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1/18/11

Economic, Social and Geopolitical

Seventies Redux...

Best case scenario: We don't become like the UK in the seventies.
Worst case scenario: Hyperinflation due to full blown currency crisis.
Optimum scenario: We make the best of whatever happens.

This is not a happy blog but a hefty dose of reality with a heaping helping of positive hope at the ending. The challenges our economy faces in order for the mild recovery that occurred in 2010 to continue are myriad and not one of them must falter in order for the others to remain intact. They're economic indicator dominoes. They require a vastly improved employment outlook, GDP far greater than the two percent we're at currently, a stable currency, resolution of the mortgage foreclosure crisis, rapid debt deleveraging with simultaneous consumer spending, an increase in manufacturing and companies holding cash investing in equipment and new services. The reader gets the general idea. This means at best we're likely in for a stagnating economy, often referred to as stagflation, due to the certainty that unemployment will remain high, debt ratios will not be reduced and productivity won't increase enough, along with the wrong kind of inflation. We are already beginning to experience this type of inflation, in the products we most need, not the macroeconomic type of inflation the Chairman of the Federal Reserve is lamely trying to coax. He is playing a high risk game of quantitative easing, chancing hyperinflation in a quest to avoid the dicey pitfall of deflation.

The price and problems of commodities are telegraphing to us what we are incrementally seeing in our daily lives and will loom larger as 2011 progresses. Oil, steel, lumber, corn and wheat, utilities (electric and gas), copper, rare earth and other commodities are gaining in price along with looming currency problems, ours and other countries. This translates to everyday consumers as higher prices for food, gas, durable goods such as household items, clothing and personal products. It is no accident that the major wireless carriers are reducing perks and raising prices, not necessarily due to their costs going up much right now, it's because they know we've become dependent on them. Heed the economic signal these corporations are sending that outmatches the one broadcasting over their airwaves.

In other words expect inflation for things we consider absolute necessity goods and have a real need to use. Products such as gas to get to work if we have a job and food for nourishment and clothes to keep us warm and dry or cool and comfortable.

Our worst danger is devaluation of the US dollar which puts us at risk of not being the preferred reserve (anchor) currency of the world. China is making a serious bid for the Yuan to become the reserve currency within the decade. Then all bets are off. Until the late sixties the UK's pound sterling was the number one reserve currency until the US dollar became the preferred currency. Britain suffered greatly during the 1970s and we would do well to mind what happened there at that time. They have never fully recovered, since after Thatcher's valiant and mostly successful effort to return the UK to a more normal economy, Tony Blair and the Labour party then destroyed advances for short term political gains. The reader should be hearing a familiar ringing in the ears here.

Simultaneously, with the probable exclusion of items of precious metals and gems such as jewelry (an exception for several reasons), coins and bullion, most items that are not really necessary such as designer label clothes, brand name fine furniture, high end appliances and electronics, prices will drop. Since consumers will have to spend money on the absolute necessities, the lower cost of these goods will be irrelevant, since they'll be out of reach for most people.

The interesting thing about this era is that many of the things, bottled water for instance, that people now consider necessities will quickly be reduced to unnecessary goods in the blink of an eye, in a characteristically true American way. For example bottled water will go out of fashion because it will become more expensive but people will state the reason they no longer consume it is for environmental reasons, citing plastic bottles, carbon burning transportation, energy used to extract it from it's source, etc. The real reason will be that the outlay for more important things, basics like fuel, food and tap water, will take priority in a squeezed budget.

On the flip side, expect deflation in things we may have once considered necessary, have become inexpensive but not as necessary as we thought, in context of what we really need. We'll discover that the label on clothing or if the veggie's soil was organic is irrelevant. 

An example is fuel costs will be high and hybrid cars will be expensive but you will be able to buy a gas guzzler on the cheap.

We may find ourselves, along with $8 a gallon gasoline, in a situation where electric power is rotated among substations or brownouts and wireless connections will be disabled during certain periods of time. In denial this could happen? Again, look to Britain in the seventies, where similar things occurred. Some people won't go to work due to wages versus cost of getting there. No US Mail, UPS or FedEx deliveries, because the earnings won't be enough to pay the costs of delivering the goods. A new found dislike for unions will be discovered amongst people who were previously neutral or pro on the topic of unionism. Police and fire unions will strike to demand they get pay raises to equal their cost of living. Think not? Think again.

We should learn from the past, relying on ourselves and each other.

Our best hope is we will be smart enough to avoid these confrontations and difficulties and learn to conserve and use wisely what we have and improvise what we don't. More importantly learn the value of cooperation and socializing with good people who will exchange one good turn for another. The art of bargaining is not as disdained in many cultures as much as it is in the United States but that could change. That is my hope but so far I'm not banking on it. After experiencing 25 years of unprecedented prosperity, we have become entrenched with a sense of entitlement, several generations have unrealistic expectations that it should always be that way. History does not bear that out.

The worthwhile benefit that I sincerely hope is this coming decade will serve as a catalyst for a significant number of people to reinvent themselves with the ingenuity this country was once attributed with. To be sure a lot of Americans will remain stuck in a rut of their own making, their choice, not collateral damage. For others that are suffering in ways not of their making, we should lend a helping hand. I'm hoping that in the long term though many will learn the creative skill of more than making do and improving what they have into something greater. Hopefully, much like a generation or two that was shaped by the Great Depression and World War II, we will learn through hard times to make life better, gaining values that stick with us for a lifetime and pass them on.

True, this thought is quite optimistic coupled with positive thinking. It is held together by hope and belief in the higher nature of many Americans, who in the long view of our history, get going when life gets down to the nitty gritty.