Thursday, November 17, 2011

Is There Life After Debt?

Fact: The debt crisis is global - and, yes, this includes the so-called creditor nations, such as China.  After all, in our fiat currency world it takes a debit in order to create a credit.  

The way we got into this mess is well known: the West foolishly (even criminally, if you ask me) gave up its industrial/manufacturing base and the high earned-income jobs it generated, replacing them with services and low value-added jobs.  However, it didn't lower its consuming and spending habits to balance the losses, instead it piled on debt from vendor nations, and constructed Rube Goldberg asset bubble contraptions that attempted to generate "wealth" out of thin air (e.g. real estate, derivative-based bonds, etc.).


 Anyone Still Making Anything in the US?

As the chart above shows, the process of de-industrialization is not new, at least not in the U.S. where goods-producing jobs have fallen steadily over the last 60 years, from 40% to 13.8% of total non-farm payrolls.  As a direct consequence (in my opinion) wage and salary income has dropped from 68% of total personal income to just a little over 50% (see chart below).

Earned Income Has Dropped Drastically

Consequently, total debt soared to 550% of earned income - even excluding debt of the financial sector (see chart below).


 Can The Real Economy Sustain This Debt?

This chart raises one very important question: can the real American (and Western) economy sustain its debt load, or will it collapse under it? To put it another way: Is there life after debt?

The answer to this question involves much more than quantitative easing, classical econometric ratios, or Tea Party dogma.  We must go straight to the heart of the global " Permagrowth" economic paradigm, the one we have been using and abusing for well over a century.  In this outdated and obviously crumbling model, debt and growth are intrinsically linked, one becoming the enabler for the other in a sort of pushme-pullyou perpetual motion machine.

But it can't go on. Debt is a call on tomorrow's growth - and if such growth is impossible then the debt becomes untenable. The Earth's diminishing resources, benign climate included, can no longer sustain Permagrowth, therefore we cannot repay or even adequately service the immense debt/credit loads we have created.

Yes, there is life after debt.  But it will be very different from the consumerist Shangri La we had become used to.  I believe we are headed towards a low-intensity, decentralized type of macro-economic paradigm where energy and most consumer goods are produced locally from renewable sources, and where the sociopolitical system is likewise decentralized.

The important question is this: can such a paradigm shift be accomplished relatively smoothly and peacefully, or will it take a major upheaval? I really don't know..

P.S. On the eurozone: Dear Mrs. Merkel (or is it Ms.?), when your entire neighborhood is on fire it is not a good time to argue the bad structure and poor management practices of the Fire Department.  Rather, please make sure the firemen have plenty of water and leak-proof hoses.

18 comments:

Anonymous said...

I like your post this lot:)

Especially as a despicable
goldbug. Mind you I was not born strictly human with even a more than decent academic education in business studies).

This is the kind of things we have not waited 2010 or 2011 to read and write by the way.

"I believe we are headed towards a low-intensity, decentralized type of macro-economic paradigm where energy and most consumer goods are produced locally from renewable sources"

Sure. Ditto. This is where we are heading to. Willy-nilly.

"... and where the sociopolitical system is likewise decentralized."

Do not forget fiat money into the loop. Fiat money is most assuredly a construct of heavy centralised political power mills.

Some would even go as far as say "political AND MILITARY power mills". I would not stretch it that far though.

Trust aka "fiat" in a paper-or-contract-currency of course a collateral effect of heavily centralised power and not only a judicial one.

"can such a paradigm shift be accomplished relatively smoothly and peacefully, or will it take a major upheaval? I really don't know.."

I certainly do not either. I have stopped blogging on those subjects when I started to consider the midterm geopolitical implications of the current situation on Asia stability.

No need to add stress to the current world. But, for sure, global peace ain't certainly no guaranteed thing...

tv said...

"The important question is this: can such a paradigm shift be accomplished relatively smoothly and peacefully, or will it take a major upheaval? I really don't know.."


One simple, Occam's Razor way to go from big and concentrated to small and diffuse is through an explosion............

Harijan said...

Thank you for a thought-provoking article.

I wholehearted identify with the separation of debt from an expected Permagrowth in the global market.

The article opens with the presumption that the West foolishly gave up goods/high-income jobs to replace them with services and low value-added jobs - thus causing a decline in income level. Coupled with inflexible spending habits, and the West became riddled with debt that it was not going to be able to pay back.

I do have to ponder about several assumptions to arrive at the problem of income vs debt in the present day.

Assumption 1. Goods producing jobs are coupled with higher income as compared to service jobs which are couple with lower income.

According to US BOL 2008 statistics, the highest paid occupations are those in the services sector: health care, air transport, law, scientists, and engineers.

I would much rather be designing an ipod than making it.

Assumption 2. Nations, which give up goods producing jobs, will therefore experience a decline in expandable income.

The transition from industrial to information age had de-emphasized the importance of production of goods as opposed to dissemination of information. One of the distinctive characteristics of developed nations is that they have moved to services based economy from a goods based economy since the 1970s. For every 100 Swede in 1900, 61 worked in agriculture, 24 in manufacturing, and 9 in services. In 2000, 4 in agriculture, 17 in manufacturing, and 79 in services.

I would think that it is in the best interest of a developed country to train its workforce for a service-based economy the next couple of decades after which it becomes hard to estimate what happens with anything.

Assumption 3. In the US, the decline in goods producing jobs is the reason behind the decrease in the wages and salary as a proportion of personal income.

The US average income has plateaued out in early 1970s with annual income fluctuating between 40-50000 USD. This compares starkly with the continued increase in GDP per capita which only begun to falter away from its exponential curve a decade earlier.

This begs the question, why is there such a huge discrepancy between average income and productive capacity of a nation over a period of last 30 years?

I would propose that there is some correlation between the “masking” of the increases in GDP from the average income and the fact that a smaller portion of personal income comes from wages and salaries, but that means more time writing on the internet and less time increasing productivity for the country. ☺

Regardless of the technicalities of the income issue, I wholeheartedly agree with the point that we are actually looking at the butt-end of the 20th century global economy and that we need a fresh face to represent a sustainable economy based on the best interest of humanity and the planet as its foundation.

Thank you.

Aram

camabron said...
This comment has been removed by the author.
camabron said...

@Harijan Thing is that almost all those in power positions around the world don't have the "best interest of humanity and the planet" in mind.

Re: Service vs manufacturing jobs. High paying service industry jobs are by definition in limited numbers. Otherwise those wages would come down too (supply and demand). The majority of the population is left with either manufacturing or low paying service industry jobs. The former is better (ie Germany, South Korea).

Regards

Anonymous said...

@Aram

Because corporations have been keeping the difference between production and income, and turning it into massive salaries and bonuses for the C-classes.

Hellasious said...

One view on manufacturing vs. service jobs is this: Science, technology, engineering are intrinsically linked to manufacturing.

Therefore, where manufacturing goes, highly skilled services follow.

One tiny example: many US engineering schools now have satellite campuses in China.

Glassgavin said...

The tendency of the universe is one of growth. Example: 1869- men sitting around a campfire looking at the moon. 1969- men walking on the moon. We must aspire to do great things that involves us in the phsical world, not cower to the diabolical illusory aspects of monetary constucts.

Hellasious said...

"The tendency of the universe is one of growth."

I most certainly agree.

But in the last decade we have confused expansion (aka bubble-blowing) with growth.

Example: burning more fossil fuels and destroying the Earth's climate in order to produce 10 pairs of cheap sneakers per Westerner - bought on vendor credit - is expansion, not growth.

Doing fundamental and applied research to eventually produce, say, fusion power IS growth.

Brian Woods said...

Hell,

I came across a statement about profit v income. It might have been by Steve Keen (can't remember!).

The PC economy was about maximizing profit (to provide a surplus for savings or investment), whereas the FIRE was about income maximization.

Brian

Harijan said...

I agree that there is a discrepancy between the intention of the powerful and the interest of a republic. However, I do maintain that the US would benefit from investing in services-related economy.

To comment on those two countries, South Korea, services sector form 68% of labour force. In Germany, 71% of labour force. For some odd reason, this same data is hard to find for the US labor statistics where industry/services sector aren't clearly delineated.

I used to do extensive research on the migration of hand injury during the globalization era. In the US, hand injury has declined drastically through the 90's because much of that industrial work was outsourced overseas.

The same phenomenon is taking place with hand injury in South Korea because it has been outsourcing manufacturing jobs overseas in favor of services sector. An example of this trend is that samsung electronic products are often assembled in Taiwan or China.

Suppose it might be that we are comparing apples to oranges. In Korea, Samsung might be considered an industrial company just as IBM used to be considered a goods company. Of course, no one would contend the idea that IBM is a completely services-oriented company now.

Harijan said...

@Anonymous who replied "corporation took the difference between GDP and average income"

Yes, that's the conclusion I wanted the reader to believe the idea came from his/her mind.

It's called inception. I believe they made a movie about this. /terrible sarcasm/

Seriously, this is a graduate thesis for a debt-laden economics graduate student!!!!

Rufus said...

Does Steve Kenn's idea make sense to you? http://news.bbc.co.uk/2/hi/programmes/hardtalk/default.stm

Outside of the details, which would be complicated, does it make sense for the government to bail the debtors out?

Hellasious said...

"Does Steve Kenn's idea make sense to you?"

Well, in a very limited way, yes it does.

But only if we look at the global economy in a very idealized, almost religious fashion. A bit like Sodom and Gomorrah receiving absolution of sins from God, as a way of solving the real problems of crime and social decay.

It MAY work under the rules of Christian theology, but, I for one, am closer to the view that God helps those who help themselves.

I do think, however, that we desperately need to slash the debt of the financial sector, i.e. that debt/money currently being used to leverage speculation in everything from corn to CDS.

Anonymous said...

Hellasious ----- can you please tell me the date of the blog post you made on the Dollar not losing its reserve status because of the Dollar's use in the global energy complex (GEC).....I believe u mention that the GEC was about 15% of global GDP
Thank you

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