"The middle class has been under assault for a long time. Too many Americans have known their own painful recessions long before any economist declared that there was a recession. We've just come through what was one of the most difficult decades the middle class has ever faced -- a decade in which median income fell and our economy lost about as many jobs as it gained." - Obama in his Ohio speech.
Here is what happened to the Americans explained in 3 steps:
1. Globalisation and free trade, contrary to popular opinion, did not benefit the American worker:
The graph above compiled by Ravi Batra shows that as the volume of trade increased, the real wages of American workers fell. What was happening isn't difficult to understand. American corporations shifted their manufacturing to the far east where wages were lower. The real wages of American workers fell as productivity increase cannot overcome the low wages of Asian countries. Wages rose in places like Singapore & China, however, govts make sure that they lag behind productivity gains. Wages of workers form the demand for goods, however, because of the wage-productivity gap, there has to be another source of money other than wages ....which brings me to the next point.
2. To consume all the goods produced and keep the global economic system going, consumers in western countries took up a rising level of debt as a % of their GDP:
3. As US consumed much more that it produced, it had a trade deficit. This was funded by sales of US treasuries. The Japanese and Chinese snapped up these treasuries - lending the Americans money to consume goods made in Asia. Over time, US became the largest net debtor nation in the world.
Every recession that came in the last 20 years was solved the same way - getting the US consumer to borrow more to consume. We have Alan Greenspan to thank for that - the maestro waved his magic wand to cut interest rate and keep the easy money flowing every time there was a recession and presto! the American consumer starts spending and the rest of the world is bailed out of the recession. But there was never a reset of debt levels with every business cycle - debt just got bigger. At the same time unit labor cost fell and real wages fell which meant that increased demand was generate largely by rising debt. When Obama took office, after talking to his advisors, the best minds in economics, the way to get out of the Great Recession he said was to get credit flowing again so that Americans can borrow for college education, cars, home purchases etc. Don't repeat the mistake of the Great Depression when the Fed tightened as the economy sanked. Paul Krugman, a Keynesian faithful said the US govt had the correct strategy to borrow and incur huge deficits to stimulate the economy. Easy money + huge govt deficits was the solution - don't repeat the mistake of the Great Depression.
If you watch CNBC often enough (for entertainment?), you will catch this feller in a trader's uniform that is saying something like this:
There is another (minority) school of thought that the Great Depression was due to a high level of debt. That will mean that the current measures taken by govts will only have temporary effect because the high level of debt is not going to disappear soon. If debt shrinks, demand shrinks and the global economy will re-enter recession and perhaps one worse than the one we have seen because govts are now themselves in debt and their ability to intervene will be limited. Bernanke and company prosposed the only way that is politically feasible because alternative was to allow the economy to fall and intervene later. The Jim Rogers aka Austrian way would have been too painful. However, the problems faced by Obama was not due to any of his decisions and created over 3 decades may be completely insolvable without economic pain by the time he took office according this alternative school of thought. Jim Jubak looking at the huge US federal deficits said the numbers don't add up - for the US federal deficits to shrink, the US economy needs to grow by 4% in 2011 and beyond just to keep its debt manageable...4% growth is unlikely ...this govt debt will weigh on the US economy for many years to come..some Americans are screaming at Obama not to put their grand children into debt. If Obama didn't do what he did, we will probably be seeing 15-20% unemployment and Americans will be screaming anyway. Little can be done in 1 year for a problem that was created over 3 decades.
While the global economy appears to be growing looking at numbers and stock markets have surged from the March 2009 lows, you have to be mindful of the 2 alternate futures being played out. Greece was just a sample of what can come. Marc Faber said warned not to confuse the asset reflation with sustainable recovery. Print enough money and everything from Gold, equities, oil to paintings start to move up. There is little sign that economic growth has reached some kind of "escape velocity" to overcome the mountain of debt built up over the years. If this economy lose momentum, we will be in for tough years ahead.
Our most famous economic forecaster, the one who said we were in a 'Golden Period' in 2007 is now saying things will be good for the next 5 to 10 years. Maybe that explains GIC's strategy to invest billions in ANA's hotel chain[Link] after losing hundreds of millions in Stuyvesant Town[Link]. Even if one has faith that 10 years will be good, should there be some contigency planning? Given that we have been through 2 crisis and 3 recessions in the past 10 years, aren't there lessons learnt about the global economy we live in? Investing our reserves in risky assets that will be hit badly during crisis is not a good idea - when we need our reserves most, they will be stuck in assets that have fallen sharply in value. Once our economy showed the 1st signs of recovery, the govt starts to go back to its old habit - school fees have been increased[Link], ERP charges hike up, housing costs up etc ....actions that passes the financial risk to Singaporean households who have to strain their balance sheet to meet these hikes. This type of perma-growth assumptions will make us more vulnerable in future crisis e.g. families taking up 30 yr mortgages to pay for public housing. In the ESC (Economic Strategy Committe) report there is no discussion on stabilisers that will help ordinary Singaporeans in the next recession/crisis e.g. unemployment issurance. It is a strategy on one track i.e.how we can keep growing the economy. The moment we discover Obama's plan going wrong, you can throw the whole ESC report into the dustbin because our export led globalised economy cannot escape from the unscathed when the US economy tanks.