US needs change to come out well after these historic times. Aging demographics and the on-going mortgage crisis will make US imbecile. However, focus on total factor of productivity and education can improve the situation.
It's 8 am on a Thursday morning. I am getting out of Washington D.C.'s JW Marriott's executive suite (they gave me an upgrade due to my platinum status) and I notice the headlines in the Journal (I refer to WSJ as
the journal). The headlines reads:
"Weak Economy Forces Elderly To Delay Retirement"I recollect my Macroeconomics concepts and conclude: The Long-run aggregate demand for the US economy has quantity of labor as a major concern right now with the aging demographics and restrictions on immigration for workers.
Yes. I am living in historic times and this roller-coaster ride is interesting to observe. Would this be the beginning of the end for a formidable power that was the United States? I will not hazard a guess as US has shown resilience in jumping back from such situations. However, a few incidents post-4/1 gave me evidence that we may begin the end.
A few days later, on 4/4, the USCIS issues a
notice about allowance for extensions on OPTs or Optional Practical Trainings for F1/H1B cap-gaps. The following week, USCIS issues the lottery system for both Masters quota as well as the Bachelors quota. All this is a reflection of a policy issue resulting in inefficient allocation of resources. On one hand, the country wants to relax trade barriers. On the other hand, they have created labor trade barriers themselves. A quota system usually results in less than efficient allocation of resources. The current H1B quota system results in similar inefficient allocation of resources. The folks who are denied work permits in the US will sit in UK and other parts of the world in order to ensure that work is done. The displacement of where the work is done from where it affects due to the Internet revolution has made this possible. Hence, the country loses significant GDP by not allowing entry to the immigrant skilled workers.
How will US remediate this?
I have no idea but have some opinions around the same. May be I will blog those on the Trendwhizo blog next....
Back to the economy
On other hand, I see following image of of Chair Bair on CNBC while reading the WSJ article:
She asserts that the regional banks are in good shape. However, Dick Bove vehemently insists that the regional banks are not in good shape and initiates a Sell on those stocks. He points out that the FDIC watch list has expanded and most of the banks on that watchlist are regional banks. He has a point.
Macroeconomics wise, I can see that this downtrend will last fairly long. The mortgage troubles will spill over into auto loans and personal loans. Later, this will snowball US into recession. I think we are already in a recession - only NBER has to confirm.
The cycle will not turn up until a source of spending is generated. A potential source is alternative energy. However, the OPEC might take a call to reduce oil prices to keep the junkie alive. OPEC parties are shrewd and will probably try to kill the alternative energy projects. However, society needs to understand this plan and not go by pure RoI-wise for investments in research for alternative energy sources.
We will see a spate of business failures. Also, we will see a spate of job losses due to business failures. In a bid to become fit for survival, companies will cut jobs in an anticipation of becoming fit. The cycle of recession leading to job losses leading to foreclosures leading to recession will continue unless a source of funding such as govt spending is identified. I will not be surprised if the unemployment will hit double digit figures, yes more than 10% !
We will also see a rise in crime rate. The social fabric will deteriorate. To what extent this might happen cannot be gauged. Noone can predict the future. It will be shaped by the actions that various central banks will take. The developed world provides social security - that fund will have a huge payout due to unemployment and other issues. However, that may not be enough to sustain living at a higher price level for the population.
The existing paradigms will change. Consumption smoothing and the all the concepts that Greenspan, an erudite market manipulator, tried to imbibe in the minds of the US residents have back-fired. He built an apparatus during the Clinton administration and later, progressed during Bush administration. This was the only way for him to show prosperity during his tenure. The US household networth is usually composed of two aspects - home and investments in the capital markets. The capital markets were not doing good after the tech bubble burst. Hence, Greenspan had to push up the real estate prices. Thus, he started the functioning of the apparatus he put in place for stupid lending. Moral hazard is one of the job description line items for the position of Fed Chairman. The results will be seen in the next few quarters.
Will there be another source of growth - such as the emerging economies? May be. The world mortar of growth was dependent on the US consuming the goods produced by China and the services produced by India. The savings of Chindia went to support excesses of the developed world. US in particular force-fed 2 billion dollars a day to the world. The emerging economies will suffer in the near short term. However, in the medium term, due to the savings rate, they will have capacity to survive. Inflation will reduce if oil prices reduce. If oil prices go back to $50 /bbl, then Chindia may never slip into recession.
Emerging markets will tank severely. I already emptied my Equity side of the assets and I am about to sell my Real Estate during my next India trip.
Why do the cash holders not come in and buy and stabilize the markets? I mean the oil powers have trillions of $s in their sovereign wealth funds to come in and stabilize these crises. I don't think they are welcome politically. Also, the developed nations have an ability to create their own SWFs by printing money. Yes, it can lead to general price-level rise (a.k.a. inflation); however, it is better than giving up your assets to unreliable outsiders (aka Barbarians at the Gate). I hope they don't follow the Zimbabwe path which led to quadrillion percent p.a. inflation rate - lol.
May be I am super-cynical; only time can tell!
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