In 2004, I warned you. And explained
the American Thermidor theory. This month, the writing is on the wall, and it is clearer than ever why we need a
National Sustainability Drive.
The BLS has released two numbers which tell the tail of the Bushconomy - and how he is bankrupting, not merely the federal treasury, but the entire American economy. It can be summed up in a simple phrase: we are paying more, and getting less.
First is import export prices. The bottom line is that we are paying 8% more for what we import, and getting 4% less. Since we already import much more than we export, this means that the curve is going in the wrong direction - what you want to see is rising export prices, and falling import prices.
The second is the consumer inflation report. As people know I prefer CPI-W since it is a better measure of a constant cost of living. Even it does not correctly reflect the cost of housing. Right now, as a headline number, CPI-W ran at 18% on an annualized basis for September, and CPI-U, the more widely quoted number, ran at an annualized 15%. These numbers are pushed up by the Katrina/Rita spike, and would be worse if Europe and the US had not tapped strategic petroleum reserves. But the story has not changed, merely the rate of accleration.
That story is that energy, health and housing are driving inflation, and everything else is stagnant. One man's inflation is another man's pricing power - and guess who is eating the inflation without having the pricing power.
That's right, you. The Republicans have argued that "core inflation remains tame" - the problem with this is that "core inflation" is only an important measure when the industrial base is expanding rapidly, and economies of scale are improving. It is supposed to "smooth out" "volatility" in the inflation series, not be a substitute for inflation. That is econogeek for "under normal circumstances food and energy wobble around alot, but eventually they will center around the same number." If energy and food aren't returning to this number - that is, if they are going up by more than core inflation month after month - it is a bad sign. In fact, a very bad sign, since we export "core" stuff and import energy.
The two numbers are exactly in agreement - that is, the import/export number says "we are paying more and getting less because of energy", and the inflation number says that there is a micro-economic shift from other things to energy. Since a large fraction of the improved standard of living in the US is that we have paid less and less of our GDP for energy and transportation - oil prices in the 1930-1950 period were quite high in real terms - this signals a reversal - not merely for the working class and lower class - but for the middle class and professional class.
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Now that it is here, there is going to be a stark choice for both monetary and fiscal policy. Since the Republicans are in charge for next year, they will almost certain take the choice of allowing more inflation - since they are profitting from it, and trying to impose consumption taxes. They are also going to gut housing asset inflation. This spells doom for the Reactionary coalition, which has gained power by bribing the middle class and upper middle class with small amounts of asset inflation - because these groups see themselves as competing with people below them on the economic scale - and giving huge asset inflation to the top. As soon as the bribes -as small as they have been - go away, so does the political coalition for more money for the rich.
The other road is a restructuring of the American economy. It will be painful, but since people are increasingly seeing pain as being the reality, and there is no end in sight, they are increasingly willing to sign on board for something that will allow them to come through with some scraps of dignity. This road would see much higher interest rates, and the need to either accept very large devaluation of the American dollar, or a global capital movement control regime - or some combination of the two. This is not an optimal choice, but one gets the right to make the best choice by making the right choice early - not the wrong choices late.
Many people have wondered why the headline unemployment rate has not gone up more, the answer is that more people are being pushed out of the affluent economy, and simply no longer "in the labor force". Instead, they are moving to the underground and under the table economy. Many contractors will not take a check - only fungible cash. Many skilled people are simply working under the table as much as they can - because that way they can avoid both taxation, and the other overhead. It is eating our seed corn, since this activity both pressures inflation - which is what we see, and gives the society no surplus to invest in the future.
The last year saw a decision to eat our seed corn in another way, much of the money propping up the US economy is from the Congressional decision to allow repatriation of foreign profits at low tax rates. This money was what we were keeping our paper for oil economy afloat on. Other nations invested here, and we invested abroad at higher rates of return, using our military, economic and political muscle to accept what for others would be a higher risk. This is "development arbitrage" and the current "globalization" order was designed to encourage it. CAFTA shows how last gasp this is - it added a tiny area of additional development arbitrage, with limited growth potential.
In the near term there is going to be a dramatic equalization of China's currency with the United States - that is the only way we are going to get jobs back here at this point - by having much less energy, much lower standards of living, lower wages, less health care, poorer popualtions, poorer retirement, higher rates of people leaving the overground economy - while China uses a strong Yuan to buy more energy.
Last month was a faster lurch down the road, a lunge forward along a trail we have been walking since Bush took office, even though we took our first steps in this direction late in Clinton's Presidency. Americans elected a congress to not tax inflation. This has broken the liberal system - which relies on taxing inflation, and the Reaganomics juggling act of using development and labor arbitrage to allow more asset inflation than otherwise would be possible.
For those that want to know why Bush is cratering now, the answer is simple. In the post 1968 period, Americans gave up labor pricing power in return for low inflation. This decision was to a lesser extent accepted in the UK. The continent of Europe went the other road - accepting lower employment rates in return for a knife edged balanced economy based on careful allocation of resources. The basic social contract of the reactionary era - like that of the preceding ones of American History - was a trade off of low labor power for a money system that kept nominal prices stable, while allowing massive speculation in a parallel money system. They have all broken down in the past, as this one has.
The penalty for getting this wrong is very high, the reward for getting it right is a long boom, where Americans can pour their effort into a fundamental shift in society. Britain made the transition between eras, going from a wood and wind economy, to a coal and steel economy, and remaining a top power. The US must act, act quickly, and with a full knowledge that we have chosen to do things the hard way, but that they still can be done.