corporate food chain until even R&D jobs and other high-level, high-skill set jobs were shifted to Asia. This, of course, diminished the number of these positions in the US. Thus began three major trends:
1) The US’s economic shift from manufacturing to services (mainly financial)
2) The massive drop in US incomes
3) The beginning of the debt bubble
Nothing illustrates the first point like the rise of the financials sector. From 1970 until 2003, financials’ market capitalizations as a percentage of the S&P 500 rose from less than 5% to 22%. Over the same period, financials’ earnings as a percentage of the S&P 500’s total earnings rose from less than 10% to 31%.
Put another way, by 2007 one in every three dollars of corporate profits came from the financial sector. Meanwhile, China was experiencing an unprecedented level of growth thanks to our renewed trade: Chinese per-capita income doubled from 1978 to 1987 and again from 1987 to 1996.
Now, fewer jobs in the US means lower US incomes. Going by the Federal government’s official (inaccurate) data, weekly US incomes peaked in October 1972 and have since fallen 15%. Of course, these numbers are based on official inflation data which is horribly under-stated. According to John Williams of www.shadowstats.com, if you were to go by actual inflationary data, US incomes have fallen more like 40% since 1972.
Full Article Here
http://www.voxeu.org/index.php?q=node/3421
ReplyDeleteThank you Davos. That is a superb article.
ReplyDeleteWe bring it on ourselves When we buy from other countries.
ReplyDeleteWhen we buy from other countries we, in effect, give them OUR jobs.
Why is this so hard to understand?
The Obama Stimulus Plan has failed, with unemployment this past week rising to 9.7%. People are appalled that $800 billion is being used to reward Obama’s supporters on Wall Street and the auto union workers in Detroit. Most of us want the Obama Stimulus Plan stopped and the return to the United States Treasury of as much of the money as possible.
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