Happy Thanksgiving to all who celebrate. This is Gary with my first published commentary from 2004 reproduced below. The reason I am posting it (assuming TK doesn't mind publishing a 5+ year old piece) is because everything still looks applicable today — only on STEROIDS.
The previous guest poster, Mark, noted that well-paying semiconductor (among many others) jobs went away in the US and what I was trying to point out in FrankenMarket is the systematic nature of the US decline. I clearly remember the day Mr. Magoo, I mean Alan Greenspan, in response to a congressman's inquiry about US manufacturing jobs said "ours is an increasingly information-based economy; if you make things in this country going forward, you may not do so well". That is what I recall, although a few words may have been different. I was stunned that he actually admitted it.
Aside from running biiwii.com and biiwii.blogspot.com, I am also the owner of a small manufacturing company. Thankfully we are 100% healthcare focused, but I am still very sensitive to the issues that Mark noted and Greenspan put a punctuation upon. Anyway, with that preamble out of the way…
As we enter the
summer of 2004, our markets appear to be moving with all the grace
of Dr. Frankenstein’s creation, staggering forward, arms
outstretched and seeking sanctuary.
Ideally, the market would find that comfortable place in the
arms of a healthy, productive and fundamentally sound economy.
But will it find those loving arms, or will it instead
ultimately find an angry mob, ready to strike it down?
What follows is
a breakdown of the situation as I see it.
There will be no charts of trends or statistics, but merely
what I consider to be a common sense overview of the situation.
I will compare what was to what now is, at
least as far as the US economy is concerned.
origins of America, at least westernized America, are rooted in
independence, self-reliance and hard work.
A land of opportunity for anyone willing to work hard, take
chances and go for what became known as the “American Dream”.
In short, people were free to come here and define themselves
and in so doing, define a great nation that seemed to out-work,
out-produce and out-compete most others.
It is no wonder that as this great vacuum was filled with
productive people seeking a better life, America was built, brick by
brick and with constant sweat-equity, into such a powerful economic
and cultural force, affecting and influencing the majority of the
From the early
days of the industrial revolution right on through two world wars
and well into the cold war, America seemed to thrive as each new era
presented its own particular set of problems.
There were setbacks of course, notably the Great Depression
of the early 1930’s. In
fact, many would argue that policies originating from the
depression’s aftermath would set the country on a course to a
destination we now find ourselves approaching; a predominantly
paper-based, service oriented economy and a financial system
underpinned by credit (and its evil twin, debt), speculation and
fiat debt paper, AKA the US dollar.
Whereas a less
mature, formative America worked and produced itself to the stature
of superpower, we now find a bustling, mature society that sadly
feels entitled to its riches and stature.
In short, hubris has set in to the American consciousness,
and it is hubris that I believe will be its downfall.
We are simply not seeing things through the same eyes that
our great grandparents, grandparents and even parents saw them
through. And because of
that fact, we have transitioned from production to consumption.
Consumption being a much easier route.
After all, why work and produce for what you want when you
can attain easy credit, and seemingly get the same results.
This would not be so unsettling if it were only a portion of
our population going in this direction, but the scary part is that
the whole country, Uncle Sam, has gotten on board and
I would argue, has led the charge into this brave new world of Alan
Greenspan’s “information economy”.
third world nations do the work that we have risen above as an
entitled superpower. Why
would we need to do the “dirty” jobs like manufacturing after
all, when we are the world’s number one financial services
provider? We will
continue to do certain dirty work, such as construction, that
can’t be outsourced. And
if it’s construction for infrastructure, so much the better.
Uncle Sam is hiring!
your depreciating dollars.
This leads me
to the main point regarding our current economic recovery.
This is a recovery built on inflation, not real productivity.
This far into a recovery cycle, I would expect to have seen a
far less accommodative Fed, as growth has really picked up and
inflationary pressures are becoming apparent even to those who
believe the official massaged numbers in the CPI and PPI. But
as a friend of mine says, we’ll probably get “tightening lite”, or the
Fed talking the talk, but in fear of short circuiting the economy it
created through unprecedented liquidity from negative real interest
rates, a credit system gone berserk, and vendor financing agreements of
massive proportions in the form of Asian central bank purchases of our
So where does
this leave our poor monster, sloppily stitched together and
meandering aimlessly forward? The
market will look to the economy, and being a forward looking
monster, I expect it to see one of two things; The Fed taking away
the punch bowl for real, deciding too late that the party is over,
or more realistically, it will see a Fed doing all it can to sustain
the monster it created. This
market was stitched together with debt, and it will require more of
the same to keep it going. We
are knocking on the door of hyperinflation, and I believe the Fed
will choose to open that door, given that it is too late for our
economy to de-leverage in any orderly fashion.
modern Americans, I can envision the majority seeing this as
bullish, and Alan Greenspan gaining even more accolades as the
celebrated maestro. Frankenmarket
will probably get an extra bounce in its step.
A warning before you go full-bore bullish longer term though;
for a reality check on what hyperinflation means, do a little
research on what Germany experienced in the 1920’s.
By contrast, a garden variety Japan style deflation would
have seemed very tame. But
it is too late for that now.