The Great Divergence

[kandrathe]

I would point out a few things here. As much as corporations broke labor, it was also labor that broke corporations.

Right, which is why unions today are struggling outside of the government sector, real wages for workers have not risen in quite awhile, and yet, executive pay has shot off like a rocket for three decades. Obviously, the corporations are not "broken". They have gained, rather than lost, power.

In aggregate, yes, those corporations who were un-unionized were able to better exploit labor. I'm saying that given numerous corporations in a competitive market, the corporation without a union will out compete it's unionized competition. This is now global. US automobile manufacturers cannot produce cars at the same quality and as cheaply as their foreign competition, partly due to union contracts (pay more for average labor, and cannot remove the bad employees).

I was at Soo Line RR when they attempted to get all the unions to renegotiate to enable it to survive. Where is Soo Line today? My father was a Teamster for his entire long haul career, but where are the companies with in-house fleets now?

If the wiki is to be believed, the line was bought and is currently managed by CP. Regardless, I would not be so bold as to advance the argument that unions are powerless, or that unions have no role in the failure of certain companies. Railroads in particular are unable to move, and therefore unable to take advantage of the international markets for labour. However, that does not change the general trajectory of labour vs. corporations in the larger picture.

I have mixed feelings about collective bargaining, and strikes. Back in the early 1900's it was necessary due to horrendous working conditions. More often these days, the issues are picayune, and effects of strikes devastate economies (especially when executed by government workers). We are facing an impending transit strikes here against the metropolitan council (collective government over Minneapolis, Saint Paul metroplex). Their contract expired last July, and they are upset over flat wages and increasing health care costs. So are we all.

More importantly, did globalization destroy the competitiveness of American goods?

American goods less than American workers. Until cheap sources of labour reach the limits of their productivity with low capital investment and poor education, American workers will face an uphill battle. On the other hand, they still have substantial advantages over their third world counterparts, and do see gains from trade - just less than their employers see, creating inequality.

I think de-development, and the devaluation of America is a part of the current administrations agenda.

Can you point to any deregulation bills during Reagan's two terms?

The Garn-St. Germain Depository Institutions act? Reagan presided over a large relaxation of regulations, both by abolishing them officially, and just changing their enforcement informally. This is the man who decided that Alan Greenspan should be Fed chairman, for crying out loud. Are you really going to argue that Reagan didn't deregulate?

I missed that one, and Title VIII (adjustable rate mortgages) of that act did result in a savings and loan problem later. Mr. Greenspan, as Fed Chairman, was in a position to advocate for deregulation, but congress didn't do any of it until Mr. Clinton came to the White House.

I think they swung at the shadow anyway. Consider that 80% of the growth in the Stock Market over the past 60 years is due to inflation, and the value of a dollar has declined steadily over the past 100 years.

Sure. But so what? What matters are real prices and real wages, unless you're stupid enough to have kept all your money in paper dollars for 100 years under your mattress. The question is not what % of stock market nominal growth is actually real growth. The question is what the rate of real growth is, and it's been quite steadily positive for this entire period, excepting a few crash years.

You wouldn't only have needed to keep it in cash in your mattress, rather, any property that you owned denominated in dollars has declined in *real* value while increasing in present dollar price. Had you left your money in savings, annuity funds, or bonds (generally things pegged to the CPI), the value of your 1925 dollar would be slowly eroded away due to the lag in rates versus inflation.



Investing in Stocks is considered the most risky. The Dow (adjusted for inflation) is trading between a 6% and 10% annual rate of return over the past 95 years (most of the growth has been since 1980), with long periods of significant down side potential. A good deal if you picked the right stocks.

The Fed just increased M3 by > 20% and this inflation has yet to work its way through the system.

It hasn't even started. Velocity is still down. There are no signs of impending inflation, at least, none that investors are willing to bet their money on. Bond yields are shockingly low. Prices are not increasing overall, and are even decreasing in some areas. A little inflation right now would be marvelous.

They are meeting Tuesday to discuss buying more stuff with fiat money. Looking at the CPI, the problem is that inflation seems to concentrate on a certain commodities, like fuel and certain other goods (meat, used autos, rental property, tuition, local government services). Where is there not inflation? Technically, due to the Fed's manipulation of the money supply, we are not in a depression. However, the massive increases in the volume of money still hardly curbs deflation, leading me to conclude we are in a depression, masked to look like stagnation and we haven't hit bottom yet.

As we've discussed in earlier posts, I believe the Feds printing of money has kept the (bogus) CPI fairly flat rather than allowing deflation (although we've seen a mix of deflation and inflation across the spectrum of consumer goods).

99 out of 100 economists agree: deflation sucks. Big time. Not printing money right now would be suicidally stupid.

Psychologically, I agree. I think most people are bamboozled by the consequences of what the Fed are doing right now. The dollar will devalue in proportion to what have been printed, and we all have lost *real* wages, and savings in relation to what we were paid, and had saved in 2007. Prices have also dropped, so we don't feel the effects yet, but there is a 20-30% price inflation waiting to express itself once the recovery takes hold.

As a result the bubble has shifted into US Treasuries.

There is a ceiling on US bond prices - the 0% nominal interest bound, the point at which you are literally giving money to the US treasury for nothing more than a promise to repay it, eventually. A bubble in bonds can only go so high, and therefore, can only cause so much damage.

Right, what does that damage look like? People refusing to buy US Treasuries? Default on the debt?

Just as with the other numbers the government publishes, the CPI, the unemployment rate, and the GDP are all fudged to make things look better than reality. We live in a world of rose colored scenarios.

It's not getting any more true every time you repeat it. It was horsepuckey the first time you said it, and it's still horsepuckey.

We talked about U3 versus U6. It's not horsepucky. Here's an article describing how CPI is fudged. GDP... We can get into that later...

"Not only has the huge buildup in the monetary base put pressure on the US dollar and caused gold to soar, but it has also broadcast an egregious and distortive price signal for US debt securities. The 10-year note is now trading just above 2.5%. That yield is near its all time record low, nearly 5 percentage points below its 40-year average, and 13 percentage points below its record high of September 1981. "

This doesn't make any sense. If the government is printing an enormous quantity of money, then the *last* thing people want to hold is US debt securities! If that was the fear, then the price of US debt should be crashing through the floor, not soaring through the roof. And yet, people still seem not only happy, but almost delusionally happy, to buy both US government debt, and also gold. What does that suggest? A flight to safety. It certainly doesn't suggest that investors are scared of monetary expansion, because that would be irrational, completely backwards. You sell bonds when you're expecting inflation, you don't buy them.

I think people are going to safety (looking for anything with a rate of return), but everything looks bad, baring certain commodities. Stocks overall look bad, bonds look bad, municipalities are defaulting left and right. Asia, and Germany look good.

The people in the lower 90% of incomes tend to do their working, spending, and saving in dollars. While the people who earn incomes which are converted into dollars will not suffer from the devaluations.

It's strange that so many of your "sources" are just editorials from right wing newspapers.

Leftists don't write as many articles, and being more Friedman than Marxist, I tend to post editorials that support my liberal(classical) point of view.

Inflation hurts the rich more than the poor. People who have little or no savings are hit proportionally less. Wages adjust relatively quickly in an upwards direction, because employers need workers. Higher inflation generates lower unemployment, which increases the pressure on wages to increase. Inflation also decreases the value of debts, which are disproportionately held by the poor, especially the home owning poor.

Everyone buys everything in the same currency, so that has no disproportionate effect on anyone. It's not like rich people deal directly in gold bullion.

Rich people, on the other hand, tend to have bank accounts. They may hold most of their assets elsewhere, but nobody operates with zero liquidity, and every dollar they keep in currency is a dollar hit by inflation.

I don't disagree, other than that those in the upper quintiles of wealth know they have something to lose, and act to attempt to preserve their wealth. They can also probably afford to hire someone who knows how to attempt to preserve their wealth, if not increase it.

It doesn't shock me that 1 in 10 people don't understand or care about the complications of wealth in a global economy, and that of that upper 10% another 1 in 10 (like Gates, or Buffet) do exceptionally well.

Bill Gates and Warren Buffett are more like one in a billion than one in a hundred. Top of the curve - someone has to be the richest. (Interesting that article is from 2005 - if you'd shorted the dollar from then until now, I don't think you would have exactly made a killing...)

You'd probably be up by about the same percentage that gold has increased in value, and maybe less. Gold buying seems to be influenced by animal spirits.

Heck, even Greenspan, Paulsen, Bernanke, Geitner, et. al. can be horribly wrong, and cause untold devastation all in the name of trying to fix today's crisis.

I don't think anything that has been done has caused "untold devastation". Not enough was done. What was done, was not as effective as it could be. But compared with the magnitude of the crisis itself, no reaction to it has had a very large effect, good or bad.

Shadow's articles questions why their is a growing divergence in incomes between the top and the rest of income earners. They've examined a number of things, which you and I agree (I believe) are not very good indicators. I see that these economic upheavals (recession/depressions) in our society have negative consequences more for the lower classes, and that the upper middle class, and the bourgeoisie weather, and rebound to further elevate their status. And, again, I use the bowl analogy to describe this phenomenon. I saw firsthand how the 70's stagflation affected my family, eliminating any ability of my parents to help fund the post-secondary education of their children. Luckily, each of us were able to pull ourselves up over time, although it took my older sister an additional 20 years, and two failed marriages. It was not in time to help her child much, who did not get the benefit of her later in life attainment of "professional" status. In general, people who are paid in the top 10% tend to have unique skills, are more in demand, and therefore their jobs are more recession proof.

The OECD recently published a paper called "A Family Affair: Intergenerational Social Mobility across OECD Countries" which captures another perspective showing that "Mobility in earnings, wages and education across generations is relatively low in France, southern European countries, the United Kingdom and the United States. By contrast, such mobility tends to be higher in Australia, Canada and the Nordic countries."

I think social mobility is another important factor.