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Letter Re: Wealth Destruction--Real Wealth or Just On-Paper Wealth?
Sir:
I followed the link in Thursday's blog to this I followed this news story: 45
percent of world's wealth destroyed: Blackstone CEO. It stated: "Between
40 and 45 percent of the world's wealth has been destroyed in little less than
a year and a half." I don't see how Schwarzman can be right about that.
The factories are still there. the farms are still there. The houses are still
there. And there are still warehouses full of everything from Machinery and
bar stock to Sponge Bob Squarepants toys.So what has been destroyed are just "on
paper" profits, not any real wealth. Please correct me
if I'm wrong, but what is to stop us from just revaluating things, and getting
along with life? Thanks, - F.T.G
JWR Replies: You are mostly right, but partly wrong. You
are correct that there has been very little real tangible wealth that has
been
destroyed, other than inventory that might be discarded for lack of a market,
some half-finished commercial and residential building projects that will
eventually get bulldozed, and some perishables that have been delayed in transit
and that went to waste. You are also correct that most of what still exists
tangibly has genuine value. But consider that an under-utilized factory
produces fewer goods than a fully-utilized factory. (OBTW, on that note,
we can thank President Obama for at least keeping America's gun, ammunition,
and
magazine
factories working
at
a fever pitch.)
So let's step back and look at the big picture...
What has been destroyed:
1.) Asset Values:
This goes without saying. Reader FTG is correct that facilities and capital equipment
are physically intact, but their values have been greatly reduced. I expect to
see this process continue for several more years.
2.) Wages and Buying Power:
By cutting out overtime, reducing shifts, idling
assembly lines, canceling re-stocking orders, reducing pensions, scaling-back
benefits, and laying off employees, there
has been a great contraction in wage-earning income and hence buying power--even
to the point where people are having trouble making their mortgage payments.
This
leads
to a chain
collision
of missed house payments, foreclosures, and evictions. Worse yet, it means
even more houses will be dumped onto a market that is already flooded with "excess
inventory."
3.) Credit, and the Perception of Credit-Worthiness:
As I've described before,
the economy is presently in a phase characterized by revaluation--as the
various market sectors probe for new market prices.(Economists
call this "Price Discovery.") Simultaneously, lenders are are positively
petrified to lend to their heretofore "credit worthy"
clients.
There
has been so much debt re-packaging that has gone on, that it is now very
difficult to reliably assess any accurate values of assets and to evaluate
loan risk
4.) Consumer Confidence
Much of the consumerism that built up in the US for the past 30 years was a Spendthrift
mentality, created by the bygone oceans of "Easy Credit". Both that
credit and the resultant spending are now gone. And I do mean gone.
In previous recessions, there had been brief declines in consumerism,
but I can foresee that this one one will be different. This will be more like
the 1930s,
where the
nation developed an entire generation of penny-pinchers. Don't get me wrong--I
consider
this a good thing! Saving is admirable. Overspending
is foolish. But from the standpoint of economic recovery, this could delay recovery
by several year, since a large portion of the economy had built up around the
concept of women with 25 pairs of shoes, and
men
with three sets of golf clubs
5.) For Many, the Hope of Retirement at Age 65:
Millions of American that were nearing retirement
have lost any hope of retiring. Aside for the holdings of a few crazy "gold
bugs" (like SurvivalBlog readers),
their IRAs and 401(k)s have been devastated. There are also some company pension
plans that have gone "poof" or that will surely be scaled back considerably.
I don't want to gloat, but those of you that took my advice three years ago
and sold their dollar-denominated investments and invested in tangibles have
come
through
the credit market collapse
virtually unscathed. Some of you even came out ahead. Meanwhile, those that
left their money in stock-heavy 401(k) accounts have been devastated. Losses
of
30% to 50% have been the norm. Ouch!
6.) Carefree Mobility:
Before the housing bubble burst, people could easily change
jobs, sell their houses (at a profit!) and move from coast to coast without
much inconvenience.
But to do so now constitutes major trial and tribulation. Up to 40% of people
with mortgaged homes now have negative equity--meaning that the remaining principal
of their mortgage now exceeds the market value of their house. (This is commonly
called being "upside down" in a mortgage.) So now, even for someone
that can make their mortgage payments, changing jobs to a new locale beyond
commute distance means losing their house and starting over. And if they go
with the "jingle mail" method, it means starting over with a ruined
credit rating.
7.) The Last Shreds of Job Security:
Following the trend set by Silicon Valley, when the "Dot.Com" bubble burst
in 2000, many industries are now getting positively ruthless about cost-cutting.
There is now a constant barrage of news of layoffs,
reduced benefits,
and cutting our perks. Don't expect "normality" to resume to the corporate
workplace in our generation. Any vestiges of "job
security" have become a thing of the past.
What Will Likely Continue to Be Destroyed:
1.) Further erosion of asset values.
The price of real estate (both residential
and commercial) will likely continue to decline until either A.) The economy
starts to recover, or B.) Inflation kicks in. If it is the latter, (which is
what I suspect, sooner or later), property prices will start to rise only
because general price inflation has grown. But this will be a false
recovery in real estate.
Real property values will continue to decline, while the currency
unit itself is
being destroyed. Yes, your house may be worth a several million dollars, but
what will a million dollars buy you in such times? The same may happen with
stocks.
In
the presence of inflation, news of a "stock
market rally" will
be nothing but fiction if the currency. Amidst the "Happy Days are here
again" hoopla,
real values will still be in the
dumpster.
2.) More job losses and further-reduced wage-earning hours
3.) More failed pension programs
4.) The dollar itself as a currency unit. This recent news article was a subtle
warning: The
Swiss central bank has already
fired the first shot in the global currency war. I expect large devaluations--both
formal and informal--by many nations in the near future. The bottom line is that
the US
Dollar
is
doomed.
What will Remain and Gain:
Tangibles, Tangibles, Tangibles! I've been harping on that theme in SurvivalBlog
for three years. Again, those of you that took my advice are mostly sitting
pretty. Silver and gold have doubled, as have ammunition and many full capacity
magazines. Productive farm and ranch land has held most of its value, while
at the same
time suburban
real
estate has plummeted. If you have not yet transitioned out of dollar-denominated
investments, then do so immediately. (The current stock rally is nothing
but a sucker
rally in
the larger context of secular bear stock market So this is a good opportunity
to bail
out.)
The present-day wave of deflation will likely be followed by a period of sharp
inflation. At
some point, all those trillions of "magically created out of thin
air" dollars
that will needed for the Mother of All Bailouts (MOAB)
will inevitably catch up with the Dollar. My closing warning: Be
ready for some serious consumer price inflation, most likely starting in
2010.
