Bubbles, part two. Thngs are out of whack.

     “If Something Cannot Go on Forever, It Will Stop.“
     Herb Stein, American Enterprise Institute, 1986, observed as the relation between U.S. debt and gross domestic product

It is possible that my guest post author and I are both simply showing our age. Men aged 75 have seen and experienced personally incidents of misfortune, where a situation was too extreme to last. So they didn't. We experienced in real time the popping of the internet bubble, the shock of 9/11, and the mortgage bond collapse of 2008 and its aftermath. We had money and careers at risk. In hindsight, you know how things turn out. In real time, anything could happen. Conditions could stay bad. So old men see perils and worry. 

Things seem out of whack to me.

  -- Young people have a harder time getting started in life. Wages for jobs available to young people in 1970 were high enough that I could work my way through the most expensive college in America and emerge debt-free. I bought my first house at age 27, at a price of $20,000, when my income was $24,000. That's impossible now.

  -- There were enough young workers to support my Social Security when I was young and accumulating credits. Not now.

  -- Thirty years ago Americans were willing to tax themselves enough to pay for most of the government we wanted. We worried about the debt and did something about it. Not enough, but something. Now we are in denial. A self-governing people sees a problem, recognizes it as a problem, but cannot force itself to address it. The rich get richer; the poor get poorer.

  -- Thirty years ago we were establishing an American brand as facilitator of world trade and cooperative military alliances. Now we are reversing that, going country to country, insulting them, bullying them, and pushing them away. And we are doing so on purpose.

 

  -- The country is empowering speculation in cryptocurrency. Cryptocurrency seems like Beanie Babies to me, a Ponzi scheme seeking greater fools willing to bet that they can sell to yet another greater fool.

Lots to worry about.

Erich Almasy is a college classmate who wrote me this weekend sharing his concerns about the economy. Like me, he thinks we are seeing extreme conditions -- bubbles -- that precede a disaster. He had too many to fit in one post.

Guest Post by Erich Almasy, part two

More bubbles. Lots of hazards out there. Yesterday I listed three.

The fourth bubble is more obscure. Tariffs may not seem like a bubble until they explode, and not only hurt the United States but also drag the world into recession. The additional $5,000 per car, the increased cost of tinplate for canned goods, and the large increase in the price of Indian pharmaceuticals will hit the pocketbooks of lower and middle-income Americans. Anyone who thinks tariffs aren’t a sales tax (e.g., the Trump Administration) is sadly misinformed. Tariffs raise the cost of imports, both raw/intermediate materials and finished goods. The exporter “may” subsume the cost for a while, but quickly the cost is passed to the importer. Whether this is Walmart or Del Monte, they must then pass that added cost on to consumers if they want to survive. Many companies stockpiled goods at pre-tariff prices, but those stocks are now empty. Following the importer price increases, local producers will raise their prices to match or exceed the importer’s. Because who doesn’t want more profits? It is not just the price inflation that will hurt. Consumers are belt-tightening, which is reflected in the way restaurants are seeing. Personal consumption amounts to 70 percent of total consumption and spending by the top ten percent of earners accounts for one-third of GDP. Can this dependency possibly continue? The coming recession (not if, but soon) will leave most Americans poorer and a lot less happy.

The fifth bubble is one that those of us who need to convert dollars to other currencies are very familiar with. The world markets have devalued the dollar (and U.S. T-Bills) because of the United States’ massive debt load. Moody’s was the last credit agency to downgrade our debt to its lowest level in decades. The national debt bubble seems to go on and on, but don’t count on it for much longer. The $36.5 trillion of listed national debt is not even half the problem. My Harvard Business School classmate and longtime Entrepreneurship Professor, William A. Sahlman, estimates debt plus unvested liabilities equals more than $90 trillion. What does he mean by “unvested or unfunded liabilities?” Oh, little things like $1.81 trillion of student debt. American consumers also hold $1.21 trillion in credit card debt. Mortgage debt is now $12.94 trillion, which will be manageable as long as house prices remain stable or continue to rise. At least 10 percent of those mortgages are variable-rate, which is not so fine if interest rates climb. The trillions of dollars in deferred maintenance for roads, bridges, and other infrastructure lack a clear payment mechanism. And, of course, Social Security and Medicare obligations for future generations. Finally, let’s not forget the 3+ trillion of high-bracket income tax cuts that the Republican majority House claimed were a “continuation” of past budgets, so they didn’t count. Imaginary tax cuts, indeed.

The sixth bubble may seem oblique, but it is the one that worries me the most. For the first time in decades, immigration is expected to be negative this year. This represents a fertility bubble. The American birthrate is now 1.6 children per female, not enough even to maintain our present population level, which requires a rate of 2.1. If a country’s birthrate falls below replacement level, then its GDP cannot grow. In the absence of more children from the existing population, the only way for this to happen is through immigration. The Trump administration is not only shutting the door on new immigrants (unless you are white Afrikaans) but deporting large numbers of the existing population. A decline in GDP growth is inevitable, which helps explain the so-called “pronatalist” movement advocated by Republicans and evangelicals. Good luck! The United States has not experienced an extended period of negative growth since the 2008 subprime lending collapse. If it becomes the norm, we may never enjoy the same standard of living again.

 

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