The global over supply of labor has just reached a new record high (since the Great Depression of the 1930's).
Prior to the start of globalization in the mid 1990's, there were just over 400 million Western style jobs (America 150m, Europe ~180m, Japan 60m, plus say 20 million from Canada, Australia and the rest).
Globalization added 1 billion potential new workers, just in China and India, that could now do Western style jobs in manufacturing and services.
You cannot quadruple the potential global workforce in a very short period of time, without some very dramatic consequences.
China and India's domestic consumer markets are slowly building up, but it is going to take a lot longer than 15 years to transform their economies. The vast majority of people still earn very low wages (as expected).
Meanwhile we continue to experience the massive over supply of cheap labor due to globalization.
There are high levels of unemployment across the globe.
There is high under utilization of labor (part time working by those wanting full time work).
There are ever lower participation rates of the labor force in the West (a lot of people have given up looking for jobs, because no well paying jobs are available).
Increasing numbers of people are working longer, they can no longer afford to retire early.
Increasing numbers are working beyond retirement age, they cannot afford to retire at all.
Both of the above reduce the opportunities for younger workers to enter the labor market.
China has just started it's first manufacturing facility in Africa to lower labor costs.
10,000 people in Ethiopia are going to be making $4bn of cheap shoes every year.
Doubtless China will seek to utilize more cheap African labor in the future.
China cannot create enough jobs to satisfy the demand from it's domestic market - yet it is still prepared to divert jobs abroad.
Unemployment levels and social unrest in China is rising because of the shortage of manufacturing jobs.
Unemployment in China is set to get worse with the recessions in Europe and America in 2013.
Debt
There continues to be record levels of government and personal debt.
Government debt is still increasing.
Governments and Central Bankers are printing ever increasing amounts of money in new rounds of printing.
This will only serve to increase debt interest payments and make everybody poorer (except for the banks).
It has not and will not, help the underlying real economy.
The so called austerity measures in Europe are not reducing Sovereign debt.
The higher social welfare costs incurred are balancing or outweighing the "cuts" in government spending.
The "cuts" in government spending are targeting the wrong things.
They should be targeted at non productive items like military spending, Corporate Welfare and other forms of government waste.
Personal debt such as student loans are increasing massively due to Western policy on sending ever increasing numbers to College for courses and jobs that don't need a College education.
This will hang like a yoke on the shoulders of the young for decades to come.
Mortgage debt continues at high levels.
Equity levels are low despite housing being still over-valued.
(House prices still need to reduce by between 20% and 40% to get back into the range of inflation adjusted historical norms for the last 100 years.)
Insolvent banks continue to be bailed out around the world by governments and Central Bankers.
It makes everybody poorer, except for the banks that have loaned insolvent banks money.
America is bailing out it's banks at the rate of $40bn+ a month.
Europe continues to bail out it's hundreds of insolvent banks.
Inflation
The money printing by the Central Banks is stoking up inflation.
America's banks already have $2tn of excess reserves.
Nobody wants to borrow this money, so the banks are using it for short term speculation.
http://ian56.blogspot.co.uk/2013/01/the-2tn-of-excess-bank-reserves-is.html
A sizeable proportion of this money is being used to bet up the prices of basic commodities, principally oil and food.
Goldman Sachs just announced that they made $400m in 2012 through betting up food prices.
Making everybody in the world poorer (except Goldman Sachs) and causing the malnutrition and starvation of millions in poor countries.
http://ian56.blogspot.co.uk/2013/01/how-goldman-sachs-made-millions-betting.html
There is currently a small amount of deflation from the writing off of impaired loans.
Mortgage foreclosures.
Student loan defaults.
Greece wrote off $100bn of it's sovereign debt last year in a deal with it's creditors.
But then it was immediately discovered that it had $100bn of off balance sheet debt previously unaccounted for.
So now Greece has more or less the same amount of recognized debt that it had before, but now has higher interest rate costs from the deal that "wrote off half of it's debt".
Global money supply has been roughly static since 2008 after a long period of exponential increases.
The inflation caused by money printing has balanced out the deflation of large numbers of mortgage loan defaults and Corporate de-leveraging over the last 4 years.
Large American Corporations are now sitting on a $2tn cash pile - most of it offshore. They are not investing it anywhere and they are certainly not borrowing more money from the banks..
However mortgage loan defaults have recently decreased and Central Bank printing is increasing.
Inflation is being stoked up for the future unless there are large loan write-offs - like there were in 2008/2009.
Total dollar money supply 1970 to 2012
Above chart courtesy of Shadow stats.
Inflation as measured by price increases is already extremely high around the world.
E.G. If the CPI model used in America were the same as that used in 1980, official American inflation would now be at 10% not 2%.
There were two major adjustments to America's method of calculating inflation, one in the mid 1980's and one in the mid 1990's.
Both adjustments dramatically lowered official inflation numbers from that actually experienced by people on main street.
This is why the ordinary people on Main Street know and can feel (even if they are still employed) that their standard of living has declined substantially over the last several years, but the government tells them it is just not so.
The people on Main street look at the prices on the supermarket shelves every week and can see for themselves.
All governments lie in their official inflation statistics, America just lies more than most.
Adjusting reported inflation downward lowers government costs and makes it seem like the government is doing better than it is.
(GDP changes are calculated taking account of inflation. The American government has been reporting about 2% GDP growth recently. If real inflation numbers were used, America would never have come out of recession since 2008.)
Real Wages
Real median wages are declining rapidly in the West.
In America they are now back below the level of 1970.
Living standards are also declining rapidly.
Real median Household Incomes are now back below the level of 1995.
The reasons for the decline in Western living standards since 2000 are twofold.
There has been a massive global over supply of labor ever since globalisation.
China and India alone supplied another 1 billion of potential new workers that could supply labor for manufactured goods and services that were previously supplied by workers in the West.
Wage inflation has been kept very low and below the rate of actual inflation due to the over supply of labor, high unemployment and government massive under reporting of true inflation.
Corporate Profits
Corporate Profits are at record levels.
Basic labor has been outsourced to lower labor cost markets.
Western pay levels have been kept below the true rate of inflation.
Governments around the world continue to give large amounts of taxpayer money to help raise corporate profits even higher.
Corporate Welfare by the American government is now well over $1tn a year.
http://ian56.blogspot.com/2012/11/it-is-very-easy-to-cut-1tn-from-federal.html
If we include the continuing bank bailouts in QE3 it is now at least $2tn a year.
A primary example of government largesse to large Corporations can be seen by the recent Fiscal Cliff deal.
ALL of the well over $1tn of annual Welfare to large Corporations was retained, while middle class and poorer taxpayers got a HUGE $200bn tax hike.
http://ian56.blogspot.co.uk/2013/01/fiscal-cliff-deal-obamas-corporate-sell.html
The Solutions to the coming Global Economic Crisis
The balance between record Corporate profits and record levels of poverty and rapidly declining living standards needs to be addressed.
This is directly opposite to the policies of just about all current Western governments, but it particularly applies to America.
Disposable income for middle and poor earners needs to rise if there is ever to be real economic recovery
As a first measure I would raise tax thresh holds to $45,000 or quintuple them.
That would cost about $500bn a year or less than half of the savings to be made by cutting over $1tn from Corporate Welfare.
It would be a MASSIVE economic stimulus for America.
It would greatly increase ordinary American's disposable incomes.
The large Corporations are ultimately cutting their own throats and everyone else's by chasing governments for ever more handouts.
If ordinary people across the world have less money to spend on the products of the large Corporations, the profits of the large Corporations will eventually collapse on their own.
The full article :-
http://www.businessinsider.com/how-to-fix-the-economy-in-one-simple-chart-2012-8
In response to a very similar set of economic problems that we have now, of high Corporate profits and low wages, Henry Ford DOUBLED the wages he paid to his workers overnight.
Henry Ford made a LOT of money from selling his cars and his workers enjoyed a massive increase in their standard of living.
http://ian56.blogspot.co.uk/2012/12/the-henry-ford-solution-to-fixing.html
Corporate Welfare needs to stop
It is paid for by ordinary taxpayers and makes ordinary taxpayers poorer.
Governments need to stop giving large amounts of taxpayer money to large Corporations.
The specific tax breaks for large Corporations should all be removed.
E.G. where large Corporations transfer their profits to offshore tax havens to avoid paying tax where the profit was generated.
Bernie Sanders has just proposed putting an end to the system whereby multinationals divert US generated profits to offshore tax havens to pay very little or zero US Corporation Tax.
Something I have been saying for some time.
http://www.huffingtonpost.com/rep-bernie-sanders/a-choice-for-corporate-am_b_2652176.html?utm_hp_ref=tw
It is not that Corporation Taxes should be raised per se - but there should be a level playing field.
Currently we have situations like Starbucks paying no Corporation Taxes but a small coffee shop owner is paying 29% in Corporation Tax.
The big banks are getting $1tn a year of free money from the Federal Reserve and then diverting their profits made from this to the Cayman Islands. Neither part of this is right.
The excessive pay and bonuses of the executives of large Corporations needs to be tackled.
It diverts the profits of companies to board members 90%+ of whom do not deserve it and do nothing to increase profits of their company.
These profits should rightly be given to shareholders - like the large pension funds.
The balance between the top 1% of income earners and everyone else is now the highest since the late 1920's and should be reversed.
Economic growth is fastest when there is a thriving middle class and this differential is low.
Wages for jobs that CANNOT BE OUTSOURCED abroad - e.g. Walmarts and Starbucks need to be raised.
Taxes on the poor and middle classes should all be LOWERED.
Excessive regulations as are now prevalent in both America and Europe, need to be cut back to make business more competitive against the rest of the world.
46,000 new regulations were added by the Federal and state governments in 2012. It makes businesses less competitive and it costs jobs and increases unemployment.
The large cartels that now operate in each major industry need to be broken up.
Record Corporate profits are a symptom of the disease not the cause of the disease itself.
The disease is too little competition in the marketplace.
It is greatly exacerbated by governmental support of increasingly concentrated monopolistic cartels.
Confessions of a monopolist
http://www.lewrockwell.com/blog/lewrw/archives/92245.html
Today we have a small clique of large banks controlling 80% of Western banking in a banking cartel.
We have 5 or so large Western oil companies that control much of the world's oil and gas supply.
We have 5 or so large pharmaceutical companies that control much of the world's pharmaceutical supplies, protected by new rivals by a high cost of entry provided by their control of the FDA.
We have a soon to be monopoly of food production with Monsanto's seed business, heavily protected by the American government and a dozen or so ex-Monsanto employees installed in the FDA.
We have 5 or so large armaments manufacturers that dominate the global arms industry, they are still "consolidating". America now has 79% of the "official" global arms trade.
We have seen the mainstream media shrink from 53 companies controlling 90% of American media in 1983 to just 6 today.
We are soon to see 5 or so large Healthcare companies that will control 80% of America's healthcare industry.
They will take control of the entire process from insurance premiums.
Much like the oil companies control the entire energy delivery process - from exploration, drilling and refining to the ownership of the majority of gas stations.
This is the specific intention of Obamacare and why single payer was not chosen.
Large Healthcare companies are already swallowing up smaller rivals including some foreign companies to take advantage of the expected bonanza and to divert the expected extremely large US generated profits to foreign tax havens to pay no Corporation Tax.
US Healthcare is already extremely inefficient, ranking only 37th.
Obamacare will make it even worse, raising the cost of healthcare for everyone.
It will also raise taxes by about 3.8% on everyone.
Businesses are already starting to pass on the expected costs - again raising inflation for Main Street and to the detriment of all (except large Healthcare companies).
There is MASSIVE potential to reduce the costs of US Healthcare and make it cheaper for everyone.
Obamacare does the opposite.
The Corporate takeover of Western governments needs to be reversed.
Governments need to get their spending under control to reduce their future interest payments.
But the cuts should first be made to non productive areas like military spending and Corporate Welfare.
Central Banks need to stop printing excessive amounts of money, which raises the profits of the large banks but makes everybody else poorer through inflation.
Debt forgiveness needs to be applied across large amounts of sovereign debt for countries that will never be able to repay their debts (like Iceland did in 2008/2009).
N.B. This includes America.
The speculators and the large banks will have to swallow their lumps.
Interest rates need to be returned to historical norms.
The average interest rate on US 10 year government bonds is 5 or 6%, averaged over the last 200 years.
It is now less than 2%. It encourages reckless spending by the American government, just as it encouraged reckless spending by the Greek government and look what has now happened to them.
This will protect savings and pensions.
It will provide a pool of capital for productive long term investment in the real economy, instead of the short term speculation that is now rampant across the globe.
Conclusion
Absolutely none of the things that are required to improve the real economy are being done by Western governments.
They are not even being discussed.
Things are going to get much worse before they get better.
It will be a long time before things start getting better - decades is likely.
Paul Krugman is 100% wrong and Nouriel Roubini is completely correct - but he did not mention half the things that need to be done.
Davos will not even begin to discuss the things that need to be changed to fix the economy.
Davos is full of senior executives of Large Corporations and government officials.
The government officials have been bribed with campaign contributions and promises of post political jobs, by the large Corporations.
The attendees at Davos are too blind to see that they are cutting their own throats a few years down the line.
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