Posted 8/15/2011

COMPRESSING AMERICA

America and its economy are being compressed by powerful economic forces.

Corporations are shedding workers in the USA while creating jobs abroad.

Banks are reluctant to lend to new small businesses because start-up risk is high.

Existing small business refuses to generate jobs because customers are staying home.

Stagnant wages, unemployment, and under-employment keep too many consumers at home.

Zero percent interest rates have destroyed the incomes of elderly savers.

It’s a vicious series of concentric circles which are shrinking America.

How much will we shrink? Read what Uncle Wisdom predicted in January 1, 2010 – eighteen months ago:

Posted 1/1/2010

THE SEVENTY-FIVE PERCENT RECOVERY

What kind of recovery will 2010 bring?

Apparently not the kind of one we hope for.

When Federal Reserve Bank Chairman talks about "recovery," he is careful not to predict the extent of the recovery.

Is that because he realizes that we are not going to recover all the way to the halcyon days of Clinton and Bush?

Does he feel that Obama is going to have to muddle through with a recovery that only reaches seventy-five percent of our peak years?

Does he feel that our vaunted $14 trillion economy was a mirage built upon "funny" money that never really existed?

Does he feel that our "real" economy never rose above $11 trillion?

If he doesn't feel that way, he probably should.

Here's why:

A seventy-percent consumer-driven economy (made out of credit and negative savings) was an economy erected upon the quicksands of funny money. Despite the severe recession and its heavy toll on jobs, the savings rate has gone from sub-zero to five percent – and rising. This means that the recovery will not be fully supported by the consumer, who now prefers saving over spending. (With Mrs. Consumer losing three trillion in stock market wealth and even more in housing equity, she's not likely to spend on designer duds.)

If consumer spending falls to fifty percent of the economy, we are going to experience a future economy that is about seventy-five percent of 2006.

This means that the consumer will never again buy 17 million cars a year. In the future, it will be more like 14 million. To make up for our excess credit buying, the recession level will dip down to 12 million a year – a level already predicted by Toyota.

A seventy-five percent economy means that the consumer will never again buy as much food, drink and drugs as she did in 2006. When this recession started, investment advisors suggested you buy consumer stocks, which traditionally weather economic down turns well. "Consumers have to eat, drink and brush their teeth," opined the sagacious finance men.

But lo and behold, the consumer sharply reduced her spending on food, drink and drugs. She may be brushing her teeth twice a day, but she is squeezing only half as much out of the toothpaste tube in the morning. Consumer stocks have been hit hard.

The restaurant business is in the soup with everyone either cooking at home or snapping up dollar menus."

Where Mrs. Consumer once went to department stores, she is now shopping at dollar stores.

Back in 2000, finance people were claiming that the USA is "over-stored." Yet retailers kept expanding and the mall builders kept on building. Now, stores are closing all over the landscape and the largest mall developer is bankrupt. This means that a seventy-five percent economy is going to result in a forty percent shrinkage in retail outlets. (If we consider automobile dealerships, the percentage is even worse.)

Citigroup, Bank of America and all the other banks sucking up government bailout funds were even more bloated than was the economy in 2006. Many banks enjoyed revenues that were artificially expanded by subprime mortgages, "liars' mortgages," bad commercial loans, excessively risky credit card offerings and investments in derivatives and collateralized debt offerings.

The banks will never recover to their former revenue levels – and the bailout funds will never be fully recouped by the taxpayer.

This is a certainty in a seventy-five percent economy which will not support excesses in lending and investing. Legitimate loan requests by small business are being ignored while the government continues to pour money into the bottomless pits called Fannie Mae, Freddie Mac and the Federal Housing Authority.

This kind of economy will make it very difficult for the government to fund Medicare, Medicaid and Social Security without raising taxes and increasing borrowing, which raises interest rates – and retards economic growth.

Our children are going to form one-car families and live near public transportation stops. Their houses will shrink from 2,500 square feet to 1,800 square feet. There will be more shared bathrooms and no vacant living rooms. Mother and Father will work, and Junior will be forced to drop after-school soccer in favor of flipping burgers at McDonalds. Kids will no longer tell their parents they're "just hanging out" because they will become an integral part of family income production.

We're going back to the way we lived in the 1950s and 1960s.

The McMansions will be abandoned, then torn down and replaced with smaller homes. (Like the ones that were torn down to build the McMansions.)

Malls will be scarce and we'll do a lot more walking and bicycling.

We'll relive the "movie and a burger afterwards" date of the Eisenhower years.

But there is good news in that.

Surveys indicate that we were happier in that simpler era than we were during the excesses of 2006.

(click here for a printable version of this article)