MARX'S REVENGE (The Old Virtues)
by Bill Bonner
For the first time in two hundred years, the West (including Westernized Japan) faces real competition. The world's largest nations - China, India, and Russia - sat on the sidelines for most of the nineteenth and twentieth centuries. They were too remote and too backward to participate in the great boom that lifted living standards during the reign of the British Empire in the nineteenth century. GDP per capita rose from barely over$1,000 (in 1990 dollars) in the United States at the beginning of the nineteenth century to more than $5,000 by its end. China, on the other hand, had a GDP per capita of about $600 when the nineteenth century began.
By its end, the figure had fallen to around $525. Indian numbers were about the same, but in the other direction, with a small gain in the nineteenth century - probably the result of British colonial
development. In the twentieth century, Russia, China, and India all became victims of self inflicted wounds; various forms of socialist claptrap took them out of economic competition.
But now they are back, and it is a whole new ball game, as they say. These countries are either on the periphery of U.S. imperial protection, or beyond the pale altogether. Either way, they benefit from the order created by the U.S. imperium. Foreign workers seem to be able to make anything we can make - but at much less cost. India is growing at 8 percent a year, China at 9 percent - Russia is booming too. In addition, they are turning millions of young people who can make things - graduates in the practical arts and sciences - better and cheaper than we do in
the United States or Europe.
What’s more, foreigners take the old virtues seriously.
They save their money - the saving rate in China is as high as 40 percent of the national income, according to official sources. These savings give them huge piles of capital with which to build more modern factories and more convenient infrastructure. The price of labor in the rich
countries is too high. The average cost of an hour of someone's time in the United States - including social charges - is $20.73. The average cost of someone's time in China, on the other hand, is somewhere between 13.5 and 65 cents, depending on the source. As long as capital, expertise, and finished products are free to move around, it is likely that the two
numbers will grow closer together.
The consumer doesn't particularly care who assembled his gadget; he only cares that he can buy it at the lowest possible price. Labor is a big component of the price of most things, so both manufacturers and consumers appreciate lower labor prices. Our old incompetent enemies have learned how to compete.
We were told that America became much richer because of Reagan's improvements, but if that is so, why did real wage rates not rise? A man sweats, humps, busses, totes, and schleps today, on average, for about the same wage he got before the Reagan revolution fired its first shot. But
that is not to say that everything is just the same. Far from it.
Today, people own less of their own homes - homeowner equity (the portion not mortgaged) has fallen from nearly 70 percent in the late 1970s to less than 55 percent in 2005. Plus, the average person owes more money to more people than ever before. Household debt in the fall of 2005 is 113 percent of annual income on average; prior to1980, it was 58 percent. Today, fewer people have secure sources of money for their retirement. More than two-thirds of older households - those headed by people 47 to 64 - had someone earning a pension in 1983. By 2001, fewer than half did.
The Reagan Era came with relatively new idea, that people should be responsible for their own pension. Companies stopped offering fixed-benefit pension plans. But by 2000, old people were feeling the effects. They were not as well off as they had expected to be. When the holdings of typical households were analyzed, today's near-retirees turned out to be a little poorer, in constant dollars, than the previous generation was when it approached retirement in 1983.
Edward Wolff, an economist at New York University, looked at 18 years of household financial data from the Fed. Somehow he retained his sanity long enough to discover that "the net worth of the median older household...declined by 2.2 percent, or $4,000, during the period [1983-2001] to $199,900." We look on that fact in shock and awe. How could it be that after the biggest explosion of wealth-creation in the history of man, the average man is not richer, but poorer?
We recall the Carter years: The nation was at peace. Despite inflation, Americans were still getting richer. Wages were rising. The country still enjoyed a positive balance of trade, and the rest of the world still owed it more than it owed to foreigners. But in 1980, stocks had been going
down for 14 years and bonds had been in a bear market that began in 1945. With eyes in the back of their heads, people must have looked out and seen nothing but trouble. The Vietnam War was still in the near background. And Richard Nixon. And Jimmy Carter himself. Americans were discouraged, we are told; they had lost confidence in themselves.
Then, along came Ronald Reagan with a message of hope, optimism, and something-for-nothing. The supply-side, the Laffer Curve! Suddenly it seemed possible to spend more... and still have more! Government could cut taxes - and get more revenue, said Laffer. Forget the deficit; it will
take care of itself. Somehow. The average man figured he could do the same: borrow more, spend more, and he would get rich. Pensions were out. Free people could look out for themselves. They could set up their own 401(k) plans and make money in common stocks.
All you had to do was buy the companies you liked. And the companies themselves no longer had to worry about their employees. Managers could focus on cooking the books to give the impression of maximizing shareholder value. America soon became "Shareholder Nation" - a whole country of capitalists, all getting rich in the freest, most dynamic economy the world had ever seen.
Now we see that the whole thing was a huge swindle. Supply-side policies never really increased the supply side. Government never actually lightened up to let people live their own lives in their own ways. Employees never quite got around to putting money into their 401(k) plans;they were too busy trying to keep up with the credit card bills. And managers soon realized that maximizing their own incomes with stock options, bonuses, and rich retirement plans was more rewarding than looking out for shareholders.
The shareholders themselves - the millions of lumpen pseudo-investors who owned mutual funds - couldn't tell the difference. They had neither the time, the money, nor the training to be real capitalists; they were merely chumps for Wall Street. And now, here we are, a quarter-century since Reagan won the White House: We are at war, with the biggest trade deficit, the biggest federal debt, the biggest financing gap, the lowest interest rates in 45 years, and the most consumer debt ever. In real terms, the average man earns less per hour worked than he did in the Carter years. And the typical household approaches retirement poorer than it would have been in 1980.
America was the world's biggest creditor when Ike was president. By Ronald Reagan's second term, about 15 years into the pax dollarium era, the nation slipped to net-debtor status. In the following 15 years, it broke all records - becoming the world's biggest debtor and the greatest
debtor of all time. But Thomas Gale Moore, then a member of President Reagan's Council of Economic Advisors, must have anticipated Ben Bernanke when he noticed the United States crossing the creditor/debtor threshold in the mid-1980s.
Not to worry, said he, "We can pay off anybody by running a press, frankly, so it's not clear to me how bad that is ...[becoming a net debtor]." In 1980, people still held parties when they paid off their mortgages. Paul Volcker said that he would bring down inflation rates, and he meant it. You could buy a stock for six times earnings and lend your money to the U.S. government for a 15 percent yield. Lenders demanded that much because they remembered the inflation of the 1970s. They knew that not every investment story had a happy ending.
The United States used to make things and sell them overseas. General Motors was our biggest employer; you could tell what year a car was made by looking at the tail fins, they got better every year. When Eisenhower was in the White House and William McChesney Martin was at the Fed, the United States had most of the world's gold and most of the world's credit. Foreigners owed us far more than we owed them. This happy state of affairs persisted until the reign of Ronald Reagan and Alan Greenspan, when the United States became a net debtor to the rest of the world and Wal-Mart - a retailer, not a manufacturer - became its biggest employer.
The foreigners own more and more of what used to be American wealth-producing assets. When Ronald Reagan arrived at the White House, foreign-owned U.S. assets were less than 15 percent of GDP. Now, they're over 78 percent. And they are growing rapidly. By 2003, net ownership
of U.S. assets by foreigners had risen to $10.5 trillion, up from $9.2 trillion in 2003.
Under Ronald Reagan, Americans thought they had rediscovered their youth. They couldn't remember ever feeling more confident or more optimistic. Then, 12 years later, in George W. Bush, Republicans thought they saw their hero reincarnate, with another 20 years of prosperity ahead. And why shouldn't it be morning in America again?
We answer the question directly. It is not morning in America because it is evening. It is the opposite end of the day's cycle.
In 1982, interest rates were high and stock prices were low. In 1982, there were a few people who wanted to buy stocks, and many who didn't. In 1982, America, Inc., looked like a has-been economy. Its currency was widely considered near-trash and its bonds were described as
"certificates of guaranteed confiscation." You could buy the nearly entire Dow for just one ounce of gold. Now it takes 22 ounces. The trend of the time, in 1982, was down. Then, as now, smart people considered it eternal. Business Week proclaimed that equities were not just in a cyclical downturn, not just sick, but dead.
As the moon looked down in the summer of 1982, it shone on a wall of worry so high that only a knuckle headed contrarian would think of climbing it. Every headline seemed to give another reason the bear market would last forever. Every poll showed that consumers expected it. Every price seemed to confirm the everlasting trend; the sun had set forever; the black of night was permanent.
And yet, at that very moment, had an investor turned around, he would have noticed a brightening in the eastern sky. Over the next 18 years, the sun rose higher and higher, until investors were so encouraged by the favorable growing conditions that they scattered their seed like confetti at a parade. Did anyone doubt that it would take root in the hard concrete of lower Manhattan's financial hothouse or the thin soils of the technology sector? But the year 2006, so far, is everything the year 1982 was not. Today, there are many people who want to buy stocks and few
who don't. Interest rates are nearly as low as they have been in half a century and stocks are as high as they have ever been.
Consumers - who were relatively reluctant to spend in 1982 - pick their own pockets today. Figures from April 2005 show consumer spending increasing at five times the increase in wages and salaries. And housing was booming. In many parts of California, prices of houses were going up 10 times faster than the rate of core inflation.
Can these sunny trends continue forever? They never have before. And no theory of economics explains how they might. Instead, the typical pattern is for night to follow day. It is also typical for the dumb things people did when they were feeling flush to be corrected by recession and bear
There is one more big difference. In the hot sun of the Reagan recovery, overseas investors, who had previously been cool on America, warmed up. Now, we start from a very different position. Foreigners have been hot for U.S. assets for years - an attitude we have come to count on, because we need $2 billion in capital inflows every day to cover our foreign- trade deficit. What happens as they cool off again? Of course, they will cool off. Americans cannot expect foreigners to support them indefinitely. Someday, perhaps soon, they will realize that their main customers
cannot pay their debts; they will get tired of lending to them.
Then, the long, dark night will begin.
Pete Peterson attempted to gauge the difficulty of even determining the burden we've now placed on future generations. "Estimates vary," Pete Peterson points out in Running On Empty, his vast inquiry into the impending bankruptcy of the US Government, "depending on methodology,
but the numbers are all vast." Peterson points to studies done on the future obligations of the Social Security and Medicare trust fund alone. In 2003, the American Enterprise Institute projected a $45 trillion shortfall; $47 trillion countered the International Monetary Fund in 2004; the National Center for Policy Analysis and the Brookings Institution came up with $50
trillion and $60 trillion respectively in their own research reports published in 2003.
Those are all incomprehensibly large numbers, of course, but the biggest of the projections came in 2004 from Social Security and Medicare trustees themselves. They estimated the unfunded benefit liabilities to have a current value of $74 trillion dollars. As an empire matures, the
imperial citizens believe more and more extravagant things. By the opening of
the twenty-first century, Americans were spending more than they earned. Each day brought more new debt than real new wealth. Yet, between 2002 and 2005, every quarter showed growth in GDP. Americans mistook this growth for progress. They knew they had the world's best economy, its best system of government, and its finest culture. They could not imagine that they
were growing poorer.
But here we turn again to the living and the dead for elucidation. Supply sider Jude Wanniski admits that real growth has come almost to a halt: In the United States, my own work shows that between 1945 and 1971, when the dollar was fixed to gold at $35 oz under the 1944 Bretton
Woods arrangement, the real economy in the US grew by 4 percent per year. From 1971 when the dollar was floated to 2004, real growth of the US economy has only a pitiful 0.3 percent per year. The growth, such as it is, in the American economy, has come about by virtue of increased emphasis on the present tense. Americans came to despise the past and neglect the future. The lessons of the dead and the desires of the unborn were both ignored. Instead, all that seemed to matter was consumption in the here and now.
A dead man, F. A. Hayek, explains the consequences: "The economy in its entirety must continue to decline so long as more is being consumed than produced, and some part of consumption therefore takes place at the expense of the existing capital stock."
Without a theory, F. A. Hayek might have said, the facts are as mute. But by the year 2006, both facts and theories had become blabbermouths. The trouble was that the facts had been corrupted so they no longer told the truth. And the old theories that might have been used to interpret the
facts had been abandoned in favor of new, more convenient delusions. Americans could now run up as much debt as they wanted, said the new theorists.
The American economy may or may not be "growing" in 2006. But if traditional, time-tested theories about how wealth and poverty are correct, thank God it is not growing more. Every step it takes moves it deeper into debt and closer to bankruptcy.
The Daily Reckoning
Editor's Note: Bill Bonner is the founder and editor of The Daily Reckoning. He is also the author, with Addison Wiggin, of The Wall Street Journal best seller Financial Reckoning Day: Surviving the Soft Depression of the 21st Century (John Wiley & Sons).
In Bonner and Wiggin's follow-up book, Empire of Debt: The Rise of an Epic Financial Crisis, they wield their sardonic brand of humor to expose the nation for what it really is - an empire built on delusions. Daily Reckoning readers can buy their copy of Empire of Debt at a discount -
copy and paste the link below:
"Now Perhaps Someone Will Listen!"