Posted 1/19/2009

DOWNSIZING AMERICA: THE MACRO VIEW

The Intrepid Ladies Book Club are now getting their books from the library, not from Barnes & Noble. As a result, Barnes & Noble is selling and ordering fewer books. As a result, the publishers are accepting fewer manuscripts. One has put a moratorium on new manuscripts. As a result, authors are ordering fewer lattes at Starbucks and the company is laying off people and reducing stores. There are fewer jobs for the people who engineered and built the stores. They, in turn, are buying fewer groceries and cheaper brands.

The behavior of the ladies book club is but one photo of the downsizing of America.

For two decades, the USA has bought more goods that it has been selling, financing the big and ever-growing trade deficit by borrowing money from China, Japan, Russia, Singapore and other major exporters.

For two decades, the U.S. Government has been running fiscal deficits by spending more than it takes in from taxes and fees. By using loose accounting rules not available to business, the government "pretended" to have a surplus during the Clinton administration. (Democrats and Republicans are very bipartisan when it comes to Federal accounting practices which ignore future obligations like Social Security, Medicaid and Medicare.)

Businesses were expanding wildly as if the good times would never end. By operating so close to the margin, they are quick to fail in negative times. And the banking industry has been playing with "funny money" for years. Citigroup, Bank of America, and Goldman Sachs are now begging the government for bailouts since their debtors want real money – not the funny stuff.

And let's not leave out the McMansion-minded consumer, living it up on plastic and home equity loans. Did they think the value of their homes would go up forever? Didn't anyone get his nose out of American Idol and read a newspaper that showed the terrible consequences of the Japanese property bubble? (Japan has been in a bear market for 25 years now. with its stock market less than 30% of what it was during their early ‘80s boom.)

What is clear is that we are not in some kind of short-term recession. We are also not in a full-scale depression. We are in something even more serious.

We are experiencing the permanent downsizing of the American economy.

As we work the funny money out of the system, we will see that we were never as big as we thought we were.

Washington still brays about our $14 trillion economy. But if you take all the bad debt out, it may be that we were never more than an $10 trillion economy. This means that we may have long been 25% less than we thought we were.

Look at the four big investment banks in 2006. Lehman Bros. went belly up and now there are but three. That's a 33% reduction.

Look at the two big electronic retailers in 2006. Circuit City is in bankruptcy and now there is only one. That's a 50% reduction.

Look at the top five banks. All are struggling and Citigroup is being dismantled and sold off in pieces. That's a 20% reduction. Without the government bailouts, Bank of America would blow away, too.

The famous "big three" of the auto business are in dire straits. Chrysler is history and General Motors is perilously close running out of cash to fund operations. It is highly possible that the next three years will see a new big three – Toyota, Honda and Ford. That's a 67% loss in American auto companies.

Twenty-five years ago, there were three great names in the luxury gift-giving business – Waterford Crystal, Wedgwood China and Dalton figurines. The company that makes them has declared bankruptcy.

The airline industry is operating on a wing and a prayer. Even during good times, the value of discounter Southwest Airlines was greater that the combined value of the next seven airlines. What happens if there is another fuel price spike during our downsizing?

The major home builders became stock market winners after the dot.com bust by building ever larger and more luxurious homes – all bought on mortgage credit. But now housing is bust and the builders are stuck with unsaleable homes and unsaleable tracts of property. All are flirting with bankruptcy.

With all major consumer companies in the tank, their suppliers are suffering too. The collapse of farm prices has hit the makers of tractors, seed and fertilizer.

Everybody is getting laid off. Some companies are doing something not seen since the Great Depression – cutting salaries as well as laying people off.

What we must understand and get used to is the fact that all this is permanent.

America has been forced into a downsizing mode.

What makes this all permanent is that the easy money days are history. Banks will never again fool with funny money. There will never again be subprime loans on autos and houses. "Liars Mortgages" are history. There will no more cozy deals between regulators, rating agencies and issuers of mortgage-backed securities and other debt instruments.

And without the funny money, how can we recover to where we were when all that funny money was floating around?

But there is good news.

Research has shown that people who lived on real money 25 years ago (and had fewer possessions) were much happier than those living today.

It seems that the amount of goods a family has is inversely related to happiness.

Next: The Downsizing of America – Micro View

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