If looked at one way… the American dream is dead. Let’s ramble through economic history for a moment to see why.
In the early 1980s the US had a challenge… a severe recession from July 1981 to November 1982. Inflation was high so the Fed slowed the rate of growth of the money supply and raised interest rates. The federal funds rate rose to 20% by June 1981. The prime interest rate, at the time a highly important economic measure, eventually reached 21.5% in June 1982. Businesses went broke by the drove… 50 percent over the previous year. Especially hard hit were farmers and real estate developers.
The recession was the most serious recession since the Great Depression.
This was tough but inflation eased and the economy rebounded. Growth took off again… real growth without bad inflation because the real estate overhang and subsequent bankruptcy of the Savings & Loan industry was dealt with by the Resolution Trust Corporation.
RTC liquidated via auction and a massive sell off to private business, the real estate that had been assets of savings and loan associations that were insolvent.
The US government had the sense then not to try and control these assets. Entrepreneurs bought the assets for pennies on the dollar and turned the property into viable deals in ways that no government agency ever could.
Japan then had a serious recession and the same opportunity. There was a real estate and stock bubble in Japan in the 1980s. Then in 1989 there was a massive withdrawal of confidence. Investment collapsed, causing the Nikkei index to fall more than 60 percent.
The Japanese government however decided that it could provide a fix. the Japanese felt they could not let big Japanese businesses go broke. Between 1992 and 1995, Japan tried six spending programs totaling 65.5 trillion yen. They cut taxes in 1994. In 1998 they cut taxes again and launched stimulus packages worth more than 40 trillion yen., A year later… another stimulus program. In 2000 11 trillion yen more was spent to stimulate the economy.
Over a decade the Japanese government provided 10 stimulus packages worth more than a 100 trillion yen. The main result was to ruin the Japanese government’s credit with public debt that exceeds 100 percent of GDP. This is the highest percent of debt of all major nations.
Any other results? Here is evidence… the main Japanese stock index the Nikkei 225 from 1989 till 2009. Japanese society is indebted for life and the stock exchange has fallen from over 35,000 to 7,600 in 20 years.
Wow that really worked well… so
now the US government has decided to do the same thing.
Last week the government offered another $30 billion in funds to A.I.G. insurance. This is the fourth round of aid to the American International Group. The government already owns nearly 80 percent of the insurer’s holding company. How much more can they buy?
This sounds like a good investment since the insurance giant was about to report a $62 billion loss after the government has already given a $60 billion loan, a $40 billion purchase of preferred shares and purchased $50 billion of the company’s toxic assets.
Behind this, the government has invested $50 billion in Citigroup… $45 billion in Bank of America. The Us auto bailout could cost another 100 billion. More on that in a later message.
This is all taking place as the US economy spirals down at an accelerated pace.
Yet the current administration is basing its spending on calculations that suggest vigorous rates of economic growth in years to come.
They have suggested this economic growth will come in 2010.
There seems to a disconnect between the Federal projections and fiscal reality. Current conditions are not yet at the level of the 1980s, when unemployment exceeded 10 percent, but they could be soon.
Moody’s chief economist now places the odds of “a mild depression” at 25 percent. In that view, the unemployment rate would reach 10.5 percent by the end of 2011 — up from 7.6 percent at the end of January — average home prices would fall 20 percent on top of the 27 percent they have plunged already, and losses in the financial system would more than triple, to $3.7 trillion.
Yet President Obama calls this a “once in a generation” opportunity and proposed a 10-year budget that overhauls health care, arrests global warming and expands the federal role in education.
How to pay for it? Tax more corporations and the wealthiest taxpayers.
Wrong! Higher tax will simply kill business or drive it abroad. What a good idea to chase away the last of the success.
The President said he would shrink annual deficits. His explanation is that he will increase revenue from rich individuals and polluting industries, reduce war costs and assume a good rate of economic growth by 2010.
The rich will stop working or leave the US. The polluters will move to Mexico or China or wherever. The high rate of economic growth will not appear. Stopping the war will help… but not enough.
Technology means that politicians can no longer ignore the global market and tax its citizens to death.
Take for example what is happening in Ecuador. Remittances sent by Ecuadorians who work abroad fell 22 percent in the last quarter of 2008.
$643.9 million was sent from October to December 2008. This is $181.7 million less than in Oct.to Dec.2007.
A similar drop was experienced in the third quarter of 2008 and is caused by the global financial crisis and especially the economic slowdown in the United States, where it is estimated 1.5 million Ecuadorians live and work.
The U.S. employment rate has crashed especially in manufacturing and construction which employ a large number of Ecuadorians.
The same is true in Spain – where 600,000 Ecuadorians live. this is the second-leading destination for Ecuadorians.
This means that there are more Ecuadorians to serve for less in Ecuador. This forces the Ecuador cost of living down down.
So if you are an American who is about to be super taxed… where would you choose to live? Our farm manager sent us this note recently, “We had 4 inches of snow in China Grove.”
Would you rather live there and pay more tax or…
enjoy open air dining as Merri and are doing here in our Cotacachi hotel courtyard with Dan Prescher and Suzan Haskins or…
would you rather enjoy a mountain train ride as these…
The is the train from Ibarra to Salinas Ecuador. Would you rather be taxed extra to be in this pool or…
be here on Ecuador’s coast with tax advantages?
Which view will the rich prefer? This in the US or…
this… especially if this San Clemente Ecuador ocean view costs much, much less?
Where would I prefer to walk with my hound? Here in sub zero temperatures or
here in Cotacachi Ecuador…especially if I am taxed less and the cost of living is much lower and government interference in my life is less?
Technology and the global market gives us as individuals enormous power to live where and as we choose that politicians can no longer ignore.
The government’s attitude to increase taxes on those who work hard could turn the existing brain drain from the US into a brain torrent.
In short there are many reasons I see that suggest the economic mess will last for years in the US, just as it has in Japan.
Recently, Warren Buffett wrote in his company’s annual report that “the economy will be in shambles, throughout 2009, and, for that matter, probably well beyond.”
This is not the picture we expect of the American dream. However the picture is not bad for all. Not all Italians became poor when Rome fell. Italy is still a great place to live. There are still millions of Japanese who have thrived over the past 15 years of Japanese recession. The end of the America dream does not have to be the end of your dream.
In the US we can expect the rich to get richer… the poor poorer. We can see why from our study of Power Distance Index. We looked at PDI, and what it is, in a recent message about JGAM’s multi currency seminar.
There is more about Power Distance Index at http://www.clearlycultural.com which says:
Hofstede’s Power Distance Index measures the extent to which the less powerful members of organizations and institutions (like the family) accept and expect that power is distributed unequally. This represents inequality (more versus less), but defined from below, not from above. It suggests that a society’s level of inequality is endorsed by the followers as much as by the leaders.
For example, Germany has a 35 on the cultural scale of Hofstede’s analysis. Compared to Arab countries where the power distance is very high (80) and Austria where it very low (11), Germany is somewhat in the middle. Germany does not have a large gap between the wealthy and the poor, but have a strong belief in equality for each citizen. Germans have the opportunity to rise in society.
On the other hand, the power distance in the United States scores a 40 on the cultural scale. The United States exhibits a more unequal distribution of wealth compared to German society. As the years go by it seems that the distance between the ‘have’ and ‘have-nots’ grows larger and larger.
The trick then is to not accept the PDI from the lower end. Let me explain.
Excerpts from 2007 article by a Stefan Bach , Giacomo Corneo and Viktor Steiner at www.voxeu.org entitled German income inequality outlines an idea. The article says:
Paul Krugman frequently mentions that America’s super rich make the 19th Century wealthy look poor. “We know what John D. Rockefeller, the richest man in Gilded Age America, made in 1894 … $1.25 million, almost 7,000 times the average per capita income in the United States at the time.” Krugman wrote. ”But that makes him a mere piker by modern standards … James Simons, a hedge fund manager, took home $1.7 billion, more than 38,000 times the average income.”
Surely such extremes cannot happen on Continental Europe with its social market economics and social solidarity. The authors of Policy Insight No. 4 shows that although income inequality in Germany is a long way from reaching US proportions, the trend is in that direction. Germany rich are getting richer, and its super-rich are getting super-richer.
In other words as a society progresses, those with power get richer while the majority of the population become poorer.
Note above that power is determined “from below, not from above. It suggests that a society’s level of inequality is endorsed by the followers as much as by the leaders.”
Power is an illusion that keeps most investors and business people depressed while a few gain from this social falsification.
The internet destroys this illusion. The web gives us all power! Today we have as much opportunity as the rich to gain from the changes that this economic correction will bring.
This is why Merri, our webmaster and I have created a new course on how to build a web business with a webmaster. More on this in a moment.
First what you can do as an investor or with your own business.
One answer we saw above is to live in a better lower cost environment like Ecuador.
Another answer is to be a multi currency investor. Despite America’s government spending , the dollar has been gaining, particularly against European currencies. The euro slipped to under $1.26, nearing a two-year low and down from a high of almost $1.60. This is caused as fearful investors jump into 10-year Treasury bonds… which have been shown to be terrible long term investments. All the US government spending means that the US dollar will fall. But against what?
The euro is not a trustworthy currency now. A March 1, 2009 New York Times article by Steven Erlanger and Stephen Castle entitled “Growing Economic Crisis Threatens the Idea of One Europe” explains why. Here is an excerpt from that article:
The leaders of the European Union gathered Sunday in Brussels in an emergency summit meeting that seemed to highlight the very worries it was designed to calm: that the world economic crisis has unleashed forces threatening to split Europe into rival camps.
With uncertain leadership and few powerful collective institutions, the European Union is struggling with the strains this crisis has inevitably produced among 27 countries with uneven levels of development.
Whether Europe can reach across constituencies to create consensus, however, has been an open, and suddenly pressing, question.
“The European Union will now have to prove whether it is just a fair-weather union or has a real joint political destiny,” said Stefan Kornelius, the foreign editor of the German newspaper Süddeutsche Zeitung. “We always said you can’t really have a currency union without a political union, and we don’t have one. There is no joint fiscal policy, no joint tax policy, no joint policy on which industries to subsidize or not. And none of the leaders is strong enough to pull the others out of the mud.”
Thomas Klau, Paris director of the European Council on Foreign Relations, an independent research and advocacy group, said, “This crisis affects the political union that backs the euro and of course the E.U. as a whole, and solidarity is at the heart of the debate.”
“All of that is in doubt if the cornerstone of the E.U. — its internal market, economic union and solidarity — is in question,” said Ronald D. Asmus, a former State Department official who runs the Brussels office of the German Marshall Fund.
If the the euro is a good currency for diversification, which currencies are?
Our multi currency course helps you learn how to diversify into safe currencies. Our studies currently suggest that the Danish, Swedish, Norwegian kroner and Canadian dollar make sense. For example beginning in March the Swedish kroner hit a new record low. The Eastern European problems are having an adverse impact on the Swedish banks. Also the Norwegian currency is a good technical buy.
You can join us to understand why these currencies make sense by subscribing to our on line multi currency course.
You can also join us for a currency review at JGAM’s Naples Florida investment course May 29 to 31, 2009. This course is $499 ($750 for two) but free to those who have subscribed to our on line multi currency course.
Another way you can attend JGAM Florida seminar free is to subscribe to our course on how to have a web based business. You can enroll in this special course for $299 and attend the JGAM course in Naples free.
Or join us for an upcoming course in North Carolina or Ecuador.
Future 2009 courses
May 29-31 JGAM Multi Currency investment Seminar Naples Florida
July 24-26 IBEZ North Carolina
Oct. 9-11 IBEZ North Carolina
Oct. 21-24 Ecuador Import Export Expedition
Attend any two Ecuador courses or tours in a calendar month…$949 for one. $1,349 for two.
Attend any three Ecuador courses or tours in a calendar month…$1,199 for one. $1,799 for two