http://bullnotbull.com/archive/dow13k-1.html
Inflation, Dow 13K and the Second Great Depression
April 26, 2007
Michael Nystrom, MBA
When I was about 9 years old, my father took my elder sister and I to
see a performance by a famous magician called Blackstone
<http://www.amdest.com/stars/harryb.html>. What I remember most
about the show is when Blackstone, with a flourish of his cape, made
an elephant appear onstage out of thin air. It was an astonishing
feat, and the crowd - including me - went wild with applause. I had
no idea how he did it. After the show however, as we were exiting the
theater, my elder sister said, “I didn’t see what was so great about
that elephant. It just walked onto the stage and everyone started
clapping.”
My sister’s revelation was just as amazing as the trick itself, which
suddenly made perfect sense. Blackstone had used some kind of sleight
of hand, distracting the audience over here while he got the elephant
to walk on stage over there. With this simple, well-known magician’s
tactic, he managed to fool just about everyone.
Yesterday, as the Dow “smashed its all time high,” closing above
13,000 for the first time in history, I was strangely reminded of
Blackstone’s performance that day some thirty years ago. The Dow’s
current levitating act is the result of another well-known sleight of
hand trick used by central bankers. It's called inflation. Even so,
most everyone is mesmerized by the performance. Everyone seems
transfixed, clapping in amazement at this spectacular feat.
But at the margins of society, far from the action on Wall Street, a
silent depression has already begun – one that is affecting the most
vulnerable members of our society. This depression is documented in
two books that I recently finished reading: Tamara Draut’s /Strapped:
Why America’s 20- and 30-Somethings Can’t Get Ahead/
<http://www.amazon.com/exec/obidos/ASIN/1400079977/bullnotbull-20>,
and Anya Kamenetz’s /Generation Debt: Why Now is a Terrible Time to be
Young/
<http://www.amazon.com/exec/obidos/ASIN/1594489076/bullnotbull-20>.
Both were recently released in paperback, and I was able to find the
hardcopy editions at the local library.
What both of these books confirm, though painstaking research and in
painful detail, is what today’s younger generation has already long
known: Simply surviving in this hyper competitive world is harder
than ever, to say nothing of getting ahead. As Draut points out, a
college degree is the new high school diploma; to be considered for
any kind of a “good job,” you’ve got to have one. The problem is that
college tuition costs have been rising three to four times as fast as
inflation for the past few decades, and financial aid hasn’t kept up.
Whereas the Baby Boom generation had the hat-trick advantage of cheap
tuition, ample grants and scholarships, and a booming economy
providing well paying jobs upon graduation, the younger generation has
had none of these advantages.
Financial aid has shifted increasingly towards loans instead of
grants. Because of higher tuition costs and generalized chronic
inflation (in spite of official Federal government statistics),
housing and food are more expensive too. Many kids who want to go to
college simply can’t because they just can’t afford it. Of those who
can cobble together enough money – and here I’m talking about working
class families, not the privileged minority whose families can college
without much pain - many have to work full time to make ends meet.
And even then, in this inflation-ravaged world, it still isn’t
enough. So they turn to credit cards, which are amply peddled on
college campuses to bright-eyed, green newbies who don’t know a thing
about debt or personal finance.
Welcome to higher education - at the school of hard knocks.
Today it is not uncommon for young adults to graduate with
unmanageable thousands of dollars in combined student loans and credit
card debt. “The next generation is starting their economic race 50
yards behind the starting line,” says Elizabeth Warren, co-author of
/The Two Income Trap/
<http://www.amazon.com/exec/obidos/ASIN/0465090907/bullnotbull-20>.
The debt is unmanageable because good jobs are hard to find. This is
not your father’s economy. Sure, there are plenty of jobs available.
How does $8 per hour sound, no benefits? As Kamenets, a recent Yale
grad points out:
…when the Boomers were entering the workforce in 1970, the
nation’s largest private employer was General Motors. They paid
an average wage of $17.50 an hour in today’s dollars. The largest
employer in the post-industrial economy is Wal-Mart. Their
average wage? Eight dollars an hour. The service-driven economy
is also a youth-driven economy, burning young people’s energy and
potential over a deep-fat fryer…The entire labor market is
downgrading toward what was once entry level.
In case you missed it, this week GM was dethroned by Toyota as the
world’s top automobile producer
<http://www.iht.com/articles/2007/04/25/business/25auto.php>. Earlier
this year, in an effort to shore up American manufacturing, the Bush
Administration proposed reclassifying hamburger flipping as
“manufacturing."
<http://www.cbsnews.com/stories/2004/02/20/politics/main601336.shtml>
The times indeed are changing, and the experiences of the younger
generation shine a light on the terrifying leading edge of that change.
*The Second Great Depression is Here*
For the past five years I’ve been saying ‘The second great depression
will not be televised <http://www.depression2.tv>.’ In addition to
paying homage to the 60’s civil rights activist and poet Gil Scott
Heron <http://en.wikipedia.org/wiki/Gil_Scott-Heron> (/The Revolution
Will Not Be Televised/), it is a jab at the inadequacy of the
mainstream news to actually report the news. The composition of the
American economy is changing in fundamental ways -- ways that will
not, in the long run, be favorable to most Americans if current trends
continue. The younger generation is simply the first to bear the
brunt of these changes, and as a result, is the first to grow up
poorer than the generation preceding it. This, ladies and gentlemen,
is known as national economic decline.
This is unpleasant news, and is therefore completely unacceptable to
the mainstream media. It’s easier to sell the idea that the younger
generation is just plain lazy, stupid and hopelessly screwed up. After
all, didn’t you hear? The Dow just hit 13K! How can the economy be bad?
As a result, Draut and Kamenetz take the brunt of Boomer criticism
from elders who dismiss their claims and only hear what they believe
to be whining. But all these authors are doing is telling the story
of their generation, pointing out how times have changed, and just how
difficult it is to be young, broke, in debt and with little hope for
the future. To me, it is the story of a second great depression.
College, housing and food are more expensive, taxes, debt and interest
rates are higher, (In spite of the fact that official rates hover near
historic lows, one late or missed payment by a financially strapped
young person sends credit card interest rates soaring across the board
-- 29% or higher), wages are lower, competition is fiercer and most of
the good jobs have moved away. Given the facts, it is amazing there
is not /more/ complaining or real demands for change. Draut points
out that this younger generation was thoroughly “Reaganized” – raised
under a steady diet of conservative rhetoric which they have fully
internalized: The government is the problem, the free market is the
solution – if you fail, it is your own fault, so don’t complain and
don’t ask for help. Even though youths 18 – 24 are the most likely to
hold minimum wage jobs, giving them a poverty rate of 30% in 2000,
we’ve heard pitifully little about this in the MSM.
But poverty is a big impediment to getting higher education. Kamenetz
points out that the nationwide high school graduation rate peaked in
1970 at 77%. It was around 67% in 2004….For every 100 young people
who begin their freshman year of high school, just 38 eventually
enroll in college, and only 18 graduate in a timely manner. This is
especially worrisome as the world continues its march towards a
knowledge-based economy <http://www.madeintaiwan.tv/blog/?p=10>.
America is clearly falling behind.
The question of particular interest to readers of all ages should be
whether the current decline in living standards is a one-generation
anomaly, or the start of a new American trend. The problems
afflicting the young – the outsourced jobs, the low wages and high
levels of debt – are increasingly moving up the generational ladder.
Just ask the entire city of Detroit, where a house can now be
purchased for less than the price of a new car
<http://www.telegraph.co.uk/news/main.jhtml?xml=/news/2007/04/06/wdetroit06.xml>.
This year also marks the first time in history that the median
American home price is likely to decline
<http://www.economicpolicymonitor.com/2007/04/ranieri-first-time-in-history-median.html>.
*Transition Ahead*
What these two important books demonstrate clearly is that at the
margins – where all the interesting economic (and other) activity
takes place – the US economy is no longer able to provide its citizens
with an increasing standard of living. Having read Jeremy Rifkin’s
1992 classic /The End of Work/
<http://www.amazon.com/exec/obidos/ASIN/1585423130/bullnotbull-20> a
few years ago, the only surprise to me is that his scary predictions
of the disappearing jobs are actually coming true. And with
“Outsourcing 2.0 <http://www.outsourcing.com/roadshow2007/>,” things
are only bound to get worse. Yet as Boomers retire – the first crop
starts retiring next year – it is young people that they will be
relying on (i.e. taxing) in order to maintain their disproportionately
wealthy lifestyle. A /Generational Storm/
<http://www.amazon.com/exec/obidos/ASIN/0262612089/bullnotbull-20> indeed
looms on the horizon.
What will this mean for the future? Neither Draut nor Kamenetz offer
a comprehensive view, but James Fallows had an excellent piece in the
/Atlantic Monthly/ a few years ago that remains relevant today:
Countdown to a Meltdown
<http://www.theatlantic.com/doc/200507/fallows>, a look back from the
year 2016.
*Lack of Awareness*
To my disappointment, neither author goes deep enough into the root
causes of the inflation that makes life for young people so difficult:
The Federal Reserve System. We all know by now that the Fed has a
“printing press
<http://www.federalreserve.gov/boardDocs/speeches/2002/20021121/default.htm>”
with which it can mint money, but like the 70% of Americans who don’t
know that plastic is made from oil
<http://biz.yahoo.com/bw/070420/20070420005536.html?.v=1>, the
majority of Americans don’t realize that a fiat money printing press
is the cause of currency inflation. The result of this inflation is
more expensive food, housing, college tuition, and (surprise!) Dow
13K. You certainly won’t read about /that/ in the /New York Times/.
The information is, however, widely and freely available on the
internet, as my friend Charles Zentay
<http://thinkinvest.blogspot.com/2007/04/our-community.html> points
out. All it takes is some thinking to figure out what is really going
on.
<Image snipped>
[Thank you to BlueWire Studio <http://bluewirestudio.com/> for the
above image, which was originally published in the Trendsman's
<http://www.trendsman.com/> excellent report /The American Inflation:
Where we are, How we got here and Where we are going/
<http://www.trendsman.com/v1/members/archive/pdf/269852696_AmericanInflation2.pdf>]
Not surprisingly, many of Kamenetz’s interviewees regret ever having
gone to college in the first place. They’re saddled with debt and
working in jobs that are completely unrelated to what they studied –
if they even graduated at all. As a result, she makes the daring
recommendation that kids think hard about whether college is right for
them or not. Before deciding to become an indentured servant to the
bank in exchange for a college diploma, she recommends investigating
this book: /300 Best Jobs Without a Four-Year Degree. /
<http://www.amazon.com/exec/obidos/ASIN/1593572425/bullnotbull-20>The
key point, which I wholeheartedly agree with is to look at the
landscape of the world, see it with clear eyes and think! Don’t go to
college just because everyone is doing it and because your parents
want you to. The world is changing and navigating it will require a
new set skills and street smarts – smarts you’re likely not going to
get in school. More on this in future installments. Sign up here to
be notified. <http://bullnotbull.com/subscribe/subscribe.html>
I urge everyone to go to the library or the bookstore and take a look
at the books. For young people, I give the nod to Kamenetz’s book.
Her writing is more urgent, more suited, I think to the younger crowd.
Each generation reshapes the country in its own image. The Boomer
generation is the current cultural center, but its cultural power will
soon be in decline, and as they fade from the national spotlight, a
new generation is rising. Based on Strauss & Howe’s generational
analysis in /The Fourth Turning/
<http://www.amazon.com/exec/obidos/ASIN/0767900464/bullnotbull-20>,
the current young generation will likely be shaped by an extreme
crisis – brought on by the exiting Boomer generation - sometime quite
soon. It is from this crisis that a new America will be born –
perhaps it will be the Golden Age that Ravi Batra
<http://bullnotbull.com/archive/batra-2.html> writes of, or the
complete reorganization that Peter Drucker predicted in 1993
<http://www.amazon.com/exec/obidos/ASIN/0887306616/bullnotbull-20>.
Every few hundred years in Western Civilization, there occurs a
sharp transformation . . . Within a few short decades, society
rearranges itself - its worldview; its basic values; its social
and political structure; its arts; its key institutions. Fifty
years later, there is a new world, and the people born can't even
imagine the world in which their grandparents live and into which
their own parents were born.
We are currently living through just such a transformation.
*Conclusion*
Thirteen is considered an unlucky number in American culture.
Strangely, most American buildings don’t have a thirteenth floor.
Both the income tax and the Federal Reserve were established in 1913.
The much-maligned Generation X is the thirteenth born on American
soil. It makes me wonder just what Dow 13K will bring.
Getting back to the theme with which I began this piece, Dow 13K is a
kind of sleight of hand, brought about by inflation, and distracting
the majority of people from the true condition of the economy.
Inflation makes the economy less prosperous, not more. If the younger
generation is any indication, prepare yourselves, for the times indeed
they are a changin’.
/The way that is bright seems dull;
The way that leads forward seems to lead backward;
The way that is even seems rough.
The highest virtue is like the valley;
The sheerest whiteness seems sullied;
Ample virtue seems defective; /
- Tao Te Ching 41