Statistics and quotes taken from the NY Times article Interest Rates Have Nowhere to Go but Up
and the Wall Street Journal article The Jobs Picture Still Looks Bleak
In the past two years we have seen American corporations do something truly amazing. Despite a deep recession these companies have managed to maintain
their profits even as their sales revenues have continued to fall. They have used the downturn to become more efficient in ways they had been
reluctant to use before.
Companies have trimmed payroll while at the same time increased outsourcing dramatically. They have replaced workers with computerized equipment.
In order for a real recovery to occur consumer spending needs to return to pre-recession levels. Consumer spending is 70% of the countries
economic output so without it there can be no recovery. This is were the problem lies.
Over the last 30 years, basically from 1981 to right now, interest rates have been in a steady decline. Over this same period consumer debt has
increased nine times from 1.8 trillion to nearly 14 trillion. The amount of money we spend to pay for that debt has only increased slightly from 10.6 to 12.4 percent of our disposable income. The reason the increase is so small is obvious, we're paying a lot less interest on our debt that we were
in 1918. In fact in 1981 you were getting 16% on a 10 year Treasury bond that now only pays 4%. Mortgage rates were 18% compared to around 5% today.
During the last recovery, between 2001-2007 median wages fell which should have reduced consumer spending during that period. People turned their
homes into cash machines continuously pulling out and spending any equity that built up. They were able to do this without increasing their payment
since they could refinance their loan at a lower rate and simply cash out any equity.
The current recovery will be similiar in that wages will continue to fall as people are forced to take more part time work or to replace a higher
paying job with a lower paying one. What is different is that there is no housing boom to fuel consumer spending. In fact the opposite is true, as
interest rates rise the price of purchasing everything will rise.
So what can we can be sure of going forward.
- Interest rates have nowhere to go but up - "Even as prospects for the American economy brighten, consumers are about to face a new financial burden: a sustained period of rising interest rates. "
- Taxes have nowhere to go but up - The tax burden as a percent of GDP is at the lowest point is has been in the past 30 years.
- Energy costs have nowhere to go but up - The demand for energy can only go up as developing nations continue to expand and the
cost of alternative energies is much higher than fossil fuels.
If companies have already become as cost efficient as possible then the cost of tax increases, interest rates and energy costs will have to
effect their bottom line. As these three factors begin to take hold later in 2010 corporate profits will begin to shrink and the stock market
gains of the last year will start to reverse.
The combination of decreasing wages and shrinking corporate profits creates a real problem for our government. The government gets its money by taxing
personal income, capital gains and corporate profits. When high paying jobs are replaced with lower paying jobs the government loses tax money. If
they end up making 50K or less the government loses all tax revenue. Our efforts to go after excessive executive pay and bonuses will also result
in huge sums of tax dollars being lost. When stocks decline, instead of collecting taxes on capital gains people get to take tax deductions on their
losses in the stock market. No amount of tax rate increases on the rich can make up for less people paying taxes and the rich making considerably less
When you put it all together you end up with the following. Ordinary people will be spending more of their income paying the interest on their debt.
They will therefore have less money to spend. On average, these same people will find themselves making less money which only compounds the problem.
Corporations rely heavily on consumer spending so as consumers are forced to cut back so too will corporations. This will mean lower executive
pay but also more reductions in workforce.
The government will find itself in the same situation it is in now, shrinking tax revenues and increased outlays. They will feel the need to spend
more money to stimulate the economy but as interest rates rise the ability to take on more debt may be impossible.
The need for both the public and private sector to stop taking on more debt has never been more urgent.
April 12 - Youth of the Nation
April 9 - Turning the Tables
April 8 - New Age of Discrimination
April 7 - Thank You Kind Stranger
April 6 - The Cost of Compassion
April 5 - Happy Days are Here Again
April 2 - Of Course We Can Do a Better Job
April 1 - The New Normal
March 31 - Take a Deep Breath
March 30 - Metaphors and Blinking Lights