Tuesday, 4 August 2009

Liars and fools

Outside the Box
John Mangun
Business Mirror

Anyone who says the US economy is bottoming out and/or ready to recover is either a liar or a fool. Perhaps both.

On Friday, July 31, the Bureau of Economic Analysis, an agency of the US Department of Commerce, released its benchmark revision of the national income accounts. The revised data show that 1) the USA is in a depression, 2) the roots of this depression started years ago, and 3) it will be longer and deeper than anyone has said.

A reader, Larry, sent an e-mail asking when the United States started borrowing money from foreign countries. In 1982, the US economy went into a recession. At that point the United States was a net-creditor nation, meaning the world owed them more than they owed the world. The USA borrowed its way out of that recession and by 1985, the United States owed more money to foreigners than it was owed, therefore becoming a debtor nation.

The roots of this current depression began in 1999. Every economy needs to create new wealth-building “machines.” At the start, they do not have to have a major impact on the overall economy, but they must show steady and increasing growth, similar to what the outsourcing business has been to the Philippines these last five years. Capital is attracted to the sector and generated profits fuel its growth. The United States moved toward the “new” industry of the Internet business. It failed and became known as the dot-com bubble.

For a decade, the United States has not created any new wealth-building sectors. The only way that the United States has sustained its economy without new wealth-building drivers is through massive private and public borrowing, hence the explosion of US debt during the last 10 years. And most of that debt, 45 percent, is held by the two major exporters to the United States, China and Japan.

The revised economic numbers show the incredible depth of the current depression. The contraction of the gross domestic product (GDP) in the last three quarters reveals nothing as to the severity of the depression.

Because this depression is in the early stages, comparisons with the 1930s depression are difficult. Other factors such as global trade and economic interconnection, the size and diversity of the US economy, and the amount of economic activity in sectors not created (technology) in the 1930s all make comparisons unrealistic.

However, comparisons with the last 50 years of economic activity are possible, and the data is horrible. The year-to-year contraction of the GDP is unprecedented, nearly three times as large as any other contraction in the postwar period. And the shrinking of the components that make up the US GDP is startling.

Industrial production has fallen by nearly 15 percent in 2009 from 2008. The previous worst was in 1958 with a 12-percent drop. Capacity utilization of manufacturing facilities is now below 70 percent, less than the Philippines. Nonfarm payroll employment has never been any worse since the troops returned home from World War II. Retail sales are at a 50 year low.

The future? Very bleak. The only solution is massive amounts of cash to repair the damage, create new businesses, and to get the economy moving again. The problem is there is no way that the United States can borrow its way out of this recession. The solution that the Obama administration is using is to infuse at least a trillion dollars of newly printed money into the system. Two problems. It is not being directed a wealth creation, and there is no wealth backing that new money. This is the foundation of hyperinflation where all that new money is spent on goods and service without a corresponding increase in production. And this inflation will hit in 2010. The US stock market is telling us that right now.

US stock prices should be going down to reflect the contraction of the economy. Further, all that money going into shares should be being used for wealth building, not buying speculative paper.

Stock prices should reflect the growth of company earnings and growth of earnings should reflect GDP growth. The GDP is shrinking yet stock prices are rising. That makes little sense, unless stock prices are forecasting future inflation.

You own a retail store that sells shoes. If you knew that the next supply of shoes you are going to buy from the manufacturer would be 20-percent higher than you paid last time, you would raise the selling price on your current inventory. If you think that inflation will be 10 percent in 2010, then you bid up the price of shares today in 2009 to reflect the lower future value of cash.

The 1997 Asian crisis was the training ground for 2009. Thailand and Korea got into trouble, bringing down the rest, because of over-borrowing and bad polices. But in Asia, nations took the hit, lowered lifestyle and standard- of-living expectations for a couple of years, and properly fixed the damage through prudent practices, creating wealth and reducing debt.

The United States and Obama, with arrogance and without a willingness for real sacrifice, have tried to “buy” the depression away with valueless funny money. It will not work, given the severity of the situation. They are liars and they are only fooling themselves.

On a personal note, the first issue of the new Stock Market Update was sent out last Sunday. If you would like subscription details and have access to the web site, e-mail me now. Participation is strictly limited.

PSE stock-market information and technical-analysis tools were provided by CitisecOnline.com Inc. E-mail comments to mangun@email.comThis e-mail address is being protected from spambots. You need JavaScript enabled to view it .

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