Thursday, December 25, 2008

Prosperity: So Long, Its Been Good to Know 'Ya

If you would, do me a favor and Google the phrase "end of prosperity". If ever there has been a consensus on the subject of economics this is it. More than any other economic downturn in my 47 years on this Earth this one has elicited the greatest pessimism. Truth be told it's all rather unsettling.


According to Time.com the U.S. — not to mention Western Europe — is in the grip of a downward spiral that financial experts call deleveraging. Arthur Lafer and Stephen Moore tell us in their book "The End of Prosperity" that the rest of the world is following the American economic growth model of lower tax rates, more economic freedom, and sound money. Paradoxically, one country is moving away from these growth policies and putting its prosperity at risk -- America. In his OP-ED piece "The End of Prosperity" Stephen Lendman quotes Marc Faber's "Gloom Boom and Doom" report. "I think first we'll have a bout of deflation that will actually be quite substantial, but then the budget deficits will go through the roof and the Fed will print even more money (so that) later on we'll have very high inflation." Last week in a single edition of the Wall Street Journal every headline in the finance section was negative.


What in the hell is happening here?

If you ask the folks in my parents generation it seems quite clear to them why this has happened. These folks lived in an America that built things. They will sadly point out the America they knew is truly gone. Today with one of the last of the heavy industries - the auto manufacturing business in the throes of its waning days I find it hard to argue with them.

In this WalMart generation where manufacturers big and small have been compelled (or coerced) to move their manufacturing to China or other points offshore in the name of cheap labor America has lost much of itself. The greatest generation fears for their grandchildren and great-grandchildren. Many of their own children successfully made the transition from the manufacturing age to the information age. They have been servicing the slow decline of the American manufacturing sector and all its ancillaries. But even the information age worker is seeing a morbid transformation of his skills into a commodity that can be filled by better educated, lower waged, and outsource-able talent from overseas. The fortunate few young people who can afford a university education have preferred law degrees and business majors over engineering and hard science majors. Honestly, do we really need any more lawyers.

If you ask folks in my generation what has happened you will find most of us are speechless, shell shocked more or less. We have made the leap from the 19th century the 21st century and now find there are absolutely no laurels to rest on. Those of us who have educated ourselves, found meaningful work, bought the house, had the kids and tried to do all the right things in this hyper-paced world have found that everything we have been programed to believe is a sham. They said buy a house, they urged us to invest in our 401Ks, we must save for college and most importantly spend, spend, spend.

After 25 years what did it get us? The house is hardly worth what we owe on it, the 401K has less than one year of living expenses in today's dollars, tuition for one semester gobbled up everything in the account. Then there is, of course, that mountain of debt. Wow, this is just great.

Are we really seeing the end of prosperity? Who or what is truly to blame? The peevish, cynical and intellectually lazy will say it was Bush of course, but they would be wrong - or at least mostly wrong. Bush failed because he let himself become completely marginalized. He backed many policies the Democrats would have loved had they hailed from a Democratic administration. As it was his opponents and their toadies in the media were never going to give him accolades, never.

The current subprime mortgage mess that is at the heart of the economic meltdown can trace its origins to the Clinton years. Yet it could have been stamped out years ago had the Bush Administration and the Republican-controlled Congress pushed hard for the regulatory reforms they proposed, but alas, they didn't. The GSE's - Fannie and Freddie - were out of control and everyone in Washington knew it. Since 2003, the Administration was calling for a new GSE regulator, and over the next five years, the Administration continued to call for GSE reform only to be accused by Democrats in Congress of creating artificial fears and fomenting racism and classism. Had Bush displayed any fight at all on this subject it would have gotten done. He failed and so here we are.

So, when housing prices collapsed it sucked out all the capital that had been supporting every other sector of the economy. Simple as that, really. When the banking and investment institutions that had thrived on it began their precipitous avalanche precisely when oil prices began to skyrocket driving the cost for food and everything else to new heights it constituted the perfect storm. With a touch of corruption at every level of business and government and a sprinkle of a media driven liars-fest called a presidential election pure psychology finished the job. We all got screwed.

In all reality we do have to spend, spend, spend as consumers and as businesses to keep the economy viable and growing. But we can't go on like we have before. For the American middle class - don't kid yourselves there are still plenty of us - one of the biggest problems we have is what to do with all this junk we have accumulated. For 30 years we have been buying stuff we don't really need and then buying bigger houses with bigger garages to put it all in.

The perpetual rising values of our new overstuffed homes was essentially a bank account we leveraged to buy more stuff we either didn't need or couldn't really afford. It's a mentality that has to change. The real question is what to replace it with? No one really has the answer to that. Does it mean that the America we knew is over? Maybe.

One of things that has to change is the tax system. We have a tax system that absolutely punishes personal savings. We have a tax system on our businesses that punishes profits. It's a tax system that has spawned entire industries and corporate strategies to "creatively" do work arounds to avoid paying taxes. It wastes time and energy and for the most part is patently stupid. Why are our non-labor intensive corporations compelled to move their headquarters and operations to other countries and offshore tax havens? Insane tax laws. In the end the government sees even less revenue from the corporations and consequently less income tax revenue because the jobs have gone too. We need a leader who can throw off the shackles of the special interests and gather the American people behind the idea of rational and realistic tax laws.

We now have to wait and see if Mr. Obama is a pragmatist or a pure partisan. His campaign rhetoric suggested the later. His partisan credentials suggests higher taxes all around and more government socialism than we already have. The worst possible outcome - and right now the most likely - is the complete loss of trust in our government and our businesses. We need corporate leaders and government officials to shun corruption, embrace transparency and do what is right for society instead of continuing to be what is wrong it. The rest of us are pawns - if that isn't clear by now you are not paying attention.

We the people have to save more (which is damn near impossible now) and be much, much wiser about our spending. No one likes austerity, wealth is so much nicer, but we must all be pragmatists now.


CW

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