Posted on 06/18/2002 4:30:52 AM PDT by NMC EXP
Recent economic reports indicate that the recovery is struggling to move forward. The main barriers are high consumer indebtedness and mediocre corporate earnings. Consequently, neither consumer demand nor business investment is driving the recovery.
Interest rates are low, but Federal Reserve easing has not provided the usual stimulus to spending and equity prices. Part of the problem is the reverse wealth effect from the drop in equity values.
The wealth effect from the long bull market made consumers comfortable with more debt, which they used to finance second homes and high living. When the market dropped, much wealth disappeared, but the debt remained.
Companies, too, made acquisitions that they could not sustain when the boom ended.
The stock market decline made the year 2000 a bad one for taxpayers. Managers of mutual funds and investment partnerships, alert to a market decline, realized capital gains early that year. Unfair U.S. tax laws required these gains to be apportioned to fund owners and taxed as capital gains even though the total value of the funds declined dramatically by the end of the year.
Taxpayers were forced to pay huge tax bills on these phantom gains, thus depleting their cash just as they were suffering large markdowns in their asset values.
Federal regulators stupidly contributed to the economy's debt woes by blocking mergers that were designed to provide a national broadband network, thus frustrating the business plans and causing the failure of many dot.com companies.
Considering the damage that government does to our economy, it is amazing that people look to government for solutions.
More trouble is brewing. The dollar is weakening and could be headed for a long slide. Strong foreign demand for U.S. assets kept up the dollar's exchange value despite massive U.S. trade deficits. Since 1994, foreign ownership of U.S. assets increased sharply as foreigners used the dollars we paid for their goods to purchase U.S. government and corporate bonds, stocks and companies.
According to Bridgewater Associates, foreigners now own 48 percent of the U.S. Treasury bond market, 24 percent of corporate bonds and 22 percent of U.S. corporations. Altogether, foreigners own $8 trillion of our assets a sum almost equal to a year's output of our economy.
Foreigners are now "overweight on the dollar." This means that they view their investments as too skewed toward the United States. If foreign willingness to hold dollars declines relative to our trade deficit, the dollar will fall in value.
A fall in the dollar has bad and good effects. Import prices will rise, driving up inflation measures and, perhaps, confusing the Federal Reserve about policy.
Rising import prices will hurt the consumer, already burdened with debt, stagnant wage and salary income, and falling investment income due to low interest rates and poor equity performance.
On the other hand, reported earnings of U.S. multinational corporations will rise, as their foreign earnings will be worth more in dollars. This effect could give a boost to the stock market.
The growth of American incomes is being held down by two other factors, which are not receiving enough attention. There are fewer well-paying jobs, as U.S. firms shift operations abroad. Simultaneously, a massive inflow of poor immigrants into the United States is holding down construction and low-skill wages.
Increasingly, CEOs are compensated according to their company's earnings and stock price. This bottom-line pressure causes management to move as many operations abroad as possible in order to take advantage of low-cost labor.
When this process first began, many economists dismissed it as merely the loss of low productivity jobs that the United States didn't want anyway. However, the U.S. taxpayer has helped to educate so many Chinese and Indians that well-paying jobs once held by U.S. engineers and research scientists have left the country, taking the incomes with them.
The United States has become a country that imports poor people and exports jobs that provide upward mobility.
It is a mistake to see the loss of jobs and income as the workings of free trade. The downward pressure on incomes does not result from an exchange of goods. Something different is occurring. Middle class incomes are being traded away in order to gain larger bonuses for top management, and politicians are pandering to the immigrant vote at the expense of lower income native-born citizens.
The longer this process continues, the more explosive it becomes, both socially and politically.
Dr. Roberts' latest book, "The Tyranny of Good Intentions," has been published by Prima Publishers. Copyright 2002 Creators Syndicate, Inc.
Regards
J.R.
We citizens exist only to serve the economy and pay taxes.
Regards
J.R.
You are right about the way it used to be. The WWII generation created an America where a hard-working, honest man could graduate high school in 1955, find suitable employment and support a wife and four kids a few years later. We can see where corporate greed has brought us, and where inflation has brought us. A man could afford a new car in 1955 with much less than a year's salary. Also, a man in 1955 did not have to worry about his company firing him so they can give his job to a Pakistani programmer for 1/4 the salary.
Times have changed. And it is foolish to not to everything within your power to protect yourself and your family. Regardless of the urges by the press and government to 'get out there and spend', your first priority is you and your family. This means:
Stop all unnecessary spending.
Save up at least 6-9 months of income - even if you can only do it $50 a month.
Reduce exposure to the stock market to a barest minimum.
Pay off all unnecessary debt.
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