Ocean of Liquidity

Date: Monday, February 10, 2003 1:13 AM

H-1B and JOB DESTRUCTION NEWSLETTER

www.ZaZona.com

http://www.signonsandiego.com/news/business/bauder/20030202-9999_1b2bauder.html

An ocean of liquidity may yet sweep us under

February 2, 2003

An ocean of our own liquidity is keeping us afloat and also keeping
other economies across the ocean afloat.

Some day that ocean of liquidity may drown us, and possibly our foreign
friends, too.

But it won't happen this year, or even, perhaps, in this decade.

The thought, however, is sobering.

In the United States, both consumer and corporate spending is slow. For
a long time, consumer spending buoyed the economy, but Christmas and
post-Christmas retailing show pretty conclusively that consumers are
tired.

Corporate spending, particularly capital spending, has been in the
doldrums for a long time, and is only improving slowly.

Both consumers and corporations are overleveraged. Consumers'
installment and mortgage debt are historically high by almost any
relative measure. Corporate debt as a percentage of total economic
activity is extremely high.

Meanwhile, a federal government surplus has turned into a deficit, both
because of spending (such as for the military) and lower tax revenue.
States are collectively $90 billion in the hole, largely because of
lower revenue, exacerbated by higher past spending.

Bottom line: For every $1 of annual economic output, there is $3 of
credit market debt, says E. James Welsh of Carlsbad's Welsh Money
Management. The only time it was as bad was in the Great Depression,
when the ratio was $1 of economic activity to $2.60 of credit market
debt. Then the ratio sank back to $1 to $1.40, before it began its
streak to $3 in the late 1980s and the 1990s.

Since 1980, debt has grown at a 9.7 percent annual rate, which is
roughly 50 percent faster than nominal (non-inflation-adjusted)
economic growth, says Welsh. "Between 1995 and 2000, our economy grew
42 percent, while corporate debt ballooned by 85 percent," he says.

After the stock market bubble burst, the Federal Reserve realized that
deflationary forces could set in, and began flooding our economy with
liquidity. Short-term interest rates are now at 41-year lows. The Fed
continues to pump reserves rapidly through the banking system.

The Fed wants to keep the mortgage rate tied to the 10-year Treasury
note affordable. After all, housing is the only strong part of the
economy. Also, consumers have to refinance their mortgages to continue
at least moderate spending.

What are consumers buying? Cheap goods from overseas. In particular,
China and Japan are exporting their deflation. This depresses prices of
our domestic manufacturers and, in turn, depresses domestic employment
and wages.

Increasingly, we have been exporting our jobs overseas, just as we
import lower-priced products. For many years, U.S. companies had their
low-wage plants abroad make the basic easy-to-assemble goods.

That's no longer true. Now, research and development, software
engineering and financial jobs are being outsourced from the United
States to places such as India, Russia, Ireland, South Africa, Eastern
Europe and Asia.

"Tech manufacturing will become centered in Asia/China by 2006-2010,"
says Donald H. Straszheim of Santa Monica's Straszheim Global Advisors.
"Already, many tech leaders are willing and confident to produce their
highest-tech and most cutting edge and mission-critical products in
China. This is likely to accelerate, not reverse."

And those jobs won't just go to China. They will go to many nations,
particularly those with relatively high education levels but very low
wages, such as Russia.

U.S. companies are under accelerating pressure to increase profits. One
way to do that is to ship operations to low-wage nations abroad.
Domestic labor unions see the handwriting on the wall and reduce
demands. But this also means that personal income advances more slowly
in turn denting the very consumption that is keeping the economy
afloat.

It's clear U.S. manufacturing cannot become hollow administrations
here, manufacturing operations abroad. Our only vibrant sector cannot
continue to be services, which are generally shielded from foreign
competition and, unfortunately, pay lower wages.

We're on a treadmill that is oiled with excessive liquidity. We're too
dependent on low wages here and slave wages abroad.

With the threat of global deflation still hovering, the liquidity may
be a necessity. But when we stave off deflation, we will face huge
problems that the battle created.

Don't blame the global economy. Blame greed: corporations wanting fat
profits at the expense of consumers who want cheap goods.

Don Bauder: (619) 293-1523; don.bauder@uniontrib.com

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