The preliminary 3Q 2006 US GDP growth was a lousy 1.6% compared to a 2.6% for the 2Q. That is a very strong drop in the growth of the GDP. Nouriel Roubini, an economist with Roubini Global Economics, writes
The first leading indicators of economic activity for October -– the Philly, Richmond and Chicago Fed reports -– are all consistent with a further economic slowdown in Q4 relative to Q3. I thus keep my forecast that Q4 growth will be between 0% and 1% and that the economy will enter into an outright recession by Q1 of 2007 or, at the latest, Q2.Here are other factors that will contribute to the upcoming recession:
- Federal Debt & Deficit
- Continuing Housing Bust
- High Consumer Debt
- Large Trade Deficit
- Continued Offshoring
- Security Costs
For the past 4 years the US economic 'recovery' has been too dependent on a mountain of debt. It was simply unsustainablele. The housing boom of last year is now a bust. The convergence of the housing bust with other significant economic factors will almost certainly put the US into a recession by late 2006 or early 2007.
Posts
It would be interesting to look into how globalization fits into all this. Predictions are based on models ... and the models we have today are based on the assumption of the existence of national economies. National economies are evaporating faster than the notion of the nation-state. Put another way, people's wealth and earnings are less and less tied to the particular geography in which they happen to be located. In the new global economy, a person's wealth can be from anywhere in the world ... just like his stream of income can come from anywhere. That being the case, why would person A located in Washington DC be anymore --- or any less --- affected by the fortunes of so-called "US" companies that person B located in Beiging?
ReplyDeleteMy thoughts on the matter are that lots of people are misinterpreting the signs of shifting wealth on a global scale with what would have been a depression if economies were still at the national level. It's simply a matter of misreading the tea leaves because one hasn't realized that they should be reading the leaves in the entire pot ... and not just those that happened to land in the cup.
Sorry, no, there's no depression on its way. On the contrary, we're on the verge of a world economy with an efficiency and scale of economics well beyond the dreams of anyone until just recently. It's what is being referred to as the Pan-Global economy. And rising real estate prices are but one sign of its emergence.
Very funny, Lance. I really hope your post is satiric in nature, for I find it hard to believe that one can be this naive...
ReplyDeleteLOL,
ReplyDeleteSorry Lance but that is just ridiculous.
Wealth for a society comes from taking two or more item's of lesser value and creating something of greater value(ie manufactureing). But I assume your going to say that's part of the "OLD World" economics and were going to have to throw all the text books away.
You cannot in the long run base an economy on Tradeing Market's nor buying and selling houses to eachother. Manufactureing has always and will always affect the wealth of an overall economy. Everything else is simply circulation of currency.
Warren Buffet a couple years ago wrote a very interesting article about consumption/debt country and a manufactureing country. In his conclusion the manufactureing country just ended up owning the consumption country.
We have lost over 500K manufactureing jobs in the last 4 years, these jobs have been replaced with non manufactureing related service sector jobs. I'm sorry but this is just not the path to prosperity for most. Individuals and groups of individuals can create wealth in this environment, but the majority cannot.
Debt is not wealth, asset values are set at the margin, and risk premium's are slowly changing where that margin is. Disagree all you want, these underlying economic conditions have held true for 2000 years, and they are just begining to asert themselves in the MBS market in the US again. We have a long way to go.
I understand the desire of the Globalist to say that Asia will be the manufacturer, India the servicer, Europe the regulator, and America the Financial Market. But it just does not work, it has not in the Micro and will not in the Macro.
It is interesting to note that prior to the last 5 resession's 90% of the Wall Street survey'd manager's did not forecast one.
ReplyDeleteJust food for thought.
so the guy who gets laid off from ford motor company is going to get his income from india....what planet is that thought process from. we are becoming a nation of pooper scoopers! we don't make anything! how can we buy anything on other than credit. sorry but there is a depression on its way. a depression that is going to last a lot longer than most could imagine. we (the US) is a bankrupt nation living on borrowed time.
ReplyDeleteLance said..
ReplyDelete"In the new global economy, a person's wealth can be from anywhere in the world ... just like his stream of income can come from anywhere. That being the case, why would person A located in Washington DC be anymore --- or any less --- affected by the fortunes of so-called "US" companies that person B located in Beiging?"
oh...it is different this time..just like during the dot com days..Douchebags on CNBC back then were often seen selling this "New Economy" bullsh!t propaganda to rationalize a bubble stock market.Did you got to the same salesmanship propganda schools as the idiots on wall street..???
Lance, I believe you're describing a trend and not an existing or nearly-existent condition. Our economy, along with many others, will eventually become pan-global because technological and political advances will facilitate the process....but there is no evidence that a fully-developed pan-global economy exists at this time.
ReplyDeleteAlso... stating that real estate gains are a result of "pan-globalism" is a red herring argument.
All of the evidence I have seen points toward a recession in 2007 and beyond.
I read a lot of doomsday on these blogs about how America is in decline (which is in part true), how real estate prices are going to crash (reversion to below the mean, etc) and how we're entering a hyper-deflationary or hyper-inflationary economic phase (depending upon whatever the panic theme of the day is).
I think most of it is bull and our ills can be solved by rational, fiscally responsible action both at the government and individual level.I think the #1 thing that ills America right now is an abject lack of rationality.
Lance,
ReplyDeleteyour spin never ceases to amaze me.
i can't wait to hear your spin during the comming "global" recession.
anybody wanna make a bet that when the recession hits it will be the fault of the "bubble heads" and the MSM as i'm sure that will be Lances spin.
and it certainly won't be the fault of millions who bought homes they really could not afford and lenders who lent them money.
nope sure can't be that.
:lol:
while the savings rate is negative now and only going to keep at it's trend, i got my quarterly TSP statement and they compare the savings rate, being around -2%, but the TSP participation has inversely gone up over the same period, almost equally.
ReplyDeleteso all is good
Let's get one thing straight, kids: a recession is defined as at least TWO quarters of negative growth. Given 3Q GDP was positive, a recession by the end of this year is an impossibility.
ReplyDelete"Let's get one thing straight, kids: a recession is defined as at least TWO quarters of negative growth. Given 3Q GDP was positive, a recession by the end of this year is an impossibility"
ReplyDelete4Q could be th first quarter where we experience a decline in GDP and thus being the first quarter that we are in a recession (ex post facto).
Let's add to the list of reasons for a recession (1) the negative savings rate for the several quarters, and (2) inability to tap home equity to sustain current consumption levels.
ReplyDeleteA Recession by definition is 3 consecutive quarters of negative growth. A Depression is 7 consecutive quarters of negative growth.
ReplyDeleteI believe in the current environment numbers will be warped and spun in a way that we will have at worst a single resession(if that). Although, the next few years for the average Joe are going to seem like a resessionary period.
A term that I feel we will here more of is "Super Stagflation".
Roubini has another post out suspecting the number was cooked due to Nov election. The BEA has incorrectly used a 26% percent increase in automobile production. Without that GDP growth stands at 0.9%. Which puts Q4 to be on the fast track for a -ve growth.
ReplyDeleteRead it here:
Was Q3 GDP growth manipulated upwards because of the coming elections or is the US government clueless about measuring output?
After the economic catastrophe, ie. "The great experiment of globalization gone bad", The US will be able to write Fair trade laws for its citizens.
ReplyDeleteThe GDP numbers are actually a lot worse than they appear at first glance. For details:
ReplyDeletehttp://paper-money.blogspot.com/2006/10/hey-big-spender.html
The housing market has been feeding this economy for the past 5 years. With the housing collapse on its way where will people borrow now. They have been using their houses as ATM machines. Without the use to borrow againt their houses where will they borrow now?????
ReplyDeleteNot going to be good once foreclosures start to increase going into 2007 as Trillions of dollars worth of ARMS reset.
Paul
Actually, I completely understand and agree with what Lance is saying.
ReplyDeleteYour good friend,
Nuttier than Squirrel Turds
hey I agree woth lance, however he is wrong about one thing - whats going on right now is Globalization all right. However depressions are LOCAL.. So even of world's market is not in depression US economy very much will be... Since all what world needs is already produces in China/asia/india. NO JOBS, NO PRODUCTION - Keep creating money - how long do you think other countries will keep on accepting out paper money??
ReplyDeleteOnly it is not even is magnetized space on the hard-drives wich can be easilly erased - kind of symbolic don't you think???
where are these people going to find new wealth and earnings??
ReplyDeleteUpdated:2006-10-30 09:51:52
Goodyear to Close Texas Plant, Cut 1,100 Jobs
AP
AKRON, Ohio (Oct. 30) - Goodyear Tire & Rubber Co . said on Monday that it plans to close a plant in Tyler, Texas, three weeks after workers at the plant and 15 others went on strike in part because of the tire maker's plan to shut down the plant.
The move will eliminate about 1,100 jobs and is part of its strategy to end some of its private label tire business.
The plant, which opened in 1962, has produced approximately 25,000 passenger and light truck tires per day.
United Steelworkers members in Tyler and elsewhere in North America went on strike Oct. 5 after months of talks with the world's third biggest tire maker.
Akron-based Goodyear has said the union refused to agree to help it remain competitive in a global economy. The union said the company's last proposal would have included two plant closings and other concessions.
Goodyear said in June that it wanted to leave parts of the private label tire business and that the decision would mean a reduction in capacity. Goodyear previously announced to investors an aggressive strategy to reduce costs by more than $1 billion by 2008.
"We must take the steps necessary to reduce our costs and improve our competitive position," Jon Rich, president of North American Tire, said in a statement. "While this is an extremely difficult decision for everyone involved, it was required to help turn around our North American
Merrill Lynch
ReplyDelete2007 Interest rate outlook sees the FED cutting rates in March 2007 says
* Unlike the Fed’s view for “limited” spillover effects from the housing correction, we foresee a substantial degree of economic contagion (from the residential construction correction and from a decline in mortgage equity withdrawals).
* In our hard-landing view, this contagion likely will be severe enough to drive the unemployment rate up to 5.8% by the end of 2007 (currently, the unemployment rate is 4.6%).
* In our hard-landing view, monthly US non farm payroll growth likely will average 75k to 125k over the very near-term, but that monthly jobs growth should begin to turn negative by 2Q-2007.
Lance,
ReplyDeleteAs for the strength of globalization, you may be right we are entering a new era. However, as it relates to real estate we may have to endure some short term pain before the powers of Globalization cure all our ills:
Realestate, by it's very nature, is local. And while anyone, anywhere can invest in it, the returns on it are purely dependant upon local factors (It aint "location, location, location, for nuthin---and by the way, I though globalization was going to make location less relevant, not more so. Wasn't it the internet that meant Amazon.com could locate warehouses in the desert, and telecomuters could work in L.A. and New York from the plains of Nebraska, and doctors could operate on patients from the deck of their yaght? ). Anyway, given that residential real estate is virtually unaffordable to local purchasers throughout the states (ex: median price is rougly 8x median income in San Diego), and most recent purchases have only occurred through the use of exotics which at some point require an increase in equity, wages, or a huge decrease in the price of debt (otherwise why purchase with one?), we may see a perfect storm of factors including an elimination of MEW, at the same time we have realestate depreciating, while exotics get scrutinized and regulated, while investors in MBE's demand a higher risk premium, while job growth (can you say local home buyers) flattens or contracts.
Globalization may make things different alright...different as in worse...It may just mean the capital inflows and outflows of local markets are that much more rapid and severe.
Definately a recession.
ReplyDeleteGary Shilling, amoung others, is predicting one. Since his fortune was built on accurately predicting recessions in the past multiple times... Would you bet against him?
Nitpic, last I heard a recession was two complete quarters of negative growth. Is a depression 7 quarters? I've heard its 25% unemployment. :(
All economics are local and global. For example, Detroit is almost at 25% unemployment (what I would call an economic depression). Is that enough to effect DC? No. But as soon as the tax revenue is squeezed... there will be cuts in DC. Government employees? Probably not. Consultants? Yes.
Adam smith wrote how cycles are just a normal part of economics. Well... we're about to be it hard by this one. :(
I know far too many people with 3 or more homes to believe this will be gentle. People who have spent almost every penny of equity appreciation. One of my closest personal friends is now going through a divorce. I was shocked to find out both of his homes have 2nd mortgages due to his wife's gambling issues.
The real pain doesn't start until 2Q 2007. Then? Ouch. Watch out. No more debate, home prices and employment will drop hard. :(
Neil
You should revisit your July 11, 2006 posting.
ReplyDeletehttp://photos1.blogger.com/blogger/1783/1012/1600/condoscondos.jpg
A new photo from the same vantage point would be very interesting. A lot has changed since you took that pic in July!
There's something seriously wrong when Lance's post is the most sensible of the bunch....And the most consistent with economic theory. (Ok, Wayne's was fairly sensible, too.)
ReplyDeleteHowever, just because globalization is beneficial in the long run does not mean that we won't experience recessions from time to time. The business cycle still exists.
OC Bear needs to go back and study David Ricardo. And, no, wealth does not only come from manufacturing. In the long run, increasing wealth (economic growth) comes from the invention of new goods and services, and the more efficent production and distribution of existing goods and services.
Services matter. Financial services matter. Legal services matter. Communications services matter. Transportation services matter. Health care services matter. Educational services matter. IT services matter. The United States is a global leader in all these very important services. This is a big part of the reason why the U.S. is one of the wealthiest countries in the world. (Currently, only Luxembourg and Norway are wealthier on a per-capita PPP basis.) Pessimists have been predicting the downfall of the U.S. economy for decades, and they have been consistently proven wrong. And, no, it's not different this time.
For those concerned about outsourcing, I recommend reading What Goes Abroad Usually Comes Back, With Benefits by U.C. Berkeley economics professor Hal Varian.
Private Contracting Trend Reflected in Region's Job Data
ReplyDeleteWashington Post
Monday, October 30, 2006; Page D02
The number of jobs in the Washington area grew to 3,006,400 in September, up 2.5 percent from the comparable period last year, as the region continues to be one of the nation's largest jobs growth centers.
www.washingtonpost.com/wp-dyn/content/article/2006/10/29/AR2006102900646.html
I agree with Lance that the economy is globalizing. I also agree that not all production results in physical goods. The fact that China makes all the trinkets we play with, while disconcerting, is not the bad news. Worse is the fact that our children are failing Math and not learning how to program computers. But that's not the immediate problem either.
ReplyDeleteThe problem with America today is simply that we consume more than we produce (refer to trade and gov deficits). Think of an island that sells a few goods but consumes more, year after year. Is the island getting richer? No, they're burning the furniture. Globalization will eventually level the living standards of people around the world. Since we in America currently have the highest SOL, we're SOL.
We consume way more than our "fair share" of resources. What does that mean? The whole world can't all afford to live so unsustainably, therefore, in a globalized economy, neither can we.
creativemind said...
ReplyDelete"where are these people going to find new wealth and earnings??"
I didn't say they would ... If you'd understood my previous (and current) postings, you'd understand I said quite the contrary. Over the last couple centuries (since the French Revolution to be exact), an increasingly complex set of laws and regs have been developed to level the playing field so that the results of group efforts were distributed more "fairly" than they otherwise would be under circumstances where it was simply "the law of the jungle" coming into play. The force and enforcement behind all these laws (even those that are so-called "international" law) are national governments. National goverments were able to pass and enforce these laws because they were able to control all aspects of an economy from production to distribution, etc. What happens when because of pan-globalization they can't? I.e., when Ford can produce its goods for cheaper in Mexico and closes that plant you're referring to? There might have been a time when there were practical considerations to keeping that plant here ... There aren't any in the pan-global economy we've entered. ... Just as there are no truly enforceable pan-global laws and regs to "level the playing field" and temper the excesses of the laws of the jungle.
anon 7:22 said:
ReplyDelete"We consume way more than our "fair share" of resources. What does that mean? The whole world can't all afford to live so unsustainably, therefore, in a globalized economy, neither can we."
Oh so true ... The only error in logic I find is your underlying assumption that the "we" of tomorrow will be "us". Where I work almost every single high-wage "laborer" is foreign born. (Only the management isn't ... and that is changing quickly as the foreign-born rise from the ranks.) I'm talking government IT analysts with a fortune 500 company (contractors) and I'm talking salaries that are certainly in the top 10% of all American wage earners. (Few are earning below 6 figures.) We're not doing a good job educating our children? And actually that's not entirely true ... if you take into account the thousands of dollars spent per year per student for pre-school alone by those with the means. True that doesn't produce enough skilled employees to fill all the spots, BUT there is plenty of talent around the globe to fill our ever increasing demands ... and we don't even need to educate them! ... They come here ALREADY educated? And, once they are here, we're willing to pay them top dollar for the skills they bring with them ... and they in return are willing to use their high salaries to invest in their new land ... including buying real estate. Being born in a wealthy country is no longer an automatic ticket to a high standard of living. The economy's gone global ... including the market place for labor. National borders can be strengthened to prevent terrorists from entering, but they don't mean much anymore in regards to job security.
@James:
ReplyDeleteI think what your argument misses is the trend toward a bimodal distribution of income in this country. Sure, our corporations are showing record profits - driven by record investment in Asia. The money is coming back here, but it's certainly not trickling down to the average US consumer.
The internet, in combination with financial market efficiency, has tapped a tremendous vein of resources. I just dont see how negative real wage growth in the US middle class will be avoided. And this will have a very large impact of two things that can't be avoided - deaths and taxes.
It's very telling that most of the large tech outfits (Intel, MOT, etc.) have opened large campuses in India and China. The focus of these campuses is R&D, by the way.
Lance,
ReplyDeleteHang in there. I agree with your general point that things are on the way up. Global, national, or local, productivity at every level is pulling the standard of living higher, and the economy with it.
All due respect to Professor Shilling; the guy makes a living calling for doom. He is a one trick pony. Regression toward the mean. Inevitable overshots, then regression toward the mean from the other direction. Hardly genius. Too many people use his kind of outlook as a reason not to invest, then congratulate themselves when the market corrects. And they eventually find themselves OLD and POOR.
That said, buying a string of condos on IO loans during a bubble will make you old and poor, too.
For the record I am with you on owning. Every so often there are moments of clarity in markets. Call it instinct, call it luck, but once in a while the road ahead is clear. This real estate bubble over the last three years has been one of those moments. Buying anything in the last 30 months will prove to have been a bad move, but for the long time home owner not a fatal one.
Another year down the road it will be time to go shopping again.
In stocks I don't try to catch the top or bottom. You can make plenty riding 60% of a move. Same with real estate.
Lance, keep looking up.
I think what your argument misses is the trend toward a bimodal distribution of income in this country. Sure, our corporations are showing record profits - driven by record investment in Asia. The money is coming back here, but it's certainly not trickling down to the average US consumer.
ReplyDeleteDuring this decade the middle class and lower-middle class have seen real wages decline slightly, but the rich, the upper-middle class and, yes, even the poor have been doing better than in the past.
Over the longer term, the trend has been that those with a college education have been seeing real incomes increase, while those with just a high school education or less have stagnated.
The U.S. has evolved past the industrial revolution and is now in the information age. Knowledge is what drives the modern U.S. economy, not manual labor, and a good education is required to get ahead. On the whole, Americans are significantly wealthier than they were a generation ago (adjusted for inflation). However, it's those with a college education who have benefitted, not factory workers.
It's very telling that most of the large tech outfits (Intel, MOT, etc.) have opened large campuses in India and China.
There are six billion people in the world, and the U.S. only has 300 million of them. Of course companies are going to open campuses overseas. Despite all the scare stories in the press about tech jobs going to India and China, tech-related college degrees still pay very well.
"However, it's those with a college education who have benefitted, not factory workers."
ReplyDeleteNow more than ever anyone who wants higher education can get it. And if they hate school, it is easier than ever to start and run your own business.
Even without globalization, technology will make it tough for unskilled workers. A friend of mine who owns a carwash eliminated three workers with a highspeed blower. Cost $30K. Paid for itself in a few months. No workers comp, no health benefits (all his employees are covered), no retirement, no sick days.
Before we fire too many shots in the class war we need only look to Rhodesia. After a class uprising and a redistribution of wealth, the breadbasket of Africa became a humanitarian crisis. After a few years of famine the workers realized that tilling the fields requires different skills than running the farms. Idealism is no substitute for skilled management.
People who have money are usually pretty good at making money. Many new jobs and services come directly from their effort and investments. I am about to hire five or six new people. Gave my tech guy a $1000 bonus last week. If my bottom line narrows due to taxes, I'll only hire one or two and expand more slowly. Too much regulation and I'll just say heck with it and go fishing.
james said.......Services matter. Financial services matter. Legal services matter. Communications services matter. Transportation services matter. Health care services matter. Educational services matter. IT services matter.
ReplyDeleteexplain in this scenerio where the first dollar is produced to be able to hire any one of these srevices.
please show your work.
BTW i'd be willing to bet that at the turn of the century the automobile was the "globalization" of it's time. the car changed everything but it didn't stop the great depression.
How will offshoring contribute to a recession? In fact, analysis from McKinsey has found the opposite -- outsourcing is a boost to economic growth.
ReplyDeleteDitto for the trade deficit. Trade deficits actually correspond with economic growth. They are not a drag. The surest way to lower the trade deficit is go into a recession.
I'm likewise unconvinced about the federal deficit, which is under 2% of GDP and better than many, if not most, industrialized countries.
James Said,
ReplyDelete"OC Bear needs to go back and study David Ricardo. And, no, wealth does not only come from manufacturing. In the long run, increasing wealth (economic growth) comes from the invention of new goods and services, and the more efficent production and distribution of existing goods and services.
Services matter."
Please re-read my comment, at no point did I say that services do not matter, please do not put words in my mouth. I said that wealth creation for a society comes from manufactureing of goods, and I agree that new goods do apply.
I have read Ricardo and although his models show wealth through services and efficiency of said services, he also beleives that levels of wealth are much higher with manufactureing most markedly in New Technology.
I agree with some of his conclusions and not with others. As you obviouslly don't agree with Buffet's and yet probably do with some of his investing ideologies.
As Corporate profits have risen in the US, the R&D total expenditures have remained at the same dollar level they were 10 years ago. This is truly an amazing thing and does not bode well for the future.
I am not against globalization, I am for Fair-Trade not Free Trade.
I am not against globalization, I am for Fair-Trade not Free Trade
ReplyDeletetouche!!!!
"explain in this scenerio where the first dollar is produced to be able to hire any one of these srevices."
ReplyDeleteYou seem to not realize that the U.S. exports services. A Chinese company manufacturing DVD players may purchase business consulting services from the aforementioned McKinsey & Company. And trust me, the American consultants at McKinsey earn a whole hell of a lot more than the Chinese factory workers building the DVD players. (They also earn a whole hell of a lot more than American factory workers building automobiles.) When foreign students study at American universities, they are purchasing U.S. educational services. When sick foreigners come to American hospitals for medical procedures that are not yet available in their home countries, they are purchasing American health care services. That's how America becomes wealthy by selling services. Manufacturing is poor man's work.
"BTW i'd be willing to bet that at the turn of the century the automobile was the "globalization" of it's time. the car changed everything but it didn't stop the great depression."
The turn of the century was six years ago and we haven't had a great depression since. LOL
"I am not against globalization, I am for Fair-Trade not Free Trade."
Truly free trade is fair, but we don't have truly free trade. Which type of fair trader are you, an AFL-CIO fair trader or an Oxfam fair trader?
OC Bear wrote...
ReplyDelete"at no point did I say that services do not matter, please do not put words in my mouth. I said that wealth creation for a society comes from manufactureing of goods, and I agree that new goods do apply."
I did not say that you said services do not matter and I did not put words in your mouth, so please don't put words in my mouth. However, you implied that wealth creation only comes from manufacturing, and I was arguing that wealth creation comes from services as well. If wealth creation doesn't come from services, how can so many service employees (such as doctors, dentists, attorneys, professors, business consultants, IT professionals, investment bankers, etc.) earn so much? Obviously, they provide significant economic benefit to society if the free market is willing to pay them well. Also, in the information age there industries, such as software, that create goods that involve no manufacturing.
If a service company, such as Amazon.com, provides a service that allows consumers to purchase goods more cheaply than they used to -- or purchase goods they couldn't find before -- then Amazon.com creates wealth. By lowering consumer costs, Amazon.com helps raise the standard of living of its customers.
If McKinsey provides advice that allows companies to operate more efficiently, thus lowering costs which can be passed on to consumers, then McKinsey -- a service company -- creates wealth.
OC Bear wrote...
"As you obviouslly don't agree with Buffet's and yet probably do with some of his investing ideologies."
I think you are mischaracterizing Buffett's writings. He has complained about the current account deficit, but I'm not aware that he has ever complained about the manufacturing decline in the U.S. Please point me to where he says this. Again, you can export services. America does it all the time.
The current account deficit can be fixed entirely by increasing the national savings rate (which is negative). The easiest way to do this is for Congress to balance the federal budget and for consumers to stop using their houses as ATM machines.
Here is one article that references debt society vs., manufactureing/produceing society.
ReplyDeletehttp://www.freerepublic.com/focus/f-news/1053684/posts
I will try and find the one that I am referencing. The one above does touch on a couple of the points.
I have been unable to find the article that I read by Buffet but will definately keep looking when time alows.
ReplyDeleteI am VP and facilities manager for a manufactureing company and as such find time a short commodity.
I am curious James, as to what percentage of GDP needs to be in manufactureing to keep an economy with "growth" in standard of living in your view in practical terms? I have heard views of 50% to 0%.
The view that I have come to beleive is somewhere around 33%. If you use the last 20 years as a barometer, at average pace the last manufactureing job will be gone around 2022 in the US. Obviouslly it won't go to zero..... but the trend is definately in.
Bidness calls, let's keep the coversation lively.
"Here is one article that references debt society vs., manufactureing/produceing society."
ReplyDeleteI've read that one before. That article is not about manufacturing. It is about the trade deficit (most people use the term trade deficit when they are actually talking about the current account deficit) and America's negative national savings rate.
The core problem Buffett is complaining about is America's negative national savings rate. When America spends more than it earns, it must either borrow from foreigners or sell off assets. You should also remember from intermediate macro that national savings equals the current account surplus. When one is negative, the other will be also.
The problem is not the loss of manufacturing jobs, it is that the federal government engages in deficit spending, and consumers spend more than they earn. This causes our national savings rate to go negative, which causes us to run a current account deficit.
I will say again that you are mischaracterizing Buffett's writings.
The easiest way to do this is for Congress to balance the federal budget and for consumers to stop using their houses as ATM machines
ReplyDeletethe entire economy would collapse.
REMINDER: THE USA IS A "DEBT" BASED ECONOMY.
that's how Bush 2.0 has managed to increse GDP by 1 trillion during his term in office but increase our debt by 5 trillion.
it now takes 5 dollars of new debt to increase GDP by 1 dollar
oc bear,
ReplyDeleteproviding a "service" is just as much providing real value as is providing a tangible good. as a matter of fact, if we start "peeling the onion back", I think we find that most "tangible goods" contain a fair amount of service in them. just like 90% of the human body is water, I suspect a similar percentage of all goods is services. take a restaurant meal for example ... without the waiter bringing it to your table, and the cook cooking it, and the chef putting together the ingredients, and the owner putting together the menu for you to read and the restaurant itself for the meal to be prepared in and for you to sit in, and for the trucker to bring it to the restaurant, and the Dept of Transportation workers to build the road, and the illegal immigrants to harvest the food and the butcher to butcher the meat, and the farmer to raise the vegetables and the rancher to raise the animals, ... you wouldn't have a meal on the table to eat. You'd be out scrambling in the woods to catch some wildlife and pull up some roots for dinner. No, you're right, services are worth nothing! ;)
Sorry, I should have said that national savings minus investment equals the current account. My bad.
ReplyDeleteJames,
ReplyDeleteI am still curious at what point you believe an economy as large as the US can reduce Manufacturing to and still be healthy?? I can't believe that you think it is zero, you have some very good points.
The R & D budgets are declining as a percentage of earnings and profit without presidence this is the part of manufactureing that I truly follow and its more than a little unsettling.
Just like the hope that US corporations are going to increase capital spending as the consumer spending slows and therefore keep us from a resession. The opposite is true, they see no need to increase or accelerate the marketplace as the demand is waneing.
In regards to my definition of Fair Trade, I like to boil it down to the simplest terms. Whatever you are tax'd on your exports to another country, you should be able to tax the incoming exports from said country to you at the same rate. The current situation which they call Free Trade is anything but that.
Lance,
I never said services meant nothing. I said that wealth creation comes from manufactureing and that services are circulation of cash. I actually think that James has some valid points and can see his belief that higher end services can create a trickle down wealth effect. But unfortunately I just can't see a country without a balance to manufactureing being healthy in the long run.
Not the article I was looking for but still, funy and sad.
ReplyDeletehttp://sfgate.com/cgi-bin/article.cgi?file=/c/a/2004/03/07/BUGMJ5F97N1.DTL&type=printable
This article I found very powerful in its understanding of what lost manufactureing could mean.
ReplyDeletehttp://www.inlibertyandfreedom.com/manufacture.htm
"without the waiter bringing it to your table, and the cook cooking it, and the chef putting together the ingredients, and the owner putting together the menu for you to read and the restaurant itself for the meal to be prepared in and for you to sit in, and for the trucker to bring it to the restaurant, and the Dept of Transportation workers to build the road, and the illegal immigrants to harvest the food and the butcher to butcher the meat, and the farmer to raise the vegetables and the rancher to raise the animals, ... you wouldn't have a meal on the table to eat"
ReplyDeleteyou do realize that you just proved that at the core of it all is somebody manufactuing.
thanks lance you just made my point for me!!!
KILLA!!
OC Bear wrote...
ReplyDelete"I have been unable to find the article that I read by Buffet but will definately keep looking when time alows. I am VP and facilities manager for a manufactureing company and as such find time a short commodity."
I fully understand. I waste too much of my own time on this site. It is also hard to find old articles when you most want them. (www.berkshirehathaway.com is the best place to look for Buffett's writings.) The point I am trying to make by asking is that I know Buffett has written warnings about the current account deficit, but I don't believe he has written warnings about the decline in U.S. manufacturing.
OC Bear wrote...
"I am curious James, as to what percentage of GDP needs to be in manufactureing to keep an economy with "growth" in standard of living in your view in practical terms?"
I'd say zero. Let's imaging a small fictional country that specializes in financial services. Let's call this country "the Cayman Islands". As long as this country has a strong comparative advantage in financial services, they can countinue to grow as long as there is strong international demand for financial services. Of course, a diversified economy is much more stable than a one-horse economy.
Economies don't grow through manufacturing. They grow by making the best use of their comparative advantages. This is standard economic theory. In a large country like the U.S., different parts of the country will have different comparative advantages. NYC has a comparative advantage in financial services, Silicon Valley has a comparative advantage in technology, Texas has a comparative advantage in oil production, West Virginia and western PA have a comparative advantage in mining, etc. If you were to break off NYC into a separate country and had no trade restrictions between NYC and the USA, it would do just fine as a primarily service-oriented country. In fact, NYC would probably be the richest country in the world.
Over the past several decades, the U.S. has been losing its comparative advantage in manufacturing and gaining a comparative advantage in professional services. One problem with your "what percentage of GDP needs to be in manufacturing?" question is that it doesn't remain consistent over time. As people become wealthier, their demand for services tends to increase more than their demand for products. Trying to keep America a manufacturing country, when our comparative advantage has obviously changed, holds us back.
threadkilla wrote...
"that's how Bush 2.0 has managed to increse GDP by 1 trillion during his term in office but increase our debt by 5 trillion."
The government doesn't run the economy. The government usually just gets in the way. Bush is just a big-government Republican who does more harm than good.
threadkilla said:
ReplyDelete"you do realize that you just proved that at the core of it all is somebody manufactuing.
thanks lance you just made my point for me!!!
KILLA!!"
And ALL services are part of the manufacturing process ... even those you have chosen to view as "just services". For example, the financial services provided by Wall Street are just as much a part of the manufacturing process of every good produced by every company listed in the exchanges as are the services provided during the assembly part of "somebody manufacturer". Are you understanding what I mean? Conversely, as an example, people don't provide financial services in a vacuum. They exist to help get goods produced, houses built, etc. etc. Even when they exist apparently only to provide a service such as the financing of an education, ultimately they play a part in the manufacturing of goods by having facilitated the educating of someone directly (or indirectly) involved in manufacturing that good for you. Looking at the problem even deeper, it becomes clear to me that actually ALL goods exist ONLY to provide a service ... I.e., you buy a car in order to be able to get places ... You buy a house, in order to get sheltered ... You buy a gameboard, in order to be entertained. Viewed in that light, i.e., that "goods" are merely vehicles for services, what do we care if it is a tangible or intangible good providing that service? What you're reading on the screen really does verge on the intangible, doesn't it? I mean it's not a book that you can put away in a drawer and know what you've read will be there forever ... Yet, it provides you essentially the same "service" as a book ... at least for now .... No, sorry, the manufacturing of goods is NOT essential for a healthy and sustainable economy. Manufacturing is but a low-tech means of supplying services. As intangible high-tech means evolve to provide the same (or better) services, the manufactured books providing said same services become obsolete (e.g., books ...) A service economy is a a more-highly evolved economy. Period.
We can argue that services are more than the circulation of cash. Services add value to material and assets. True, there has to be something there to sell or use in the first place, but services are a powerful factor in wealth creation and often overwhelm the value created when something is manufactured.
ReplyDeleteSo a dollar's worth of value is created when someone manufactures a scalpel, but it takes the services of a surgeon to save a life. Some actuaries now value a life at $10M USD. So in this case manufacturing adds $1 of value, services $10M.
I think many people value manufacturing jobs because many can be performed right out of high school and be learned on the job without the expense of college. There are tiers of complexity of course, but it is this flat learning curve that makes such jobs vulnerable to outsourcing.
And honestly we should be happy to export the low value positions and let Americans focus on high value jobs and skills. This involves change, and change is threatening, but it is inevitable.
There is then the question of what to do with the 58 year old who has a high school education, a family and mortage, and has spent the last 30 years putting nipples on widgets in the same factory.
Limited skills, not ready to retire, social and financial obligations, and totally unable to compete with a 20 year old in Manilia who can nipple the same widgets in half the time for $18 less an hour.
Someone mentioned Fair vs Free trade.
It isn't fair to our worker to outsource his job. Our competition doesn't care and can deliver the same nippled widget for 20% less than we can and make a higher per unit profit. If very much of that happens we go out of business, affecting all of our workers and share holders.
So Free trade will win everytime, even when it isn't Fair.
It is interesting to note that high end service sector job's are being outsourced as well. We are actually puting people on planes and sending them to India for surgeries.
ReplyDeleteFinancial analysis is being moved to Asia, Taiwan MBA's cost a lot less than US MBA's.
Pharmacutical's are moving out of US and Europe for Asia and India.
But the real problem is the R&D budgets in 1995 were 10% of corporate expenditure now its less than 2% and several corporations have moved large portions of their R&D to Asia and India.
We all know that software is being developed in India now.
What will be left without R&D. Low end services??
I think that there are areas that can grow, like alternative fuel. Problem is the US players are spending more on Mexican and Canadian Facilities than US ones.
Being the top of the Food Chain in a Globalization environment has a serious draw back. Either everyone needs to accelrate to where we are, or more likely we have to drop back to their level.
I am sure it will be a combination of these things, but believe the average American is not going to like the reduction in quality of life.
OC Bear wrote...
ReplyDelete"This article I found very powerful in its understanding of what lost manufactureing could mean.
http://www.inlibertyandfreedom.com/manufacture.htm"
I read the articles you listed. As a general rule, I think it's wiser to learn about science from scientists, economics from economists, and history from historians, etc.
Journalists and politicians tend to be generalists and they tend to be fairly ignorant regarding both science and economics (as well as many other fields of study). Thus, when the public learns about science and economics from them—as they usually do—it is often a case of the blind leading the blind. Journalists and politicians also tend to over-weight the importance of anecdotes and under-weight the importance of statistics. In addition, journalism tends to be manic-depressive; overly-optimistic and overly-pessimistic stories tend to make far more interesting reading than your typical academic research paper. Journalists also tend to be myopic because their profession revolves around day-to-day events, rather than focusing on the long term.
Scientists, economists, and other academics (especially researchers) spend much more time, and use much more intricate thought, when studying their respective fields of study than a generalist would. They also tend to be much more up-to-date regarding the latest advances in their field. At the same time, some academics are better than others. I generally prefer to read books written by professors at Ivy League universities, and other highly ranked schools such as Stanford, U. of Chicago, Cambridge, etc. Leading textbooks are also excellent sources of information, because they reflect the mainstream specialist view.
With that said, journalists and politicians—and the general public who learns about economics from them—tend to agree with the "free trade is bad" hypothesis. Economists, who study the subject in much more detail, are overwhelmingly of the opposite disposition. Of course, specialists can be wrong just as anyone can, but I'd argue that they have a much higher probability of being right than the generalists do.
OC Bear wrote...
ReplyDelete"It is interesting to note that high end service sector job's are being outsourced as well. We are actually puting people on planes and sending them to India for surgeries. Financial analysis is being moved to Asia, Taiwan MBA's cost a lot less than US MBA's. Pharmacutical's are moving out of US and Europe for Asia and India....We all know that software is being developed in India now."
Again you make a very serious logical error. You assume that because companies hire people overseas, it leads to an aggregate loss of jobs in the USA. This zero-sum-game assumption you make violates economic theory. The statistics don't back you up on that either. MBAs aren't hurting. Neither are software engineers, college professors, financial advisors, or many other service industry professionals.
Outsourcing has been threatening to destroy our way of life for decades. We're still here. The economy is hopping. It is easy to see doom around every corner. We can never dispell uncertainty completely.
ReplyDeleteAs for our factories we need to consider the EPA and other regulations we have to deal with in the US. Cost of labor is only a small part of doing business in the US. We source all of our product in the US, but I tell you, it is so easy to do business with China these days. I can't say I won't be using a Chinese vendor in a few years. Just add 20 days to our lead times and our costs go down 30%. That said, we are going to start using a call center in Montreal. Much cheaper than adding employees to our office staff to cover the phones 24/7.
James, you are right. With all the outsourcing we stand very near full employment. A survey of factory hiring managers last month revealed that 68% of them were complaining that they could not find enough qualified applicants.
Our WalMart ran out of bags last Saturday. If that's not a sign of a booming economy what is?
One of the leading aggravating factors of the Great Depression was Congress's attempt to protect what US jobs there were by imposing tariffs and quotas. That stroke of brilliance seemed like the right thing to do but worsened and prolonged the Depression.
The Free Market will eventually win out. The lowest cost supplier wins.
James,
ReplyDeleteThe closeing of the first article you linked actually supports quite a bit of what I said.
"And although the United States long paid the highest salaries, this crown has now been taken by Western Europe, although this is partly due to the weak dollar increasing the value of European salaries when denominated in the US currency.
Other MBAs, meanwhile, are playing a longer game and turning their attentions to Asia.
"More and more MBAs are joining Chinese companies from international MBA programs and Asian MBA business schools," Michael Yang, general marketing manager of Motorola (China) told the authors.
"I think the attraction for these MBAs is not the starting salary, but the growing opportunity. For example, the average MBA salary growth rate is higher than 15% per year here in China."
If you trace the percentages back Asia is really accelerating in MBA' absorption.
The R&D is still the key IMHO, it may take 10 or 20 years but eventually we will be overtaken.
OC Bear,
ReplyDeleteSo, intense U.S. and global demand for well-educated workers is a bad thing? I don't get it. Why are lots and lots of high-paying MBA jobs a bad thing?
You seem to have a zero-sum game mentality: that in order for Americans to prosper, the poor nations of the world must remain poor. Do you want the world's poor to remain poor?
I will re-emphasize my earlier statement, "Again you make a very serious logical error. You assume that because companies hire people overseas, it leads to an aggregate loss of jobs in the USA. This zero-sum-game assumption you make violates economic theory."
The reason the zero-sum game belief is wrong is because there isn't a fixed amount of wealth in the world. People create wealth by creating new goods and services, improving existing goods and services, more efficient production and distribution, etc. As John F. Kennedy said, "A rising tide raises all boats."
Lance...
ReplyDeleteFirst, the entire economic system, both globally and nationally, is based solely on fiat currency (completely backed by debt, nothing more). In every historic case of the use of total fiat currency, the economy eventually implodes due to the fact that the economy can no longer service the burden of debt. Eventually, it requires more of the economy to service the debt than can be used to support the actual economy of commerce.
We have almost reached the practical life-span of the system itself; that is, it will soon become inpractical to continue the system because it can no longer function.
Our government is very similar to a person borrowing a home loan from a bank. The bank doesn't actually have any "money" in their vaults to lend, the "money" for the home loan is created the moment the borrower signs the Mortgage Note. The borrower then spends the next 30 years paying the bank back "money" that the bank never actually had to lend in the first place, and on top of it all, the bank charges interest on the "money" it never had to lend...in the first place.
The whole economy of the world is based on the very same principle, eventually, it cannot maintain the burden of debt that is created through the fradulent Central Banking System. The problem with such a system is that the debt can never be repaid, in fact, in the case of government borrowing, it is never meant to be repaid.
Consider this: The publicized debt of the government alone is now over $9 Trillion, with future obligations estimated at over $80 Trillion. Now, if you started in the Year 1 A.D, borrowing $1 Million a day, every day, 365 days a year, year after year, it would take you until the year 2037 to borrow $1 Trillion. Now relate that debt to what the government has borrowed and add to it corporate debt and then add to that private debt and you get an idea of just what type of overwhelming burden we are facing. Actually, we will never fact it because the whole system is headed toward a massive collapse that cannot be thwarted by any tricks of the Central Banks, or governments around the world.
Republicae wrote...
ReplyDelete"First, the entire economic system, both globally and nationally, is based solely on fiat currency (completely backed by debt, nothing more). In every historic case of the use of total fiat currency, the economy eventually implodes due to the fact that the economy can no longer service the burden of debt....Actually, we will never fact it because the whole system is headed toward a massive collapse that cannot be thwarted by any tricks of the Central Banks, or governments around the world."
Wow! That post was 100% pure B.S.
A little hidden secret:
ReplyDeleteThere hasn't been on single recession that wasn't trigged by a significant change in regulations (either regulations or, in some instances, dergulations).
For all those that think the U.S. economy is headed toward a recession in 2007 or 2008, one must ask this: what recent and material regulatory change has been significant enough to result in a future recession? In my, there hasn't been since 1996 and 1998, respectively, each causing the dump after 2000. Today, growth, as measure by GDP, might slow, but there's no recession on the horizon.
Its late 2007 and there's no recession here yet
ReplyDeleteHey James, it is now almost two years later since you called my posting was pure 100% B.S., I wonder what you will be saying in another two years? As you may know, we are now in the beginning of a rapid degradation of credit liquidity, now since the entire monetary system is built upon and consist of credit expansion, thus debt creation, it will only be a matter of time before the pressures of this present liquidity crisis actually works through the economy.
ReplyDeleteFor the first time in the history of the fractional reserve banking system in this country the non-borrowed reserves not only hit the zero mark, but took a dive to around a negative 100%. Of course, if you don't understand how our money is made, how it works in the fractional reserve system you might not understand the import of this development, but soon enough you will.
Since every single "Federal Reserve Note" must be "borrowed" into existence, the underlying debt obligation is now irreversible and multiplies exponentially. Soon, the expansive money supply will exert pressure on the economy in an ever-increasing rate of inflation to the point that hyper-inflation places a death-grip on the economy.
It has already began, but the first step is when people know that prices are high and getting higher, so they think to themselves perhaps they will wait to make a purchase they need for a few months, when they expect prices to go down.
Then, when they notice that not only are prices not retreating, but continue to rise rapidly, they decide that the purchase they were planning could be put off for a couple of years.
Afterwards, the final step is when the people decide that they had better spend their cash as quickly as possible, converting it into any and every possible product they can because they suddenly realize that their money is rapidly losing all its purchasing value. So, the begin to immediate buy anything they can that they believe might hold some value even if they don't need what they purchase. At this point the shortages begin to spread and chaos ensues.
So, get back to me in a couple of years, then tell me what you think....
Well looks like you were right ....
ReplyDelete