Wednesday, 4 March 2009

Panic economics

Outside the Box
John Mangun
Business Mirror
http://www.businessmirror.com.ph/home/opinion/6874-panic-economics.html

The United States’ gross domestic product (GDP) contracted by 6.2 percent.

These economic numbers for the last three months of 2008 should be a wake-up call for the Philippines. But not in the way you probably think I mean.

From CNN: “Among the main drivers of the decline was a 4.3-percent drop in consumer spending, which makes up two-thirds of the nation’s overall economic activity.”

The US is a nation of spenders. It is an economy built on buying and investing. America is a consumer-oriented society. That is one of the main factors that has made that country and its economy great. For more than 100 years, the standard of living of the US has grown and grown, bringing along with it the rest of the world’s.

Virtually every human technological invention came to life and thrived because it became part of the consumer-oriented economy. The flush toilet was invented in 1595. It was only because of upper-economic-class British consumerism in the late 1800s that this “modern” device became part of nearly everyone’s life.

There are 4 billion cell-phone users in the world. Bell Labs of American AT&T invented the concept for the mobile phone in 1947. The complete modern structure was designed in 1973 by American company Motorola, with the Japanese telecom NTT setting up the first commercial citywide cellular network, launched in 1979. More people now hold cell phones than those who do not.

And Filipino consumerism played an important role in the cell-phone revolution. Text messaging or SMS began in Europe in 1993. As late as 2000, Europeans were sending an average of 35 messages a month. Filipinos were sending 50 texts a day. Nations, particularly the “poorer” ones, learned from Filipinos the cost-effectiveness and convenience of texting, furthering the cell-phone explosion in the last eight years.

Hundreds of millions use their phones every day for banking and bill paying, and who do you think started that? The first commercial payment system was launched here in 1999 by Globe and Smart.

Texting is a global business worth over $80 billion a year. Consumer spending is a powerful economic force; it can give life or it can give death to an economy.

Asians have the idea that people in the West, particularly Europeans, do not take baths as much as they should. That is absolutely not true (except some French). The oldest personal-sized bathtub discovered was actually found on the Mediterranean island of Crete. But around 1600, some European “experts” told people that bathing was dangerous because water could carry germs through the skin. Well, that killed the bathtub and soap-making industry for 200 years.

The same kind of “experts” may be doing a good job of killing the US economy. Yes, that economy has major problems. The GDP contracted by 6.2 percent. Unemployment is at 7.6 percent. These are the worst numbers in 26 years.

Not the worst since the Great Depression, but the worst since 1983. The unemployment number in January 1983 was 10.4 percent. But that is not even the worst since World War II. In 1982, unemployment hit 10.8 percent. In 1958, the first-quarter GDP growth rate was negative 10.4 percent.

But the US stock market is acting as if these numbers were the most terrible in 70 years. Stocks just had their worst month since 1933. The market has now seen its nastiest six-month drop, 42.7 percent, since 1932, when it dropped 45.4 percent starting in January.

There is an index called the Misery Index which factors the two most terrible things that can kill an economy: unemployment and inflation. The highest (19.72) was under President Jimmy Carter and the best under John Kennedy (6.82). The administration that made the most positive change in the Misery Index was Ronald Reagan (19.33 down to 9.72). Jimmy Carter took it from 12.72 to 19.72.

Jimmy Carter said: “For the first time in the history of our country, the majority of our people believe that the next five years will be worse than the past five years.” He said that in July 1979 and the Misery Index was 10.4; in January 1981, when Carter left office, the index was 19.3.

Ronald Reagan said things like: “I hope the people on Wall Street will pay attention to the people on Main Street. If they do, they will see there is a rising tide of confidence in the future of America.” Reagan said that in July 1981 when the Misery Index was 17.4. In January 1989, when Reagan left office, the index was 9.7.

The current Misery Index is 7.63. President Obama said: “We start 2009 in the midst of a crisis unlike any we have seen in our lifetime; a crisis that has only deepened over the last few weeks.”

Consumer spending is driven by consumer sentiment. We spend money with our emotions, not with our brains. Otherwise, there would only be white cars since white paint is cheaper, lasts longer and reflects the heat from sunlight. But red cars look hot and black paint is cool.

There is a concentrated endeavor by some individuals and sectors to ensure that consumer sentiment is broken, thus driving down consumer spending. It is an agenda-driven effort to serve their purposes. Obama’s Chief of Staff Rahm Emanuel: “You never want a serious crisis to go to waste. And what I mean by that is an opportunity to do things you think you could not do before.”



PSE stock-market information and technical-analysis tools were provided by CitisecOnline.com Inc. E-mail comments to mangun@email.com.

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