Interesting chart (which we marked up) from the JEC of the U.S. Congress illustrating household net worth as a percent personal income.   If that doesn’t look like a head and shoulders formation in the making, nothing does!

The second chart illustrates why the U.S. economy is so dependent on the wealth effect generated by asset bubbles.   It’s stunning to think that average real earnings in the U.S. are almost 11 percent lower than where they were in 1973.

Policymakers’ focus should be on increasing worker productivity through: 1) reforming the country’s education system;  2) unleashing entrepreneurship;  and 3) in the words of ECB chief, Mario Draghi, “doing whatever it takes” to empower small businesses.

This is tough political business, however, so we take the easy way out.   The political pandering increases budget deficits, forcing the Fed to repress interest rates and print money to drive up asset prices.   The boom side of the cycle is sustained longer than most expect because of the reserve currency status of the dollar.  This temporarily generates artificially inflated demand (i.e, fake) through the wealth effect, which eventually collapses when asset markets crash.

Wash, rinse, repeat.

This is not a good long term economic strategy and sustainable path for permanent wealth creation, folks.  It probably won’t change until it is forced upon us and then the adjustment will be more abrupt and disruptive than if policymakers were more pre-emptive.

America needs Mario Monti!

Jan2_Household Net Worth


Jan2_Real Wages

(click here if charts are not observable)

Category: Economy, Markets

Please use the comments to demonstrate your own ignorance, unfamiliarity with empirical data and lack of respect for scientific knowledge. Be sure to create straw men and argue against things I have neither said nor implied. If you could repeat previously discredited memes or steer the conversation into irrelevant, off topic discussions, it would be appreciated. Lastly, kindly forgo all civility in your discourse . . . you are, after all, anonymous.

9 Responses to “America’s Bubble Dependent Economy”

  1. PeterR says:

    Thanks for the great take-away near the bottom:

    “This is not a good long term economic strategy and sustainable path for permanent wealth creation, folks. It probably won’t change until it is forced upon us and then the adjustment will be more abrupt and disruptive than if policymakers were more pre-emptive.”

    There seem to be lots of recent articles about “abrupt and disruptive” forces on the horizon.

    Diversify your ammo IMO, and keep it safe and dry.

    Hmmmm, will the increase in income taxes just passed help or hurt here? [ . . . parenthetical question . . . ]

    Same question for another housing/commercial real estate crisis. [ditto]

    We live in interesting times . . .

    Oh, and Happy New Year! [tone of sarcasm]

  2. Conan says:

    Over 20 years ago when I first started traveling extensively to the so called 3rd World it was like going back in time. No roads, air ports or even McDonalds. Just lot’s of motivated people willing to work and work hard to better their life. That’s what they did in most part. By compounding their growth rates at 6 to 8 % yearly over this period of time it is amazing what you see when you go to these places.

    When I first started going I was young adventurous and wanted to see the world. I come from a military family and this was the traditional option, however I decided to go my own way. Now folks at the home office talk about all the advantages that I have and want to go too! just amazing how things change.

    You can put the blame wherever you like and there is plenty to spread around, but this isn’t going to fix the here and now and get us going again. So here is some of my observations as to the differences.

    1) The folks are more hungry. They can easily see a big jump in their lives in their own generation and for their kids. Hard to do in the developed world that all complaining aside, has so much. (PS there are no safety nets, just family, charities and yourself so motivation is very basic)

    2) The governments by many different ways actively target sectors and go after market share. Pure mercantilism.

    3) Infrastructure. The best roads, airports, ports, etc are not in the USA anymore. Sad but true.

    4) Tech is easily transferred to 3rd world environment. Many are skipping right to the latest. The US doesn’t have the best internet, cell service nor I would say the basics of Health Care either. (very specialized areas yes, but but otherwise no. With poor service and high cost to boot!)

    5) Education – when I started going off shore the vast majority could barely read and write. Today no. What do they want their kids to study, overwhelmingly STEM disciplines. Look to the US, who is in the Master and PhD programs? Where are we going to get the Doctors for the projected short fall??

    6) Here is an out of the box point – kids…the developed world isn’t producing them. Family sizes have gone down in the 3rd, but they still want kids and are very family orientated. All countries in the developed world are shirking. The only ones that are not is due to immigration. (this is the case in the US). Demographics affect the economy, it is hard to have growth with a shrinking population, especially the drive of the young and the burden of the old.

    Please don’t confuse the above with America bashing. It is not! the saying “If you can’t measure it you can’t fix it ” applies to us. We need to be more open minded to see what is working and learn form it and adapt it to our needs to move forward! The only thing stopping us from fixing where we are and going to where we want to be is ourselves.

    As Deming said Plan – Do -Act – Check >>>It is amazing how many American ideas / inventions have been used successfully applied elsewhere. Why can’t we do the same?

  3. Lukey says:

    Excellent post! I couldn’t agree more!

    The reason we don’t notice the lower real wages than 1973 is likely due to two factors – 1) that was the cusp of the sexual revolution that sent droves of women into the work force, creating the rise of the “two earner family” and 2) a steady increase in household debt levels.

    Policymakers’ focus currently seems to be on killing entrepreneurship and smothering small business. Latest example is Obamacare. Instead of implementing single payer paid for by a carbon tax, which would have freed up small businesses and entrepreneurs from having to figure out how to make enough to afford health care benefits for their employees in a way that enables them to still compete with big businesses, we legislated that they must do it in a way that does the opposite – makes it harder for them to compete with big business.

    But don’t take my word for it – Carl Schramm says it better:

    You need a growing, dynamic, self sustaining economy to fix these trends. And “growth” that is almost entirely based on big government deficit spending and QE isn’t getting the job done.

  4. rd says:

    The sovereign debt/monetary bubble is likely to be more disastrous than the others.

    Bubbles that are based on physical assets and technologies leave something behind that continues to be used for years to help the economy advance. The railroad bubble in the 1800s left such a legacy that survived for a century. The bubble of the late 90s left millions of miles of fiber-optics (as well as funding new technologies) in the ground that was snapped up in bankruptcy and has been a mainstay of our communications explosion of the past decade. The housing boom left behind lots of housing and commercial/office space that should keep real estate prices low over the next decade or so providing space for entrepreneurs to work in.

    Unfortunately, sovereign debt just leaves debt behind unless it was used to build something like quality infrastructure. Spending it on wars etc. doesn’t leave anything of value behind. That is a major reason why financial crises lead to low economic growth for a decade or more as documented by Reinhart and Rogoff.

  5. mick says:

    You had me until you mentioned Monti. As someone who lives in Italy part of the time, I can not (so far) endorse Monti. Of course he’s infinitely preferable to that abomination Berlusconi. But he’s a banker and his austerity policies have hurt the savers, the people needed to make Italy work. He’s taking money from the schools, the universities. He’s breaking labor instead of simply reforming. Yes, he’s cracked down some on the ‘black’ economy–all to the good. At the same time there are zero mortgages available; he hasn’t made it easier to start businesses. Ordinary Italians who have traditionally had a modest (truly!) little house near the beach or in the mountains have had to put these properties on sale–firesale prices–because they can’t afford the new higher tax on ‘second homes’ (homes that should be exempt unless over a certain value). A teacher in Italy makes around 15,000 euros a year. When you raise the pension age you’re raising it on people who went into the workforce at 16. You can’t ‘crack down’ on those who have little. With austerity already in effect, more austerity crushes. All the talent is fleeing Italy.

  6. rj chicago says:

    Barry says: “Policymakers’ focus should be on increasing worker productivity through: 1) reforming the country’s education system; 2) unleashing entrepreneurship; and 3) in the words of ECB chief, Mario Draghi, “doing whatever it takes” to empower small businesses.”

    Agree and I have three words for you that will resist this to the death PUBLIC SECTOR UNIONS!!!

  7. kaleberg says:

    There has no problem with worker productivity over the last 30 years. The problem for the last 30 years has been with flat-lined worker pay. This isn’t sustainable in the long run. Unlike third world economies which rely on exports because they lack adequate internal demand, a large developed country has to purchase most of its own output. If wages lag productivity, demand will slacken, and eventually the whole thing will mire in depression. The US has delayed this by increasing the number of workers in each household, asset bubbles and easy credit, but the only long term solution is higher pay or more government benefits paid for out of general revenues.

  8. TimmyB says:

    All politics revolves around leaders bribing supporters so they getting the support required to rule. It doesn’t matter if you are a dictator who needs the support of a few, or an elected politician who needs the support of the many.

    Currently, to become President of the United States,or a U.S. Senator or Congressperson from most states, the supporters one needs to take care of are the financial elites who fund elections. This means our elected officials cannot do what would do the most good for the most people. Instead, they must do the most good for those who’s support they need.

    This is why we have a bubble economy, because it enriches the funders of our elections.