Best of the Week
Most Popular
1.Is the Stocks Bull Market Over? Dow Trend Forecast into End January 2015 - Nadeem_Walayat
2.Gold and Silver Stocks Apocalypse Now, Bear Market Review - Rambus_Chartology
3.NHS Baldrick Plan to Spread Ebola Across UK - Sheffield, Newcastle, Liverpool, London Hospitals - Nadeem_Walayat
4.Ebola Terror Threat Suicide Bio-Weapons Threatens Multiple 9/11's, Global Plague - Nadeem_Walayat
5.Second-Richest Man Says Mortgages Now a "No Brainer" - Dr. Steve Sjuggerud
6.Gold And Silver Still No End In Sight - Michael_Noonan
7.NHS Baldrick Plan to Spread Ebola Across UK - Sheffield, Newcastle, Liverpool, London Hospitals - Nadeem_Walayat
8.The Gold Bug is Set to Bite Back - EWI
9.How Alibaba Could Capitalize on the EBay-PayPal Split - Frank_Holmes
10.The Consequences of the Economic Peace - John_Mauldin
Last 5 days
Bullish Silver Stealth Buying - 24th Oct 14
Blood in the Streets to Create the Gold Stocks Investor Opportunity of the Decade - 24th Oct 14
Swiss ‘Yes’ and ‘No’ Gold Initiative Campaigns Compete at Launches in Bern - 24th Oct 14
War And The Law Of Unintended Consequences - 24th Oct 14
Tesco Meltdown Debt Default Risk Could Trigger a Financial Crisis in Early 2015 - 24th Oct 14
Saudi Move to Cut Oil Prices Is Now Russia's Biggest Economic Threat - 24th Oct 14
US Stock Market Top Is Now In Sight - 24th Oct 14
New Profit Points in the Shifting Balance of Power, Welcome to Saudi America - 24th Oct 14
QE Failure & Folly Of Paper Mache, Treasury Bond Integrated Lifeline Patches - 24th Oct 14
U.S. Economy Faltering Momentum, Debt and Asset Bubbles - 23rd Oct 14
Annuities - Afraid Your Money Will Vanish before You Do? - 23rd Oct 14
What Debt Deleveraging? - 23rd Oct 14
How to Profit from Massive Spin-Offs with Just One Play - 23rd Oct 14
Evaluating Ebola as a Biological Weapon - 23rd Oct 14
Euro, USD, Gold and Stocks According to Chartology - 23rd Oct 14
Why You Should Always Be Invested in the Stock Market (Even Now) - 23rd Oct 14
Five U.S. Housing Market Warning Signs Point to Real Estate Market Downturn - 23rd Oct 14
The Better Short: Gold or Silver? - 23rd Oct 14
Focus on Graphite Companies with Green Energy and Technology Strategies - 22nd Oct 14
Crude Oil Price Hitting Bottom - 22nd Oct 14
Evidence of Another Even More Sweeping U.S. Housing Market Bust Already Starting to Appear - 22nd Oct 14
Gold Or Crushing Paper Debt Stocks Crash? - 22nd Oct 14
India Gold Demand Surges 450% and Bank of Russia Demand At 15 Year High - 22nd Oct 14
Bitcoin Stock Exchange Could Be "More Valuable than Alibaba" - 22nd Oct 14
Currency War - How to Profit from a Stronger U.S. Dollar - 22nd Oct 14
Banks Hold Treasuries and Make Loans- 22nd Oct 14
Gold and Silver Timing is Everything - 22nd Oct 14
Don't Get Ruined by These 10 Popular Investment Myths (Part VII) - 22nd Oct 14
Follow the Baby Boom to Biotech Stock Profits - 22nd Oct 14
Copper, Nickel and Zinc Won't Be Cheap for Long - 22nd Oct 14
How Will We Know That the Gold & Silver Price Bottom Is In? - 21st Oct 14
Is Gold as Dead as Florida Hurricanes? - 21st Oct 14
First Swiss Gold Poll Shows Pro-Gold Side In Lead At 45% - 21st Oct 14
The Similarities Between Germany and China - 21st Oct 14
The REAL Reason Why the Stock Market Turned Down - 21st Oct 14
Petrobras is a 'Scheme, Not a Stock' - 21st Oct 14
Stocks Bear Market Indicator Is Off the Mark - 20th Oct 14
Stock Market Ideal Turning Point is at Hand - 20th Oct 14
Investors Quit Complaining, The Environment is Perfect Right Now - 20th Oct 14
Ebola Armageddon Could Trigger a Rebirth in Gold and Silver Prices - 20th Oct 14
Gold vs Euro Risk Due To Possible Return of Italian Lira - Drachmas, Escudos, Pesetas and Punts? - 20th Oct 14
Stocks Rebounded Following Recent Sell-Off, But Will It Last? - 20th Oct 14
U.S. Responsible for West Africa Ebola Outbreak Says Liberian Scientist - 20th Oct 14
Stock Market Intermediate B Wave has Started - 20th Oct 14
Gold Stocks Analysis – FNV, CG, NCM, SBM - 19th Oct 14
Stock Market Primary IV Wave Counter Trend Rally - 19th Oct 14
Gold And Silver - Financial World: House Of Cards Built On Sand - 18th Oct 14
Anatomy of a Stock Market Sell-Off - 18th Oct 14
Why OPEC Has Declared an Oil War on Russia - 18th Oct 14
Gold and Silver Extreme Shorting Peaks - 18th Oct 14
Bitcoin Price Fall to $350? - 18th Oct 14
Tesco Supermarket Crisis Worse To Come as Customers Vanish! - 18th Oct 14

Free Instant Analysis

Free Instant Technical Analysis


Market Oracle FREE Newsletter

Stocks Epic Bear Market

Obama's Economic Team has failed, America's Economy Has A Structural Problem

Economics / US Debt Sep 09, 2010 - 11:33 AM GMT

By: Gordon_T_Long

Economics

Diamond Rated - Best Financial Markets Analysis ArticleObama's Economic Team has failed him!

It’s a STRUCTURAL problem not a CYCLICAL problem!

It’s a DEMAND problem not a SUPPLY problem!


I gave President Barrack Obama six months to roll-out his doomed Keynesian policies, twelve months to discover they were flawed and eighteen months to realize that the solution to America’s problems must lie within a different economic framework. I had hoped by the end of twenty-four months to see new policies closer to an Austrian economic philosophy emerge. I was wrong.

Though, even the Wall Street Journal recently featured an article on the re-emergence of the Austrian School of Economic philosophy, it would appear that President Obama’s administration still neither gets it, nor I am afraid ever will. Key defections by his leading economic advisors, talk of the need for QE II and a Stimulus II, and a political collapse in public confidence suggests a growing awareness that Keynesian policies are not working, as many predicted they wouldn’t. Obama's exciting rhetoric of Hope and Change has left myself and the majority of recent polled Americans disillusioned and disappointed. What I see the administration failing to grasp is twofold:

I-America has a Structural problem, not a cyclical business cycle problem. Though the cyclical business cycle was greatly worsened by the financial crisis, I would argue that the structural problem facing the US is actually a contributor to what caused the financial crisis.

II- America has a Credit demand problem, not a Credit supply problem. It isn’t that the banks won’t lend, but rather that few can any longer afford or qualify (on any reasonably and historically sound basis) to borrow.

A STRUCTURAL PROBLEM

1) Trade Balance: Insufficient Export/Import Ratio

We are all painfully aware that the US has not produced sufficient exportable product to support its standard of living for many years. Manufacturing in the US has been in steady decline since the 1960’s and the excess spending during the Vietnam War. It has been 50 years since the US had a balanced budget (forget Clinton's social security slight of hand). Over the last 10-15 years the US has seriously compounded this problem by accelerating the de-industrializaton of America without a strategy to replace salable export product. Corporate industrial strategies of outsourcing, downsizing, and off-shoring were never countered other than by an excess consumption splurge which fostered massive real estate and retail expansion distortions.

Simply said: A US Service Economy that is based on 70% GDP consumer consumption does not pay the bills!

For a brief period of time following the dotcom implosion, the US operated as a mercantile “Financial Economy” that turned out to have been nothing more than a historic illusion.

As the graphs below clearly show, since late 1999 with the surge in the adoption of the internet, unemployment in the US has spiked. Clerical, manufacturing and almost any job that could be further automated through networking advancements were replaced. 

2) Creative Destruction: Slowing Innovation Rate
 
In my recent paper INNOVATION: What Made America Great is now Killing Her! , I described how the dotcom bubble ushered in a change in America that is still reverberating through the nation and around the globe. The Internet unleashed productivity opportunities of unprecedented proportions in addition to new business models, new  ways of doing business and completely new and never before realized markets.  Ten years ago there was no such position as a Web Master; having a home PC was primarily for word processing and creating spreadsheets; Apple made MACs and ordering on-line was a quaint experiment for risk takers.


In 1997 prior to the ‘go-go’ Dotcom era unfolding, America’s unemployment was less than half of what it is today at 4.7%.  At that time the US added 3 Million net jobs which reflected the creation of 33.4 Million new positions while obsolescing or cutting 30.4 Million old positions. Job losses occurred in old vocations such as typists, secretaries, filing clerks, switchboard operators etc.  Hired were new occupations such as C++ programmers, web masters, database managers, network analysts, etc. 

As our research chart above however illustrates, the additions have fallen off precipitously while the job losses have stayed relatively flat. In 2009 job losses were 31M and only slightly larger than 1997, which would be expected with further internet application development. New job creation however was only 24.7M which is dramatically lower than the 33.4 in 1997.

Over 98% of all jobs created in America have traditionally been created by companies with less then 500 employees. Recent research by the Kaufman Foundation shows that in fact new start ups versus existing businesses dominated the creation of new positions.



America’s slowing ability to innovate which is reflected in published research papers, patents issued and numbers of college graduates with advanced math and science degrees has seriously fallen behind. I laid out the seriousness of this problem in my early 2010 paper: America - Innovate or Die!

It is more than a little disconcerting that after 13 Trillion in stimulus measures we see business spending on capital investment STILL shrinking in the US.


It can’t be any clearer, the US has a structural problem. The administration can not possibly fail to realize this. My sense is they just don't know what to do about it.

A DEMAND PROBLEM

1) Credit Available - Demand Flat.

According to the Federal Reserve's latest quarterly survey of banks' lending practices recorded during July 2010, “for the first time since 2006, banks are making commercial and industrial loans more available to small firms, with about one-fifth of large domestic banks having eased lending standards. This offset a net tightening of standards by a small fraction of other banks."  Also, for the past six months, banks have continued easing lending to large and mid-sized firms. What's more, banks also reported that they stopped cutting existing lines of credit for commercial and industrial firms for the first time since the Fed added the question in its survey in January 2009. As for consumer loans, banks also reported easing standards for approving loans.

Credit is available, but demand remains flat.

Asked in the July survey how demand for commercial and industrial loans has changed over the past three months, 61% of banks responded "about the same," while 9% said "moderately weaker." While it was good news that 30% responded "moderately stronger," it's not exactly a surge in demand.  Even in a slowly recovering economy, the growing distaste for credit among our debt-weary public has hampered the way for new purchases and investments.

This isn't all that is surprising. The latest economic indicators paint a very exhausted consumer: In the years leading up to the financial crisis, he bought too much house and too many cars. The consumer is in burn-out mode, more focused on either saving or paying down credit card debt than buying more appliances and gadgets.

The amount consumers owed on their credit cards during the three months ending in June dropped to its lowest levels in more than eight years, indicating that cardholders continue to pay off balances in the uncertain economy, according to TransUnion's second quarter credit card statistics.

The average combined debt for bank-issued credit cards fell by more than 13% to $4,951 over the previous year. This represented the first three-month period where credit card debt fell below $5,000 since the three months ending in March 2002. Meanwhile, personal savings have risen to 6.4% of after-tax incomes, about three times higher than it was in 2007.

Perhaps what the Fed's quarterly report is really saying is this:

"There's a growing distaste for credit. The American consumer is the child who ate too much and spoiled his dinner. And even if you hand him his favorite meal on a silver platter, he's just not that hungry.”

2) Shifting Demographics

Another obvious but seldom highlighted factor affecting demand is shifting demographics. The Baby Boomer generation is no longer the consumption engine it has been to the US economy.


We have a generation that, as has been predicted for some time, is reducing its expenses but it may be even more dramatic than forecasted. With home housing prices no longer being the wealth generation vehicle they had expected it to be, stocks not delivering the returns they had been told to expect for the 'long term’ investor and medical expenses climbing above their worst budgeted targets, the baby boomers are being forced to cut back even further than the expected demographics were warning about.

The demand for credit to finance new acquisitions is not the same priority it was only a few years ago. Harry Dent's extensive demographic research lays this out in indisputable detail.

All Federal Reserve and Government actions are about increasing credit supply.  None effectively address demand.

THE RESULT

Expect it to get worse until the administration finally realizes that we have both a structural and demand problem facing America, not a cyclical business cycle and credit availability problem. I personally don't believe for a minute that the Obama Administration haven't come to realize something is wrong. The White House simply doesn't know what to do about it. They are doing the only thing our Washington political machine knows what to do - throw money and credit at the problem, which is precisely what got us into this problem in the first place.

FREE this month, our 34 page Monthly Market Commentary: Market Newsletter

Sign Up for the next release in the Innovation article series: Commentary
Follow daily developments of critical importance at Tipping Points

Gordon T Long   gtlong@comcast.net   Web: Tipping Points
Mr. Long is a former executive with IBM & Motorola, a principle in a high tech start-up and founder of a private Venture Capital fund. He is presently involved in Private Equity Placements Internationally in addition to proprietary trading that involves the development & application of Chaos Theory and Mandelbrot Generator algorithms.

Gordon T Long is not a registered advisor and does not give investment advice. His comments are an expression of opinion only and should not be construed in any manner whatsoever as recommendations to buy or sell a stock, option, future, bond, commodity or any other financial instrument at any time. While he believes his statements to be true, they always depend on the reliability of his own credible sources. Of course, he recommends that you consult with a qualified investment advisor, one licensed by appropriate regulatory agencies in your legal jurisdiction, before making any investment decisions, and barring that, we encourage you confirm the facts on your own before making important investment commitments.

© Copyright 2010 Gordon T Long. The information herein was obtained from sources which Mr. Long believes reliable, but he does not guarantee its accuracy. None of the information, advertisements, website links, or any opinions expressed constitutes a solicitation of the purchase or sale of any securities or commodities. Please note that Mr. Long may already have invested or may from time to time invest in securities that are recommended or otherwise covered on this website. Mr. Long does not intend to disclose the extent of any current holdings or future transactions with respect to any particular security. You should consider this possibility before investing in any security based upon statements and information contained in any report, post, comment or recommendation you receive from him.


© 2005-2014 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in

Free Report - Financial Markets 2014