The Coming Economic Collapse Pt1
Economics / Great Depression II Jun 12, 2009 - 12:58 AM GMTBy: Graham_Summers
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.
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 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 up 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:
- The US’s economic shift from manufacturing to services (mainly financial)
- The massive drop in US incomes
- 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 real inflationary data, US incomes have fallen more like 40%.
This fact stares us in the face everyday, though no one really notices it. In the early ‘70s, typically one parent worked and the other stayed home. Today, BOTH parents work and most Americans are barely getting by.
The reason we didn’t notice the dramatic drop in quality of life in the US before is because of one thing:
Credit.
Credit cards had been in use since the ‘50s, but they had yet to catch on, largely because banks couldn’t make obscene profits from them (the interest rates they could charge were limited on a state-by-state basis).
Then, in 1978, the Supreme Court passed a law stating that banks could charge their cardholders any rate allowed in the bank's home state. With this ruling, credit cards suddenly had the potential to become a major profit center for banks. Major banks immediately shifted their credit card operations to states where there were no limits on interest rates (Delaware and South Dakota).
Credit creates the illusion of wealth (or in the US’s case for the last 30 years, the illusion of maintaining the same standard of living) because you’re able to spend more than you make or spend money without paying upfront. Americans, earning less and facing rising costs of living, gradually began their descent into indebtedness: between 1980 and 1990, credit card spending average household credit card balances quadrupled.
In this manner, the average American didn’t notice that his or her quality of life was deteriorating at a rate of about 2-3% a year. Similarly, he or she didn’t notice that more and more jobs (of greater and greater technical expertise) were shifting overseas.
And thus began the epic shift in American wealth to Wall Street (the rise in the financial industry) and China (the producer of cheap goods we had to buy due to the drop in incomes).
On Monday I’ll detail how the debt bubble encapsulated the US government and why Obama’s Stimulus won’t accomplish anything in terms of fixing the economy.
In the meantime, I’ve prepared a FREE Special Report detailing three investments that will soar when the Second Round of the Financial Crisis hits. I call it the Financial Crisis Round Two Survival Kit. Swing by www.gainspainscapital.com/roundtwo.html to pick up your free copy today.
Good Investing!
Graham Summers
Graham Summers: Graham is Senior Market Strategist at OmniSans Research. He is co-editor of Gain, Pains, and Capital, OmniSans Research’s FREE daily e-letter covering the equity, commodity, currency, and real estate markets.
Graham also writes Private Wealth Advisory, a monthly investment advisory focusing on the most lucrative investment opportunities the financial markets have to offer. Graham understands the big picture from both a macro-economic and capital in/outflow perspective. He translates his understanding into finding trends and undervalued investment opportunities months before the markets catch on: the Private Wealth Advisory portfolio has outperformed the S&P 500 three of the last five years, including a 7% return in 2008 vs. a 37% loss for the S&P 500.
Previously, Graham worked as a Senior Financial Analyst covering global markets for several investment firms in the Mid-Atlantic region. He’s lived and performed research in Europe, Asia, the Middle East, and the United States.
© 2009 Copyright Graham Summers - All Rights Reserved
Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors.
Graham Summers Archive |
© 2005-2022 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.
