How the middle and lower classes in America and Britain lost it…
Alan Greenspan is widely quoted in the world’s financial media. The former head man at America’s central bank is promoting his book, The Age of Turbulence. We espied the book at Waterstone’s in Piccadilly this weekend, in a huge pile right out in the front lobby.
Thumbing through Alan Greenspan’s oeuvre, the first section appeared rather engaging. The great man recounted the details of his early life in a matter-of-fact way. But when he began to write about economics, the words fattened… the sentences stretched… and the thoughts thinned. Pretty soon, the language was so obese you could barely get around it. And if you did, you found nothing on the other side:
“If my suppositions about the nature of the current grip of disinflationary pressure are anywhere near accurate,” he writes, “then wages and prices are being suppressed by a massive shift to low-cost labor, which, by its nature, must come to an end… ”
He then continues, “A lessening in the degree of disinflation suggested by the upturn in prices of US imports from China in the spring of 2007 and the firming of real long-term interest rates as this book goes to the press raise the possibility the turn may be upon us sooner rather than later.”
Speaking to the BBC, Alan Greenspan made the same point:
“I’m reasonably confident that the inflation tranquility that we have experienced throughout the world actually for the last 20 years is not something we can hope to readily replicate as we move into the future.”
First, we translate: Low cost Asian labor has been holding down prices. Watch out, because this trend may be coming to an end now.
Second, we add value: If you’re not rich, you’re probably not going to like what happens next.
Rest assured, what we are working on here is not a serious quibble with modern macro-economic theory; we rise only to mock and ridicule its most famous theorist.
The former chief of the U.S. Federal Reserve system is right about globalization. It suppressed prices; every sentient being on the planet knew it. Labor at $5 a day was bound to build cheaper products than labor at $50 an hour. He’s right too about it coming to an end. Sooner or later the $5 a day man wants $6. The latest news from the middle kingdom tells us of shortages of labor in the coastal cities. All of a sudden, the Chinese working man has some bargaining power. Now, he also wants a little more butter on his toast. We greet the news like a teenager spotting his first pimple; it is a sure sign of ugliness to come.
While wages in India and China increase about 10% per year, real incomes in America and Britain are mostly stagnant. And now the Asians are getting uppity. They want more than a few pieces of paper with green ink on it. They want the world’s real resources – the kind a central bank can’t print. Meat, corn, gas and gold – all are at or near record highs. All of a sudden, people in the occidental world are not the only ones using gasoline… and eating beef.
In the United States and Britain, too, the proles increased their standards of living. But not like the Asians, who made things and sold them at a profit. Instead of earning more, they borrowed more. And now, while the skinny Chinese and Indians race along at 10%annual GDP growth, our countrymen stagger under the weight of their own heavy debt. How can they hope to compete with the heaving masses of Asia for jobs, for food, for capital, and for fuel?
The Yank and the Brit could not be less prepared or more poorly positioned. They already live beyond their means. They can expect no wage gains. Their costs are rising. And with three billion Asians hard on their heels, they can’t expect a breather – prices will continue to rise; wages will not.
What’s worse, the street value of their most cherished asset – their houses – is going down. Already, house prices in America are down 3.5%, according to the latest Case/Shiller report; futures indexes traded on the Case/Shiller numbers imply further declines through the year 2010. In merry old England, meanwhile, prices fell in September for the first time in nine months… with much more to come. The English have even more debt than Americans… and are more vulnerable to a fall in housing prices.
How did they get into such a tight spot? Who is to blame?
“What are you looking at me for?” Alan Greenspan seemed to say last week. As to the charges – that he was spotted at the scene of the crime – the former Fed chief pleaded ignorance and impotence:
“It’s really not something which central banks any longer have control over,” said Mr. Greenspan to the BBC, “… we have never really successfully been able to forecast significant turning points in the economy.”
Alan Greenspan told investors in the late ’90s that new communications technology had created a world of higher growth and more permanent prosperity. Then, panicked by a micro-recession in 2001, he cut rates down to their lowest level in 60 years and held them there for over a year. And then, he urged homeowners in 2004 to take advantage of innovations in mortgage finance, such as the new, subprime ARM. And what was he thinking when he claimed that new collateralized debt obligations made the financial world a safer place, because they spread the risk around?
What got the householders into such a fix was a combination of good luck and bad central bank stewardship. As to the good luck, you can hardly blame Alan Greenspan or Mr. King if the Asians wanted to work for nothing… save their money… and then lend it back to us. But as to the stewardship… our central bankers might show a little contrition. Maybe they did not force the working man down the road to perdition; but they gave him a little shove.
Markets and Money