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Did Washington Save the Economy? Part 3

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We're edging steadily closer to becoming a tree-planting economy.

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Editor's Note: This is Part 3 in a 5-part series. Click here to read Part 1. Click here to read Part 2. Click here to read Part 4. Click here to read Part 5.


This review of the interstices of the nonfarm jobs report shows that, in fact, we're edging steadily closer to becoming a tree planting economy -- a trend that raises profound questions about sustainability and whether corporate earnings should continue to be valued at traditional multiples. There are two main indicators of this trend. The first of these explains why Goods Producing jobs will continue to shrink, while the second shows that behind the comforting façade of massive gains in service-economy employment, there was really not much going on except the economic equivalent of tree-planting.

The first indicator is the composition of valued-added. In the late 1940s about 47% of the nation's value-added was accounted for by manufacturing, agriculture, mining, and construction. In other words, half the economy made "things," some of which could be sold on the world market to pay our import bills, while the other half provided necessary services like transport, warehousing, retail, professional services, haircuts, and government. By 1990, the Goods Producing economy (including agriculture) was down to 25% of value-added and today it's less than 19%. Scratch a Wall Street economist, of course, and he'll urge not to fret, reminding how Adam Smith explained 230 years ago that "its comparative advantage, stupid!" But that was under the old-time financial religion when nations sooner rather than later settled their debts in specie. So, today's financial troglodyte might well repost that "it's not stupid, its fiat money!"

Stated differently, in classic times a leading nation entering its economic senescence couldn't have tooled on for decades issuing $5 trillion of its own currency to comparative upstarts the likes of China, Russia, Japan, India, and Brazil in order to keep on buying "things" it no longer bothered to make. Instead, it would have been stripped of its gold reserves -- good and hard and not before long. Thus, finding the financing spigot for goods bought on credit from aboard shut-off, it would have reined in its appetites for current gratifications, and gotten back to the business of earning its keep.

Yet the demise of the barbarous relic didn't repeal the laws of economics, it only transmuted their effects. Thus, in the classic scheme a nation that issued too many notes on the short-term money markets would soon face the dreaded gold drain. There's no mechanism to periodically clear paper debts under the dollar reserve currency form of fiat money, of course, but there's nevertheless still an economic drain. It involves the export not of gold bullion, but of jobs and value-added from the Goods Producing industries, and so far it's dreaded mainly by the AFL-CIO chieftains and their former members who now pour coffee at the McDonald's (MCD) rather than steel at the mill.

Ironically, the only real cure for this on-going drain of value-added and jobs from Goods Producing are a good stiff increase in interest rates. That would cause a sharp rise in consumer savings and a commensurate decline in the current purchase of goods and services. In the bye and bye, the nation's uncompetitive wage structure would be deflated and, on the margin, some goods production would return home.
No positions in stocks mentioned.

The information on this website solely reflects the analysis of or opinion about the performance of securities and financial markets by the writers whose articles appear on the site. The views expressed by the writers are not necessarily the views of Minyanville Media, Inc. or members of its management. Nothing contained on the website is intended to constitute a recommendation or advice addressed to an individual investor or category of investors to purchase, sell or hold any security, or to take any action with respect to the prospective movement of the securities markets or to solicit the purchase or sale of any security. Any investment decisions must be made by the reader either individually or in consultation with his or her investment professional. Minyanville writers and staff may trade or hold positions in securities that are discussed in articles appearing on the website. Writers of articles are required to disclose whether they have a position in any stock or fund discussed in an article, but are not permitted to disclose the size or direction of the position. Nothing on this website is intended to solicit business of any kind for a writer's business or fund. Minyanville management and staff as well as contributing writers will not respond to emails or other communications requesting investment advice.

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