By: Todd Wheatley
(c) IQ-2k   01-31-10

More than a new year it's a new decade. So now it's time for predictions and a time to look back. Yet too many analysts are using past trends to produce current predictions. Though time will certainly find those predictions in error since past trends no longer apply. To understand think of how the atom bomb forever changed the nature of warfare. In a similar fashion technology and globalism have changed U.S. economic fundamentals. As such a new paradigm has developed. A new set of rules for the economy to follow.

For the past thirty years the United States has been under the influence of "bubble economics" though arguably the trend started as early as 1948. One of the greatest bubbles, however, happened nearly a century ago during the "Roaring Twenties". And when it popped the country experienced the "Great Depression". Now in the midst of the "Great Recession" todays economy must incorporate a mature tech environment, global interdependence, and a vast array of consumer products. The full interplay of these variables are still unknown, but there has been a distinct shift from former associations. As the collapse of the housing bubble became a harbinger.

For just over a century consumer products experienced rapid growth as did technology, global trade, and the dominance of the U.S. financial system. Now things have changed, matured. Yet more disturbing, the balance of trade is shifting. No longer the undisputed king of manufacturing the United States economic foundation has begun to crumble. Real wages are stagnant, if not dropping. And last, but certainly not least, the U.S. national debt is soaring beyond belief. And while all is not doom & gloom looking to past trends will not help forecast the economic environment. The future is global. The future is competition and the future will be bubble free in the United States. But what makes a bubble important?

Past bubbles invariably create a "wealth effect" that translates into a physical and psychological phenomenon allowing vast numbers of people to engage in conspicuous consumption. Therefore without a bubble and the corresponding wealth effect conspicuous consumption remains highly unlikely. As a result the economy should flatline and create an "L-shape" recovery. Neither growing nor falling at least until the end of the year. In the short-term the economy will likely experience a low roller coaster. Rising slightly and dropping back. The best example comes from the "Santa Clause Rally" in the Dow Jones Industrial Average, but lacking wherewithal we are back at DOW 10,000.

Many analysts, on the other hand, want to use past recessions to predict the "V-shape" recovery as delayed demand and the desire to return to "business as usual" energizes consumers. Again, past trends are useless, the bubbles are gone, and so is the wealth effect. High unemployment numbers will exacerbate the erosion of the wealth effect and delay consumer confidence. Alterna- tively accumulated wealth and a diversified economy should help maintain consumer demand, but until employment picks up there will be no sharp rise.

Though many would argue that emerging markets like China, India, and South America will deliver the demand needed to re-employ American workers. Yet given the relative cost of U.S. workers in conjunction with the forces of cost cutting and consolidation, U.S. unemploy- ment will remain high. Now fast forward 10 years ... 15 ... 20 ... what will the economic landscape look like?? Taking the new paradigm in consideration global economic growth will slow. In a decade or two the demand for new cell phones, computers, and the like will level off and begin to drop. As will the demand for many consumer products.

But beyond stagnant demand there will be no emerging markets, and no new labor market to exploit. Finally the economic competition will be relentless. Corpora- tions will shuffle and reshuffle until global monopolies emerge. The trend has already begun and money is flowing at a breakneck pace. Unfortunately little seems obvious to bring back the glory days. Moreover political rancor and free market radicalism may put the nails in our economic coffin. The times have certainly changed. So have the economics.

(c) 2010    DR-KNOW
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