Thursday, December 23, 2010

The Last Christmas in America

The end of cheap oil, the end of work and the end of affluence: welcome to The Last Christmas in America (TLCIA).



As unemployment rose toward 10%, the January 1975 cover of Rampartsmagazine blared: The End of Affluence: The Last Christmas in America. (TLCIA)


The government responded quickly to unemployment, high inflation and rising budget deficits: it started manipulating data to mask the politically inconvenient realities of rising inflation, unemployment and deficits by playing switcheroo with Social Security Trust Funds, inflation data, etc.--games it continues to play to cloak reality from the media-numbed public.


The Bear market, and thus the "real" recession, lasted 16 years: from 1966 to 1982. Now statistics are echoing that last great recession: rising prices for essentials, systemically high unemployment and stagnant wages.


We all know the 16-year recession/malaise had a "happy ending": huge new oil fields were discovered in Alaska, the North Sea, West Africa and elsewhere, ushering in a renewed era of cheap, abundant petroleum. President Reagan "saved" Social Security for a generation by raising contributions paid by employer and employees, and he heralded a "lower taxes, higher permanent deficits" ideology that is now accepted as the norm: deficits don't matter, even when they reach the trillions, because our good friends the Gulf Oil Exporters and Asian exporters will buy all our debt forever and ever, keeping interest low forever and ever.


(And if they drop the ball, then the Federal Reserve will print money and buy the Treasury bonds. Sweet! We don't need any external buyers, just the Federal Reserve.)


Then the U.S. created and launched two revolutionary technologies which both created new wealth around the globe: the personal computer (microprocessor and cheap RAM) and the Internet (TCP/IP, Ethernet, and the commercialization of Tim Berners-Lee's World Wide Web with free browsers) spawning the generation-long boom of the 1980s and 90s.


But when the wheels fell off that boom in 2000, the U.S. did not create a new engine of wealth: it opted instead for a devilishly insidious simulacrum of wealth: debt which rose at an exponential rate throughout the economy.


Borrowed money and phony financial legerdemain (mortgage-backed securities, derivatives based on the MBS, etc. etc.) from 2000-2007 created what I have termed a "bogus prosperity": no actual new wealth was created, only a brief and doomed bubble of debt-based housing valuations was inflated which followed the classic model set down by the Tulip Craze in Holland hundreds of years ago: insane boom, crushing bust.


We have to revisit the early 1970s for a reality check. In post-industrial America circa 1970, a huge surplus of food was grown by a mere 2% of the workforce. The cornucopia of manufactured goods was produced by about 20% of the workforce (hence the phrase "post-industrial"), and other than essential government services like the Armed Forces, police and the courts, the rest of society's work was either service-oriented paper-pushing relating to affluence (insurance), do-good selfless work (Peace Corps, churches) or leisure-related: entertainment, films, travel, amusement parks, stereos, clubs, etc.


This was not all fantasy. A friend of mine supported an entire house of hippies in late-60s Pittsburgh on his union steelworker job, and had plenty of money left to save for his trip to San Francisco. (As I recall, the rent for the big old house was less than $200 per month.) Hippies were the first ardent dumpster-divers/scavengers, driven not by poverty but by the idea that since that our society generated so much waste and surplus, why bother working?


As noted here many times before, the purchasing power of American wage-earners reached a plateau around 1973 and has been declining ever since.


One key point which is usually overlooked when comparing "The Last Christmas in America" circa 1974 and TLCIA circa 2010: the wealth distribution in the U.S. was much flatter then. CEOs of financial institutions did not earn $10 million each; there were no hedge funds with chiefs pulling down $600 million each (yes, that was the average "compensation" for the top ten fund managers at the hedgies' glorious peak), and even minimum wage ($1.60/hour in the late 60s, I know because my wage stub recorded it) bought far more goods (purchasing power) then than minimum wage does now.


Not only was gasoline cheap, but housing was far and away cheaper than it is today. Just about any G.I./Vet could buy a house with his/her V.A. benefits (3% down), and anyone else could scrimp and save for a few years and then buy a house for 2 or 3 times their annual wage at an interest rate around 6%.


Even in the the most expensive city in the U.S. in terms of cost-of-living, Honolulu, I was able to rent an old studio apartment in 1973 for $120/month--$525 in today's dollars. My tuition and student fees at the University of Hawaii per semester in 1971-75 was $117--$514 in today's dollars. Can you find an apartment in a high-cost city for $500 and go to a four-year state university for $500/semester (not including books of course)? No. Was the state or Federal government running stupendous deficits to provide this education? No.


Meanwhile, in TLCIA circa 2010, obscene "compensation packages" are defended as "free enterprise." Well, what did we have in 1973? Unfree enterprise? Amidst all the ideologically convenient defenses of heavily skewed "compensation," we have to admit that the dream of affluence combined with leisure was based on the presumption of society's wealth being distributed somewhat evenly, not by a Communist central state but by the "free enterprise" system and modest common-sense government regulation (limited work hours, overtime, minimum wage, etc.) which protected employees from the excessive exploitation of the late 19th century and early 20th century Monopoly Capitalists.


That dream seemed at hand in 1970. Now, after "the limits to growth" were mocked by those expecting ever larger oil fields to provide endless abundant cheap oil, we find that Peak Oil was merely put off a generation; there have been no new discoveries of super-massive oil fields since the early 1970s, and the supposedly abundant alternative petroleum sources like shale oil are horrendously costly to exploit, for they require vast quantities of energy (mostly natural gas at the moment) to be consumed to extract the oil.


Now we face a future which might well be called the End of Work for up to a third of the current workforce. Since agriculture employs about 2% of the workforce, industrial/factory production about 11%, essential transportation and essential government each a bit more, we have to ask: in an economy in which 70% of GDP is consumer spending, how many jobs are actually essential? How much actual wealth is being created/produced in the U.S. and sold overseas? Is giving people with Medicare coverage 13 costly and often ineffective medications and endless MRI tests actually creating wealth, or it mostly squandering it?


We might also ask: how much of the consumer economy is superfluous if wage-earners shift values and decide saving is more important than consuming? How many malls, storefronts, internet retailers, restaurants, fast-food joints, etc. can a newly-frugal economy support? How many dog-walkers, derivative salespeople, nail shops, carpenters, financial planners, realtors, etc. does an economy need if the FIRE economy (finance, insurance and real estate) is shrinking?


Based on the tremendous size of the service economy, construction, finance and government, I have estimated that 30 million jobs out of the current 134 million-strong workforce are superfluous. Many government positions are essential: police, meat inspectors, rangers, tax collectors, meter maids, etc., but as Mish so thoroughly illustrated in his detailed analysis of the California state budget ($120 billion or so), dozens of agencies could be eliminated without any visible effect on the economy except to the wage-earners who lost their jobs.


If 20 million jobs disappear (9 million have already vanished since 2008), so do all the taxes those wage-earners paid; if 10 million homes go through foreclosure, the inflated property taxes the owners once paid will disappear, too. Once businesses close, it's not just wages which disappear: all the junk-fees governments levy disappear, too: the business taxes, the licensing fees, the permits, transaction fees, etc.


Does anyone think all these taxes and levies can fall and government employment will be funded by some other source? Yes, the Federal government can borrow money for a few more months or years at low interest rates; but soon, the surplus money which has piled up in exporters' accounts will be gone, and the endless borrowed trillions will actually start costing real money--money that will be diverted from government employment to pay the interest on all that wonderful debt everyone loved when they got a piece of it.


So how does a society deal with The End of Cheap Oil and the End of Work when it also means The End of Affluence, even for many of those with jobs? How does government deal with declining tax revenues and rising interest rates?


The death throes of the debt-based consumerist lifestyle are already visible beneath the glossy propaganda of "rising revenues this Christmas season." My friend Richard Metzger (founder of the amazing Dangerous Minds website) neatly summarized the reality of our "consumerist paradise":

When we first met in 2007, there were so many topics we could have started with, but the most pressing one seemed to be, to both of us: 'What is "it" (Depression II) going to actually look like?' Or what will it look like in a year, then two, then five? What will be the visible and social manifestations of the crisis? Let's start with that here, shall we?


What strikes me at the moment, is just how poor the retail environment is. Well poor for the merchants, great for the consumers. Would they have slashed prices this deep, this early, unless sales were off on an absolutely monumental scale? My wife and I were walking around the mall the other day and the prices now are lower than they'd normally be at the end of February, when they REALLY want to get rid of stuff.


Here in Los Angeles many of the chi-chi modern furniture stores and small clothing boutiques are closing or have closed already. Not to type out such a Grinchy prognosis, but here it comes anyway: I think it's obvious that as bad as this retail season has been --if 75% off isn't flat out DEFLATION, I don't know what is-- this will still be seen as the "last" great, old school American spend spend spend Christmas shopping orgy for some time to come.


Christmas 2010 will be the historical bookend of the consumer era.(Emphasis added: CHS) The last gasp. I don't see any possible chance of its return. This culture of spending, the conditions won't be there for it, nor the desire to consume like that again. I think it's simply being beaten out of us.


But, further to this point, with the tremendous implosion in the FIRE economy and the huge aggregate losses in the GDP from Wall Street, the banking sector and the real estate bubble (all essentially non-productive enterprises seen from hindsight, none likely to rebound for decades), when these losses get combined with a massive, massive slowdown in US consumer spending --which serves as a sort of gigantic furnace for much of world manufacturing and trade, of course-- we'll have an America where the GDP returns to the level of... what year?


You often read economists writing about real estate saying that housing prices might eventually return to pre-bubble levels by 2014, but what about the GDP? A lot of the Ponzi scheme profits of Wall Street and the hedge funds can now be seen to never have existed in the first place. There's been unprecedented wealth destruction in real estate. In practical terms for a reasonable guesstimate of the true United States Gross Domestic Product, might this mean a return to the GDP of, of say, pre-dotcom bubble America, taking the years 1994 to 1996 as an arbitrary yardstick?


Subtract the FIRE industries, throw in the consumer/debt shut down and how much THAT will subtract (I can't guess at that number) we are looking at one hell of a haircut for the GDP. It won't be anything like a 4% contraction-- already an epic nightmare-- it'll be an abrupt implosion of some high percentage of the GDP.


And when America's rapidly growing national debt is measured against a GDP that looks closer to 1996's tally than to 2006's, this is when the word DEFAULT will be on everybody's lips. It will begin to seem advantageous to repudiate the debt before there is no possibility of any sort of governmental spending beyond servicing it. What will that do to the currency, what will this do to world trade, etc.? So many more onion layers keep presenting themselves and it all looks doomed.

Excellent summary, Richard, thank you. The numbers being bandied about to quantify the wealth that's been lost/destroyed in the U.S. in the past two years are truly staggering: $12 trillion has vanished.


The Fed is desperately attempting to re-inflate the debt bubble by lowering interest and mortgage rates and buying up all sorts of semi-toxic/impaired debt.What the Fed dreads is the reality we all feel and see: fear of the future due to diminished wealth and shaky incomes. If your assets have been slashed, you feel poorer because you are poorer. Borrowing more at any interest rate will not make anyone feel wealthier.


People who fear their income may plummet due to layoffs or their hours being cut are not in the euphoric mood to borrow more, and banks which cannot dare to lose more money loaning to people who will default have cut off credit to millions of previously rabid consumers of debt.


And let's not forget that much of what is purchased in this frenzy is needless, superfluous crap. My wife saves the most egregiously gift-buying-frenzy advertising circulars, and one from Bed, Bath & Beyond caught my eye.


There is no difference between this "1001 Best Gifts" from BB&B and a parody of consumerist excess. Hmm, how about an "executive standing valet" rack of wood and plastic for $99.99.


To make this poor-quality contraption, a forest somewhere in a Third-World kleptocracy was cut down and precious, irreplaceable oil was burned shipping the lumber to China and from that factory to the U.S. across 6,000 miles of Pacific Ocean.


We know this spindly piece of garbage will break in a matter of days, weeks or maybe if the owner is especially careful, months; then the legs will break loose of the base, the towel bar will pull out, etc. and the "we cut down a priceless rain forest to make this" piece of human handiwork will be put on the curb where a diesel-burning garbage truck will haul it to the landfill along with all the spoiled food Americans throw out.


The 16-bottle wine cellar/cooler from China (labeled Cuisinart for your consuming pleasure) for $199.99 might come in handy storing something once it's unplugged--but a cardboard box will probably do just as well.


I for one will not mourn the last Christmas in America. Good riddance to the flaunting of borrowed money and the heedless, desperate purchase of valueless "goods" as gifts for an insolvent nation awash in too much of everything but common sense, integrity, gratitude, accountability and healthy living.


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