If we weren’t on vacation we’d be wondering how people could still believe in this boom. Wednesday, the Dow rose 145 points. The believers bought stock.
What were they thinking?
Our guess is that they are not thinking at all…but reacting to such a long, long run of good news; they can no longer imagine that anything bad could ever happen. The crowd always wants to believe that everything will work out…but history (and good sense) proves this just isn’t so.
But we digress. This new Theology of Capitalism is based on blind faith…in the dollar…in modern economies…and in the central bankers who manipulate them both.
Fortune magazine recently called this boom the “Greatest Economic Boom Ever”.
Robert J. Samuelson describes it more fully in Newsweek:
“From 1990 to 2005, trade rose 133 percent. Supply chains are increasingly global. Since 1985, imported components as a share of worldwide manufacturing output have doubled to almost 30 percent. Cross-border money flows (for stocks, bonds, loans, real estate, entire companies) are huge: US$6 trillion in 2005, says the International Monetary Fund. Finally, the boom has reduced acute poverty. The share of the world’s population living on US$1 a day or less has dropped from 40 percent in 1981 to 18 percent in 2004, the World Bank estimates.”
Roughly during the same period, the average American homeowner enjoyed a 52% real increase in the price of his house. This increase added substantially to his wealth; too bad he spent the money – all of it – and then some! Yes, take away the net increase in debt, and the poor fellow is actually in the hole for the period .
But it gets worse…because his income fell for the first five years of the present century (these are the only figures we have…we suspect that his real income/hour worked fell during the entire period…but we have no reliable figures to back it up).
How did the average citizen of the world’s most dynamic, wealth-producing economy actually lose ground during the “Greatest Economic Boom Ever?” That is the question no one seems to care to pose…or answer. And how can you have a genuine boom when most people don’t really increase their spending power?
Which is why we have to keep reckoning…even on our vacation…! No one else will do it.
Samuelson recalled what might have been the greatest economic boom ever, until now:
“From 1896 to 1913, trade roughly doubled. Declining steamship and telegraph costs were melding countries together. ‘There was something close to an integrated world market for most goods,’ Harvard political scientist Jeffry Frieden writes in his book Global Capitalism. In 1870, wheat prices in Liverpool were about 60 percent higher than in Chicago; by 1913, the gap was 16 percent. European investors eagerly bought bonds of then-developing societies—Argentina, Australia, the United States.”
But that boom was very different. That was the boom that put the United States of America not only on the economic map…but at the centre of it. In 1910 – thanks to savings rates and GDP growth rates comparable to present-day China – the United States became the world’s number one economy. Wages rose quickly and average people – not merely Wall Street speculators – became much wealthier. Consumer credit had barely been invented and the dollar was still backed by gold; gains enjoyed by working men and women were substantial…and the boom was real.
Maybe the present boom is real for China, as we discussed at length at our symposium in Vancouver. For the USA, it is a fraud.
Markets and Money