The Dow Jones (the Murdoch ?) Hits 14 K In A Hollow Economy (July 23, 2007)
The Dow Jones Industrial Average (the Murdoch Average?) exceeded 14,000 last week. At some time it will retreat because it has to retreat. Why is it so high? First, there are a small number of individuals who have too much money and few productive outlets. That money has no ready home now that the last domestic American industry–the real estate industrial complex–has run its course. However, no one, Republican or Democrat, will get elected by arguing that too much money is in private hands and not enough in government hands to pay for the common weal and reduce purposefully the nearly 9 Trillion dollar Debt. Government borrowing is “crowding out” funds for private sector projects.
In addition, the rampant easy credit has fueled a hollow and unsustainable expansion. The economy since 2002 was driven and is being driven by spending that mortgages the future of the country and its citizens. Too many Americans view their residence as an asset. A residence may be an asset if there is some equity, yet it is not a productive asset. Too many Americans view their residence as an ATM (automatic teller machine). The “wealth effect” experienced by homeowners who see their home prices rise is giving way to a more realistic “poverty effect.” The purchasers with “sub-prime loans” drove up the price of all homes and made everyone feel wealthy and thus more inclined to spend. When some of these purchasers are unable to pay and foreclosures result, the price of all homes will decline. Even homeowners without dubious mortgages are negatively impacted if they have used their homes as an ATM to purchase other consumer goods. When the value of a home declines below the remaining arrears on a mortgage, some homeowners may question how long they are willing to sustain the hemorrhaging. [See the e-ssay dated February 7, 2005 entitled “The Microeconomics of Suburban Subsistence”].
The myopic emphasis in business on the next quarter is not surprising. Bonuses are paid for results in the short term not for long run performance. Although some businesses are reporting profits, the consumer spending that is driving the economy cannot continue. Many companies are selling to foreign consumers with more disposable income which admittedly diversifies the sources of revenue and offsets the decline in spending in America. Americans are in debt their tonsils. They do not save. Soon there will be few funds available to borrow and few Americans willing and able to loan them.
Bumper sticker of the week:
It is only a matter of time