Tradesight economic reports pre-date the current website. In 2000, I predicted that the market would close lower when Bush left office than when he came in. This had never happened with a 2-term President until Bush 2, by the way, but it ended up happening. In 2004, we suggested that the real estate market was nearing a bubble top. This played out in 2005-2006. I’ve suggested many times in the past that the biggest issue facing America from an employment perspective is outsourcing (which we will recap here). In October 2007, when oil broke $80 a barrel the first time, we predicted an economic collapse that was unparalleled. The banking crisis hit behind that. We also pegged the bottom in late 2008/early 2009 from the VIX reading. All of these reports are available in the archive.
We are, currently, in a near-Depression that can’t be rivaled since the early to mid-1930’s, mostly caused by the lack of regulation in the real estate and mortgage markets of the mid-2000s, but also by a derivative bubble in the stock markets and the controlled price of oil.
But the problems aren’t over, partially because of our own undoing due to a lack of education.
We have talked many times in the past about how technology affects employment. The reality is that the US, the greatest economy in the world until the last 5 years, has begun to outsource what I call support employment. Ever bought a Dell computer? Ever needed help? Ever talked to someone with a name that sounded foreign? There you have it. Now, this isn’t the end of the world. I live in Arizona, a state where house cleaners and landscape maintenance folk have employed what I will generously call “cheap labor” for a long time. But there comes a time where technology and outsourcing make a difference. Been to a grocery store lately? What used to take 8 check-out clerks helping you check out and pay is now down to three plus the guy that monitors the self-checkout lines. Home Depot and Lowes offer this now. It’s a norm. This is where the world is going.
We eliminated manufacturing jobs with computers. Now check-out clerks. Then sales people. It doesn’t end, but it does mean trouble on the labor front. An economy will never support 4% unemployment with most employment dependent on higher-end wages. We don’t even need to talk about minimum wage. Let’s just face the facts. The Internet, technology, and out-sourcing have increased unemployment.
Then the rest of the world tried austerity. What is it? It’s tightening the belt. It’s taking the idea that we can spend less on things and do better. To be kind, it’s BS. It doesn’t work. Spending less on things means higher unemployment, which is the whole problem right now.
What is a Depression? It’s when everyone spends less and becomes risk averse. How does it work? Simple. Most people decide to pay off debt instead of invest and spend. That’s individuals. Sukanto Tanoto businesses. That’s people in general. That’s the government. Historically, what breaks that cycle? The only group in the equation that can spend more. Government. Businesses in this country are sitting on two TRILLION dollars in excess capital. Profits have never been higher. But they don’t spend. For the first time in 30 years, individuals are paying off debts. And, tax rates are at historic lows. If low tax rates created jobs, we would have the lowest unemployment in years. But we don’t. Why?
Because low taxes don’t mean anything for employment. Businesses produce goods, and they do it when they see buyers. There are no buyers because unemployment is too high. The middle class gets smaller day by day. So how do we fix this? There is only one way that has worked throughout history. The government must spend.
If we need a reminder of this, look at most of the countries in Europe over the last two years. They tried to cut government spending, and unemployment rose. They tried to balance the budget by spending less, saving more, and not raising costs. It didn’t work. It never has before in history. The role of government should be simple. Stay out of the way usually, but when things are good, collect taxes that pay off debts, and when they aren’t good, spend. That’s reality. Don’t spend more in the bad times than you have to, but spend to bridge the gap until the economy is repaired. There has never, not once in history, been an economy that has fixed itself on lower taxes. In fact, countries have died on that principle.
Europe is now the example. Britain felt a depression coming and cut spending without raising taxes on the elite, and now faces higher unemployment than ever. That means a smaller middle class and no buying power to buy goods from producers.
The current US Congress was voted in with one job. Pass a Jobs Bill. Not a tax cut, which we’ve been trying for ten years without success, but a Jobs Bill that puts people back to work. Until you accept that this country includes people that will forever be middle class, but people that can build and fix and improve infrastructure, well, you haven’t understood this country.
France and Greece and most of Europe tried austerity. It’s a bad principle. Balance your books during the good times. We didn’t do that in 2000 when we had a surplus. We voted to give the money back (remember the $200 check you got in 2001?) and to cut taxes on the “job creators.” That was our solution. We don’t try to balance the books when spending is weak. At those times, we should spend more. The only reason this is a problem is that most of the world went on a ten-year spending binge without trying to balance the books when things were good. Now we have to clean it up.
The current Congress has failed miserably at their primary job, which is to put the middle class back to work. There has been no bill passed that represents or enables those jobs. The economy is now in trouble because of this failure. The US sat through a debt downgrade not because we were unwilling to understand the issues, but because we couldn’t do what has always been done to solve the problem: cut spending where we can and raise taxes to pay the bills. This was the first downgrade of US debt in history, and it wasn’t because of deficit spending. It was because the S&P and groups that decide when to upgrade and downgrade realized that we were no longer serious about solving our problems.
There is now only one path out of our own misery, and that is for the government to recognize that there are bridges and roads and rails to be repaired, and that US workers are the best to make those fixes and improvements. We need to invest in our future and our infrastructure as a country as we always have in the past, raise taxes on those that benefit the most, and take strides to balance our budget. We can fix this in the next couple of years, but not if we continue to believe that taxes are a bad word, especially for those that benefit from this great country. Put people back to work and you will have a growing class of citizens who can spend to purchase goods and services, and that will break the cycle of depression. It won’t happen without that, no matter what anyone does with taxes.
Technology improves and eliminates jobs. Tightening the proverbial belt of spending does the same. Combine the two and employment can never improve. It means that less people can trade, less people can invest, markets become dependent on the Fed, and volume and activity decreases, which is bad for traders. We can do better. Let’s not get the next Congress wrong. For more info please visit