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Leonard Brecken

Leonard Brecken

Leonard is a former portfolio manager and principal at Brecken Capital LLC, a hedge fund focused on domestic equities. You can reach Leonard on Twitter.

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A Bubble Induced Economy & The Wage Gap

During the 1990s, developing nations including Mexico and many in Asia became very competitive manufacturing bases due to lower wage structures. This, I believe, was the root cause of the use of failed fiscal and monetary policy to “close the gap” with the competitiveness of low-cost wage structures around the world, which has played out for three decades. The result has been three bubbles and a worsening systemic problem of wage and taxation disparity between the U.S. and developing nations.

In addition, an immigration explosion has occurred in part tied to big business’ desire to use foreign-born lower wage earners to fill the so called “wage gap”. Then policy followed to accommodate this desire. U.S. corporations in the 1990s accelerated outsourcing manufacturing to nations such as China and Mexico to temporarily solve the wage dilemma.

The chart below shows that wages, adjusted for inflation, have been steadily declining for decades. This illustrates the systemic problem we have as a nation. Wages have increased and decreased along with the vagaries of economic cycles, but they have steadily made lower highs and lower lows. Instead of responding with traditional methods of lower taxation to compete in the global marketplace, the government has chosen to keep taxation high relative to other countries, even while other countries lowered taxation. That made the wage disparity problem, and U.S. economic competitiveness, worse.

Source: Zerohedge

The labor participation rate turned down almost exactly when wages peaked in the late 1980s. This reinforces the fact that the labor problem was growing at the same time that immigration accelerated. Yes, baby boomers have impacted the rate as they aged and left labor force, but it’s no coincidence that the rate peaked coincidentally with wages. Many left the workforce simply as result of not being able to find a high-wage job, concluding that it is not worth it. Related: There Will Be No OPEC Cut

Source: Zerohedge

With a shortage of high-wage jobs, many are substituting lower-paying jobs, as well as the chart below clearly depicts:

Moreover, to artificially boost GDP, the U.S. turned to debt (public and private) and easy monetary policy (which enabled more debt), but as the chart above shows it failed to address Americas wage competitiveness.  Related: Rig Count Plunges Yet Again, Down Another 30

Source: Federal Reserve


(Click to enlarge)


Even after decades of low interest rates that has encouraged mountains of debt, the end result will likely be a deep recession unless structural changes in taxation and regulation occur. The use of both debt and artificially low interest rates only temporarily fills the gap.

Furthermore, both have consequences eventually when the debt comes due, as growth can no longer support it. Asset bubbles are the other consequence, or in economic terms, “mis-allocation of capital.” Related: Computerized Trading Creating Oil Price Volatility

However, lowering taxes permanently could help alter the long-term structural problems. As U.S. government debt eclipses $19 trillion, it is clear that its use of debt to artificially prop up the U.S. economy has not solved anything.

Source: Gov’t Data

Debt is a temporary stop gap measure for politicians to kick the problem to a new generation. As the chart on wages show, all the new debt has done very little to rescue three decades of falling wages.

We are bumping up against the limits of both fiscal and monetary policy. And financial markets are just now realizing this. Easy money is only enabling the debt binge as the problem has only grown since the last crisis of 2008-2009, as yet another crisis may be beginning.

Lastly, many investors are finding market volatility extreme driving many from participating. If one was to measure investor participation rates like labor you would find a steadily declining one as algorithm driven trading grows. This is not a healthy trend either. Would you go to a casino & lay bets knowing the house has unlimited chips to out bet you? That is exactly what’s going on with stock market, systemic to easy money fed policy. Price swings as a result of algorithm trading in order to "stop" investors are not tied to fundamentals but unlimited capital & headlines. The investment field is changing forever like the economy and it isn’t good for the all but the very large investor.

As always, Leonard publishes a video in which he further discusses this article. 

By Leonard Brecken for Oilprice.com

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Leave a comment
  • John Scior on February 14 2016 said:
    Just as many banks were lending out without regard to fundamental bank lending policies during our most recent financial crisis, many manufacturers are shipping jobs overseas to achieve lower labor costs. It is only going to work on a temporary basis though because as I point out, "who will buy your product ?" questions never enter the equation until we see our economy in the doldrums it is now. Lower wages mean people hang on to their money longer, make do with what they have and scutinize purchases even more. Were going to find ourselves in a situation where manufacturers don't have enough buyers which sets off a deflationay cycle thats hard to escape. Until the emerging economies finally become developed to the point you have an audience that can afford the product you make, you may ultimately inadvertently cause your own self-destruction.

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