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Old 06-07-2002, 08:16 PM   #1
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Economic Stagnancy?

Okay...this is *supposed* to be a thread about economics.

An interesting trend I have noticed is that Japan has always been about 10 years ahead of the U.S. in terms of economic growth. Japan's big boom was the 1980s; the U.S.'s was the 1990s. However, the 1990s were Japan's stagnant years, with still no end in sight to their economic stagnancy. It is now more than apparent that the U.S.'s boom of the 1990s is now over. Are we now on track for an indefinite stagnancy?

My issue with supply-side economics, as defined over the last twenty years, is that I believe it to be an unsustainable economic system, characterized by steadily higher consumer spending to continuously drive up corporate stock prices, coupled with constantly higher demands for lower production costs. The key problem, for me, are the words "steadily," "continuously," and "constantly." The Dow Jones Industrial Average is now at about 10,000, take or give a thousand points, depending on the day. Compare that to the average 11 years ago, which I believe was at about 3,000 (don't quote me on that), and stockholders shouldn't be complaining.

Of course, the mantra that has been drilled into our heads is that it will "always" go up. However, I question as to whether this will even happen again, as our economy is currently structured. Economic growth in the 1980s was stimulated by drastic tax cuts for those who could afford to invest (business and the wealthy), with the bulk of the tax burden being shoved on those who could not afford to invest (the working class). Wages were also being drastically cut, so it wasn't really spending that brought up this economy; it was investment speculation. The 1990s were stimulated by the rise of new technology, namely the internet, and the infusing of 401K retirement funds into the market, but, once again, there were no "real" profits; only investment speculation.

What can drive the 2000s? Well, tax cuts for business and the wealthy, like which drove the 1980s, are no longer going to work, because these individuals have already invested. Probably still recovering from losses sustained during the recession, these individuals are now looking towards more secure investments, namely bank services (either in CDs or government securities) or real estate. New technology, like with the 1990s, could be a potential spot for investment, but the idea of a whole new industry (as the dot-coms were) popping up is unlikely; the computer and the internet are now just as taken for granted as refrigerators and microwaves, which were once "new technology" in themselves for their days. Retirement funds? Not likely to happen, as new 401K investments levelled off a couple years ago, and, with the losses many people sustained, they are likely to convert their 401K accounts to something more secure like bank IRA accounts or invest the 401K into government securities. The present administration did propose theoretically infusing Social Security into the stock market, but this is not a viable idea either; the current structure of Social Security has no surpluses to invest and the several trillion dollar bailout that could allow this bailout no longer exists, thanks to the 2001 tax cut and the unexpected (and expensive) war on terrorism.

What option do we have left? First, I look at what I *believe* is necessary for an economy. Consumer spending is unarguably a necessary component in this equation. Stock investments are not; companies used to rely on self-investment to stay afloat, preventing a sudden stock panic from relegating them to bankruptcy. Tax cuts for the working class could help, but we also have an infrastructure to run. Federal tax cuts from 2001, for instance, have forced individual states and local communities to make up the difference, often resulting in increased taxation anyway. The only other alternative is to recreate a tax structure that gives incentives to raise wages substantially, which will, in turn, generate spending. Such a structure *did* exist until the 1980s, until inflation was redefined to put the burden on wages and the tax laws were repealed.

As it stands currently, I expect economic stagnancy much like Japan. We have an inflationary structure that demands high spending but low wages (high wages are the key indicator for inflation). As such, we also have high personal debt to make up for these demands; 30 years ago, it would have been unheard of to have these many new car loans, college loans, and credit cards. Now that we've maxed out our credit, we can no longer spend on suppressed wages. The last alternative, to me, is to stimulate wage raises, otherwise we will flounder much like Japan. The idea of "the stock market will always go up," as propagated by pop economists, may not be as simplistic as we'd like to think. You cannot create something out of nothing.

Your thoughts?

Melon
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Old 06-07-2002, 09:59 PM   #2
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I should point out that the internet was first used by the military in the 80's when most of us didn't even have computers. With all of the new secret government technology going on today I wonder what could spill over into the civilain markets once the impact has subsided.

The government, and defense components therefore of are growing by leaps and bounds. This is the fastest growing segment of our workforce. It's not just old VFW veterans anymore sitting on their ass collecting a fat check. THere are a lot of suprising fat and happy govt employees nowadays.

I am wondering about the hybrid-fuel vehicle technology. It was a huge threat made by Al Gore, but it seems the intrest is there regardless. At least this way, it won't be forced upon us all at once. As little as I know about it, I was able to speak with one of my uncles recently, who retired form a big oil company in texas. He told me some fascinating stuff, I wonder how many jobs would be lost or carried over if/when the technology changes.
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Old 06-08-2002, 08:43 AM   #3
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Actually, I believe the Internet has existed for about 40 years now, if you include the old Arpanet. E-mail is about 30 years old itself. I wish I remembered more exact figures...

But what kind of "growth" are we getting in the military now? The Cold War, despite the whole downfall of nuclear war fears, was a great economic boon, because we were not afraid of new technology. Cold War research has given us not only computers and the internet, but hair dryers, microwaves, etc. What are we creating in the military now? War machines. That's fine and all, because that's what the military was meant to be, but I don't know what we can do with death lasers and missile shields in the private sector. It certainly wouldn't be too prudent to allow civilians to have those.

The Cold War, in too much reality, *was* our economic boom. When it ended in the early 1990s with the end of the Soviet Union, so did our government's desire to expand into technology research. As much as some of us don't like to admit it, but corporations nowadays are not in the business of experimentation, but just quick and assured profits. Most any new technology we have is government-originated that, eventually, is authorized for the private sector.

Of course, it begs the question, is the government in the business of inventing anymore? Perhaps. The "war on terrorism" could do for us what the "Cold War" did for a generation or two ago; but will the public even be able to afford what we can invent now? The marked difference between the 1950s and now is the wage and tax structure. Ironically enough, we make less than people did in the 1950s, when adjusted for inflation, and the tax burden was on business (90% on business and 10% on individuals in the 1950s; 70% on business and 30% on individuals in the 1970s; 30% on business and 70% on individuals in the 1990s). Personal debt was also not much of an issue then; people could afford to pay cash for a house even back in the 1950s. It only seems logical to me that, if we wish to stimulate the economy beyond short-term profits, we will have to make an investment into technology, in addition to making an investment into those our economy depends on the most: the consumers, namely the working class. An inflationary structure that discourages wage increases, coupled with demands that people keep on spending is not a sustainable economy forever. It will fall apart, once all the derogatory credit adds up, and the debt-to-income ratios end up too high for lenders.

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Old 06-08-2002, 09:54 AM   #4
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I don't have much time to properly respond to your thread, albeit its a good one.

There are a couple of flaws inherent in your logic, though.

The fault of the collapse or stagnant nature of the Japanese economy falls largely on their banking system. Traditionally, Japanese banks established strong relationships with their corporate customers. In Japan, their culture is one in which long term relationships shall remain strong and the relationships shall endure any hardships "together". However, the emphasis on these relationships led the banks to lend money to their corporate customers who were not credit worthy or whose credit had seriously deteriorated. As a result, many loans defaulted and the banks became owners of the collateral which in many times was US real estate.

If you remember, the US real estate sector in the late 80's and early 90's was a disaster. Many Japanese corporations bought such high ticket and well known items such as Pebble Beach and Rockefeller Center. Such property was used as collateral for their loans and when they defaulted the banks had to sell the real estate at huge discounts. I believe the Japanese bought Pebble Beach for around 1$ billion but ended up selling it to a group that included Arnold Palmer, Clint Eastwood and others for around $300 million. A $700 million loss!! The same could be said about Rockerfeller Center, although I don't remember the ball park figures on that transaction. I do know that the Japanese sold it at a huge discount.

In summary, the Japanese banking system is faulty. Their relationship structure so rooted in their culture doesn't apply to modern economics.

Nice topic. I'll have more later.

You friendly CPA,

CK
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Old 06-08-2002, 10:22 PM   #5
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Although I do not have figures to support it, I'm highly skeptical that the average American makes less after inflation than he did in the 1950s. Maybe with minimum wage , but I doubt the average wage is lower. I do know that GNP adjusted for inflation, is currently 3 times what it was in 1967. Plus, also compare what the average household would buy in the 1950s compared to what the average household buys in 2002. Most middle class house holds have 2-3 cars while in the 1950s they would have one. Then think of TVs, VCRs, Cable TV, Radio-Compact Disc players, Video Games, Cell phones, point being people have the means to buy everything bought in the 1950s plus all this other stuff that people back then could only dream of.

As far as military techonology goes, as long as the Democrats don't get in the way, the R&D and Procurment holiday of the Clinton years is over and money is being invested in all kinds of new technologies for every armed service. Missle Defense as always is only a fraction of this investment. Robots and unmanned arial vehicles of course are some highlights. The spinoff from military to civilian use is not always clear but its there. But I feel at the same time that the civilian sector does very well today without the prodding of the military.

Another important factor is that a key characteristic of the Economic boom of the 1990s, increased productivity per hour per person, continues to rise. This will continue to be a source of greater profits in the future.

I'm bullish about the economy in the next 10 years, and most Economist have hard time defining the past 2 years as a recession, because technically there was never two consecutive quarters of negative economic growth. Japans troubles are much deeper and dificult to get out of than the USA's. Unemployment only went up from 4% to 6%. 6% is considered to be the natural rate of unemployment. Of course trying to find a job over the past year has been rather difficult since companies have not been expanding, waiting to see what happens next.
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Old 06-08-2002, 10:29 PM   #6
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Quote:
Originally posted by melon
Actually, I believe the Internet has existed for about 40 years now, if you include the old Arpanet. E-mail is about 30 years old itself. I wish I remembered more exact figures...
40 years, damn. I said 80's early in speculation. I do know the first use of internet was by the military, whenever that was. I'm afraid I am ignorrant to the term Arpanet though.

Quote:
But what kind of "growth" are we getting in the military now?
I am sorry that I cannot go into details, I am sure you would understand however. I know of projects that include massive growth.

Quote:
The Cold War, despite the whole downfall of nuclear war fears, was a great economic boon, because we were not afraid of new technology. Cold War research has given us not only computers and the internet, but hair dryers, microwaves, etc. What are we creating in the military now? War machines. That's fine and all, because that's what the military was meant to be, but I don't know what we can do with death lasers and missile shields in the private sector. It certainly wouldn't be too prudent to allow civilians to have those.
No you goofball, I think we know enough now not to let certain trade secrets or devices out to the general public (esp. since the Murrah bombing, Trade center, etc.)

However, I would love to see your apartment fitted with a high-tech vacuum cleaner that would come on and vacuum your floor automatically while you were away. It would be fitted with special sensing devices that would engage when dust forms and navigate all on it's own. And if you had a rodent loose in the night, i.e. a mouse, the vacuum would recognize this and eliminate this creature for you with it' s specially fitted laser beam. And the best part is that the vacuum only weighs 8 pounds, though it is completely mobile and you would never have to lift it after purchase!



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The Cold War, in too much reality, *was* our economic boom. When it ended in the early 1990s with the end of the Soviet Union, so did our government's desire to expand into technology research.
Wrong. We have in use drones that we haven't seen the likes of before. While they may have used these drones 20 years ago, the technology improved to the point that not only can they successfully complete reconissance missions but also search and destroy. And this is well publicized so I'm not talking unclassified lingo here.

And we have a revolutionary new fighter that is due to be commissioned in a couple of years. Even our stealth fighters (see my sig) and bombers are vulnerable after so much success and accolades. The truth is, since the public is so aware of these aircraft, that is a guarantee that there is a very costly upgrade or replacement somewhere<---In My Opinion, that is

Quote:
As much as some of us don't like to admit it, but corporations nowadays are not in the business of experimentation, but just quick and assured profits.
Isn't there still a big demand for engineers?

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Most any new technology we have is government-originated that, eventually, is authorized for the private sector.
Won't it be nice when you get your vacuum cleaner and I get my own drone

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Of course, it begs the question, is the government in the business of inventing anymore? Perhaps. The "war on terrorism" could do for us what the "Cold War" did for a generation or two ago; but will the public even be able to afford what we can invent now?
Perhaps a bit contradictory here for you, but I think this is a good question you present. Being as that we will never have our very own drones or such I hope there will be a place for that level of technoogy in our future on a smaller scale that we can afford

Quote:
The marked difference between the 1950s and now is the wage and tax structure. Ironically enough, we make less than people did in the 1950s, when adjusted for inflation, and the tax burden was on business (90% on business and 10% on individuals in the 1950s; 70% on business and 30% on individuals in the 1970s; 30% on business and 70% on individuals in the 1990s).
Is this the cost of all of our wonderful technology that marks up our products to this extent. I mean, in the 50's we didn't have all of the processes and process controls and engineering issues that we have now. If a company makes an aftermarket hood for a chevy camaro, they need to take 100 cars with the new hood installed and crash-test them into a brick wall to make sure the hood creases in the correct spot, or crumple zone. Of course I am speaking of aftrmarket products, the same car would go through this anyway 10 fold. Also if this particular hood has any type of air induction openings (ram-air) or scoops, there are specific tests that study the amount of water that may/may not enter the scoop (rain, driving through standing water, what speeds, etc.), not to mention certain tests to see if the grill in the hood scoop opening is strong enough to withstand a june bug collision at 75 mph.

Quote:
Personal debt was also not much of an issue then; people could afford to pay cash for a house even back in the 1950s.
Inflation and natural disaster both say "your welcome folks", since we are always so appreciative of their affect on housing. After the may 3rd 1999 tornado here, our wonderful governor warned consumers about price goudging. Well I suspect he profited from this somehow, because after he said he wouldn't allow this it happened anyway. Rental houses were scarace, and houses that would normally rent for say $500 now rent for $750.

There have been enough fires, floods, tornadoes, hurricanes, and such to drive up insurance and construction.


Quote:
It only seems logical to me that, if we wish to stimulate the economy beyond short-term profits, we will have to make an investment into technology, in addition to making an investment into those our economy depends on the most: the consumers, namely the working class. An inflationary structure that discourages wage increases, coupled with demands that people keep on spending is not a sustainable economy forever. It will fall apart, once all the derogatory credit adds up, and the debt-to-income ratios end up too high for lenders.

Melon
Well if the derogatory credit becomes too much of a factor, then lenders may as well become ditch diggers. It is funny that people go and charge up the world and then file bankruptcy 6 months later without paying a cent.

I dunno know Melon, you have some really interesting points here.
good thread
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