The true wealth of a society is based upon what it can build, create, sustain and trade. Financial wealth held in stocks, bonds and other securitized paper assets is merely a transitory illusion. Competitive advantage in producing higher value added goods and services is the ultimate determinant of the wealth of nations, something the Asian nations figured out a long time ago...
The Age of Alchemy and Five Bladed Razors
Finance and Marketing are the alchemy of our time. They do not create wealth, they merely package legacy assets for sale to the highest bidder. Enduring wealth is defined by productive capabilities embedded within the economy - factors of production that don't come and go with quarterly profit statements and the whim of Wall Street. The value of a financial asset - whether stock or bond is only as good as the counter-party standing behind it. If the counter-party for a stock is a multinational corporation that sold its productive assets to China, then the residual "value" is merely that of a notional marketing brand. It's an illusion that was created on Madison Avenue that can vanish as quickly as it was created.
Real Wealth
Real enduring wealth of nations is a function of their productive capacity. The ability to design, build and trade goods and services that have value. The higher the value add in the outputs, the greater the true wealth. Therefore, true wealth is predicated upon skills, knowledge, trades and engineering capabilities. Economists have long known that service-based economies have lower productivity than manufacturing-based economies. Yet, that all-important fact didn't prevent Western nations from allowing their intellectual capital, management and engineering capabilities from being sold to Asia. Economists in the highest echelons have known for decades that most developed nations were transitioning to lower wage, lower productivity economies. But because the modern economic text books, supply-side neocons and Wall Street alchemists don't believe in any form of industrial strategy, they just let it happen. I guess they assumed there would always be a high demand for economists willing to tell us how poor we were all going to end up in the long run.
Real Income
For most of us who live on of our job income versus our cache of savings, steady income is even more important than wealth, so obtaining and sustaining a living income is of primary importance. A properly functioning economy rewards hard-work, skills, trades, and knowledge with higher income. However, a marketing and finance based economy featuring mass securitization and outsourcing does the opposite, it deflates wages. Skills and trades are systematically packaged and commoditized then exposed to ultra low wage foreign competition. Soon the ability of the average worker to obtain, maintain and grow their skills is compromised by a lack of a fertile economic ecosystem and constant job turnover. A commoditized and securitized economy featuring massively concentrated ownership, is a stagnant ecosystem. Whereas one that employs, rewards and supports new training and skills and entrepreneurship, is a fertile environment for new jobs, new business start-ups and overall innovation. All of this is merely commonsense of course, but in this day and age, commonsense is as foreign as Antarctica. We are experiencing in real-time the catastrophic failure of modern economic theory, which is dissolving right before our very eyes - now merely supported by a compulsive willingness to plunder future generations. Only the econo-dunces propagating their failing theories haven't figured out that their ivory tower alchemy is not working. Specious dogmatic adherence to the cult of "comparative advantage" was always going to be trumped by competitive advantage. As it has been since the dawn of mankind.
The Resource Curse
We were reminded on ZH today, that Africa is the last frontier for cheap oil. Unfortunately, however, we all know that resource-based economies all too often are sadly more likely to be impoverished by their resource wealth rather than enriched by it. As the article states, the issues endemic to the Third World are greed, mismanagement, misallocation of resources, bribery, malfeasance and worst of all an inflated currency that kills all other types of value-added exports. Growing up in Canada (B.C.) I was acutely aware of the drawbacks of resource dependency even in a country with relatively low levels of corruption. British Columbia has never developed the same manufacturing and engineering base as Ontario, partly for historical reasons but largely because B.C. wages and input costs were inflated by the resource sector. In a static sense, inflated wages is a good thing, but over time it's a bad thing if it means that all human capital is dedicated to a declining industry with a stagnant industrial ecosystem. Over time, the ability of a resource-based economy to compete with rest of the world on higher value added goods and services becomes stunted by the lack of expertise in anything other than extracting resources. Granted, B.C. has done a lot to diversify it's economy, but it has taken about three decades and significant government investment to make the shift.
It can be debated all day as to whether or not manufacturing should be the center of the economy or not. Some say that robotics and automation will take over assembly lines. Fine by me. However, skills, knowledge, trades and higher engineering are critical to creating higher value added products and services. Therefore when these vital capabilities slip out the same door as the manufacturing plants, to be replaced by spreadsheets and marketing slogans, then the seed corn of the economy is lost, perhaps for generations. So retaining and sustaining these vital capabilities should be the priority for any society that doesn't want to end up being a nation of baristas (no offense to anyone at Starbucks).
The Idiocracy: A Walking Billboard
The premise of the movie Idiocracy is that in a dystopian future, everything and everyone is massively commercialized and denaturalized. As we know, the future has a way of arriving ahead of time. It should come as no surprise, that this shrink-wrapped society, corporatized to the maximum extent possible, would turn to the marketing department to strive for some form of identity in a sea of conformity. What other way is there for the average wage zombie to find some form of differentiation other than to wear their favourite brands like they're some sort of identity anchor. Still, the underlying value of these brands is purely ephemeral. Debt-addicted consumers desperate for their next mall-induced dopamine hit are more than willing to rack up their credit cards to the benefit of their favourite multinationals. The U.S. spends upwards of $368 billion per year on advertising aka. brainwashing. Total U.S. marketing expenditures would rank 30th in GDP, right after Thailand. So when the flow of debt ends, inflated brand values will collapse. The typical multinational is a house of cards in which the only thing left to deflate are the profit margins. When bankrupt consumers wake up to the fact that there are identical products for 25% of the cost, the industrial arbitrage will end and along with it the age of multinationals.
Popular Culture Is the Enemy of Science and Technology
The self-installed culture warriors in Hollywood, who would be lucky to have a job if they were not churning out film reels full of junk culture, have systematically stereotyped scientists and engineers as socially awkward geeks and nerds. It's no wonder the U.S. ranks 21 out of 23 countries in math when the population is constantly bombarded with the message that math doesn't matter and is merely for introverted geeks who can't make it in sales. Anyone who has kids knows exactly what I am talking about. I have three, and they think that I am the family IT dork. I couldn't convince them to go into the IT field if my life depended on it. Unfortunately due to relentless outsourcing I would not want them to consider this field anyway, but the attitudes of young people towards science and technology are overwhelmingly negative. The cable TV menu which consists of 2,000 channels of vacuous bullshit is devoid of any programming that requires the least amount of intellectual thought or effort. We are raising yet another generation of salesmen who don't know anything except who won the fucking game last night.
Today's Best and Brightest are Neither
Getting back to the markets, it's important for the Harvard alumni on Wall Street, making millions trading pieces of paper back and forth in a zero sum game, to bear in mind that the overwhelming majority of today's financial assets are backed by nothing. They have no collateral. No tangible assets. No underlying value.
Econ 101: U.S. (Im)Balance of Trade
This was always going to lead to mass unemployment and massive debt. Even the econo-dunce text books would agree:
This was always going to lead to mass unemployment and massive debt. Even the econo-dunce text books would agree:
