The big payback

Twenty years of going nowhere! Where are we? Yokohama?

Dear reader -and anyone who has been paying attention - you already knew there was something wrong. The world's leading economy, in the most dynamic, inventive period in human history, failed to make people a penny richer.

GDP went up. But real wages did not. In fact, people got nowhere financially if they were lucky. And many families got caught in the credit/housing bubble. When it blew up they got knocked back, actually losing wealth.

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We'll give you the conclusion before we give you the facts: the 'growth' in the last 20 years was largely phoney. The wheels on the US economy spun around faster and faster. The shopping malls were full. Houses were built on nearly every vacant lot. Wall Street cashed big cheques. But, overall, it was an illusion. Compared to a real boom, it was a counterfeit. Nobody got anywhere.

Here's the story from The New York Times:

Family Net Worth Drops to Level of Early '90s, Fed Says

WASHINGTON The recent economic crisis left the median American family in 2010 with no more wealth than in the early 1990s, erasing almost two decades of accumulated prosperity, the Federal Reserve said Monday.

A hypothetical family richer than half the nation's families and poorer than the other half had a net worth of $77,300 in 2010, compared with $126,400 in 2007, the Fed said. The crash of housing prices directly accounted for three-quarters of the loss.

Families' income also continued to decline, a trend that predated the crisis but accelerated over the same period. Median family income fell to $45,800 in 2010 from $49,600 in 2007. All figures were adjusted for inflation.

You might be tempted to think that this is just a temporary setback that when things return to normal the typical household will recover two decades of financial progress too.

Don't count on it. Household wealth in the US rests on housing and wages. Housing prices might stop dropping; they are unlikely to enter a new bull market. Instead, they will probably track GDP growth, just like they always did. Nor can you expect to see wages rise substantially. Why? Because there are 15 million people who don't have jobs. It will be a long time practically forever at the current rate before they are absorbed into the labour force again. Until this huge inventory of willing and able labour is put to use, don't expect wages to go up.

In other words, when things return to normal they will be what they are now. The bubble was an illusion. The current, dismal situation is real.

And more thoughts

The New York Times continues, pointing out that if the feds had let Mr Market do his work in 08/'09 the rich wouldn't be so rich.

The data does provide the latest indication, however, that the recession reduced income inequality in the United States, at least temporarily. The average income of the wealthiest families fell much more sharply than the median, indicating that some of those at the very top of the ladder slipped down at least a few rungs.

Isn't that what we've been saying? First, the feds made the rich richer by creating a phoney, credit-fuelled economy, where the amount of credit grew 50 times over the last 50 years. Then, when the credit bubble blew up, the feds stepped in to prevent the rich from losing money. And now the feds moan about the inequality' in our society and how they have to do something about it. Haven't they done enough already?

And now, we know you've been wondering. How's our 'Trade of the Decade' going? Remember, we're long Japanese small cap stocks. We're short Japanese government bonds. How are we doing?

Well, so far, not very well. Awful, in fact. Japanese stocks have gone down, recently hitting a new low for this cycle. Japanese bonds, on the other hand, have done well. Colleague David Stevenson, in London, has the story. Read it here.

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