Sunday, October 29, 2006

service economy that is “post industrial”.

Productivity is a simple measure based on total output, divided by the number of workers. Since we have a negative return on capital, the more factories we close to raise capacity utilization, and the more factories we move to China, the fewer workers we will need. Therefore, by definition, productivity goes up. So when our Fed Chairman says “everything is all right because productivity is rising and this is good for the economy and good for the “market”, you should stop and think about who Chairman Greenspan is really talking about. As in every downturn in the past 25 years, when manufacturing jobs go, they don’t come back. We are continuing to move to a modern service economy that is “post industrial”.
The real bubble that remains is the Debt Bubble. What ails corporate America is the need to pay down debt. Moreover, there is no need to invest in new equipment until such time as there has been enough corporate restructuring to get capacity utilization back up to 85%. If new investment is going to be undertaken it is then likely to be undertaken where the labor is hard working and cheap, like China. Even service industries are letting workers go. Productivity is rising, but lay-offs are at recession levels. There are no new jobs. Wages in some industries are dropping, benefits are being slashed, and pensions are not going to be there. We have rising productivity, falling incomes, a negative return on cash, and the destruction of financial capital that will continue until enough factories are taken off line and permanently closed. Both physical and financial capital are in surplus and need to be “destroyed” to bring back a positive return to new investment.

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