Why this economic boom is just a fraud
By
Bill Bonner Jan 24, 2007
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The generation of the 1930s learned to save and hated debt. They paid dearly for this in the years following World War II – especially in the 1960s and 1970s – when their savings were wiped out by inflation. The next generation had its lessons to learn too. In 1949, investors were so negative on the value of General Motors’ stock that they sold it down to five times earnings, where it produced a dividend yield of 11%. With the war over, they must have thought the firm might not profit. Soldiers returning from the war wondered if they would be able to find a job. But then the US boomed in the post-war period. The soldiers got work, got married and started families. And they wanted houses and cars.
It was a classic boom. Savings from the war years were put to work, too. Output increased. Wages rose. Everyone’s wealth increased. We saw it first hand. Our cousins lived in Donora, Pennsylvania, and worked in the steel mills. In the 1950s and 1960s they earned high wages, drove new cars and lived in houses with all the latest conveniences. Now, those neighbourhoods are like ghost towns. There are empty houses, boarded up shops and rusty factories. The people who still live there seem to have been left behind by economic history. In real terms, US factory workers earn about the same, or less, than they did 30 years ago.
And now, even in the midst of the biggest boom in world history, they seem to be falling behind even faster. The few who own substantial assets – or who deal in them – are getting rich, while the average person makes no financial progress at all.
A new study by McKinsey and Co puts the value of all the world’s stocks, bonds and other assets at $140trn – mostly concentrated in a relatively few places, and in a relatively few lucky hands. Nowhere is this boom more evident than in central London. Restaurants are full. Shop counters are heavy with expensive merchandise. House prices have just seen their biggest increase since 1979, with the greatest growth in the dearest areas. Meanwhile, the top five Wall Street firms gave away $36bn in bonuses last year. Goldman Sachs gave staff average bonuses of about $400,000. In London, one employee got almost $100m.
Never have so few done so little and made so much doing it. But where is the money coming from? And why isn’t it trickling down? While a ‘normal’ boom lifts wage earners, this one seems to have cast them down. Why? Because the Great Boom is a fraud. It does not lift up all boats; it lifts only the luxury yachts. Why is that? Because it is an asset-price boom, not an economic boom.
As Bank Credit Analyst Research says: “Increases in asset prices do nothing to create new resources for investment as the gains can only be realised by selling the asset to someone else, who must come up with the money from somewhere. The exception is if domestic investors sell their assets to foreigners (as the US has been doing).” US and UK householders have been selling their houses (via mortgage refinancing and equity extraction) to the lenders, who package the loans and sell them to investors worldwide.
We are witnessing the biggest transfer of wealth ever seen. Here’s how it works. The world’s central banks, led by the US Federal Reserve and other financial intermediaries, create new forms of ‘wealth’ – paper dollars, securitised debt, derivatives, etc. This ‘wealth’ never reaches the hands of the masses.
Instead, it stays with the investing classes – bidding up prices on financial assets and other forms of wealth favoured by the rich (such as London houses).
A new form of ‘inflation’ has been loosed upon the world, one that everyone seems to love – especially the wealthy; their purchasing power has risen dramatically. But the rest of the population suffers; their own purchasing power falls. They have no more income, while they have higher living costs – health care, housing, energy and education have all gone up. Nor do they own the assets that have risen so much. And to make matters worse, they now have to pay off the money they borrowed when they thought they were getting rich.
Every generation has to learn its lesson. When consumer price inflation picked up in the 1960s and 1970s, another generation learned it is better to spend than to save. This they proceeded to do – with the same vigour the baby-boomers brought to all their enthusiasms. They do not save; they spend. And those who live where house prices rose most rapidly – on both coasts of America, as well as most of the UK – were able to borrow money against their houses and spend on a huge scale. Now, with the end of the housing boom at hand, we can’t help but wonder: what lesson will they learn next?
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Bill Bonner
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