1.27.2008

Ramifications of International Market Upheaval.

As I have been having a back-and-forth with fellow blogger Jim over at An Average American Patriot, it dawned on me to start thinking about economic forecasts and possible fallouts of an all out depression/recession. What would happen? How would it work? How we would recover, and why the "stimulus Package" is about as stimulating as watching flies reproduce.

If you look back into history and really examine the cause of the Great Depression, what you might notice, are similarities. Starting with disproportionate wealth, or a widening gap between the wealthy, and the not-so-wealthy, as well as the imbalance of supply, versus demand.

You might also notice that a shot of good fortune and economic growth raises the bar of expectation for investors and shareholders, and consequently the brokers who buy and sell on their behalf.

The excessive speculation in the late 1920's kept the stock market artificially high, but eventually lead to large market crashes. These market crashes, combined with the maldistribution of wealth, caused the American economy to capsize. [...] While the wealthy too purchased consumer goods, a family earning $100,000 could not be expected to eat 40 times more than a family that only earned $2,500 a year, or buy 40 cars, 40 radios, or 40 houses.

Through such a period of imbalance, the U.S. came to rely upon two things in order for the economy to remain on an even keel: credit sales, and luxury spending and investment from the rich.


Does this sound familiar? Now skip on over to John C Bogle's book, "The Battle for the Soul of Capitalism", and what he is saying is that investors and shareholders are only getting a fraction of the reward (regardless of taking all of the risk), because the capitalistic system has changed from "owners capitalism" to "managers capitalism". Brokers, as well as heads of company CEOs are taking larger and larger chunks of the profit, when it is the shareholders who are putting in the real capital. (Don't forget, CEO's shares are paid for by the company as a benefit - they put up no risk or capital yet can gain upwards of 70 million dollars per annual share increase, and/or liquidation of stock options). The only difference now is that instead of charging enormous interest rates (although they are still high after the Fed cut them) many brokers went straight for the throat and simply took a bigger cut.

Investors' craze over the proposition of profits like this drove the market to absurdly high levels. By mid 1929 the total of outstanding brokers' loans was over $7 billion41; in the next three months that number would reach $8.5 billion42. Interest rates for brokers loans were reaching the sky, going as high as 20% in March 192943. The speculative boom in the stock market was based upon confidence. In the same way, the huge market crashes of 1929 were based on fear.


This is a problem for two reasons. One, it narrows the distribution of wealth into just a few concentrated places instead of spreading it out among shareholders and investments. Two, there is a sense of artificial inflation of stock prices, thus elevating the investor's expectations of return - and furthermore, of return in short order. The new stock market game has become a smash-and-grab buffet of fast trading. This weakens the market, artificially strengthens confidence, and does little to promote real capital investment for actual company growth and productivity.

Which leads me to outsourcing. Yes that old standby evil as anything outsourcing. If companies are unable to sell as many products as they need to sell at the right price or they can't price the items high enough to cover their overhead, then they either must charge the customer more, get more backers willing to take a risk, downsize, close up shop, or ship their company overseas for every department that can actually be shipped elsewhere. As business practices go, sometimes this is what must be done. Of course, the country they leave loses jobs, thus wealth, thus their target market will have a harder time purchasing the goods from the very same company to keep it afloat...

Right now, it seems alright. Right now, people still have jobs. The inevitable backlash however is that companies can only offer so many jobs, and only so many people can fill upper management jobs. We can only have so many professional jobs too, only so many doctors, lawyers, and accountants etc... The rest will be relegated to service industry jobs (brick and mortar retail jobs, waitressing, janitorial, maintenance etc). As everyone knows, these jobs often don't pay enough to cover the basic cost of living.

What then?

I've come to a cross roads of sorts, unable to decide on the most likely scenario. After reading up on outsourcing trends, I've come to the realization that one scenario - which I will delve into later - is already coming to pass in more than one way. Many companies are finding out that outsourcing, particularly in customer service areas, isn't paying off. Companies such as New Balance pays ten to twelve times more in overhead costs, but they say that the cost is more than made up for in the hassle and delays that outsourcing can cause a company. Other companies have outsourced to places like India, only to find that India turns and outsources part of that contract to another country (typically Mexico), and even sometimes back to the US.

What does this have to do with a recession or potential Depression?

Everything. The idea of global networking and contracting wasn't around for the first Depression. The only international lending going on was between governments, not commerce in the way we understand it today (leaving room, of course, to consider import/export trades and possible deficits accrued as the precursor for standard outsourcing practices today). The Great Depression still affected the rest of the world . When our stock market crashed in 1929, it was felt all over the globe, regardless of our isolationist practices. The repercussions of a Depression today would be dramatically worse.

Of course, I have come up with a few possible outcomes to a Depression. With the help of passionate discussions both on and off Blogger, I am delving into the world of economic models, solutions, or simple "endgame" plans.

Want to know more? Read On



Related Links:
The Second Great Depression
Longest Bull Run in 80 Years
Mediocrity Postured As Success is a Loss of Failure
Fight the Corporatocracy!
A Word or Three About Economy

resource links:

http://searchdatacenter.techtarget.com/tip/0,289483,sid80_gci1226242,00.html
http://www.mpo-mag.com/articles/2003/10/device-rd-outsourcing-trends
http://www.msnbc.msn.com/id/12760698/
http://www.outsourcing.com/content.asp?page=01b/articles/intelligence/oi_top_ten_survey.html
http://www.ezgoal.com/outsourcing/
http://www.outsourcingprofessional.org/content/23/152/1197/
http://economictimes.indiatimes.com/Opinion/Columnists/Swaminathan_S_Anklesaria_Aiyar/Mystery_of_Indias_economic_growth_unravelled/articleshow/2444003.cms
http://seattlepi.nwsource.com/business/164018_outsource10.asp
http://finance.indiainfo.com/news/2005/02/04/0402outsourcing.html
http://enterpriseresilienceblog.typepad.com/enterprise_resilience_man/2007/09/india-outsourci.html
http://www.strassmann.com/pubs/gmu/outsourcing-v61.pdf
http://www.globalchange.com/outsourcing.htm
http://www.itmanagersjournal.com/feature/707
http://www.law.harvard.edu/programs/olin_center/corporate_governance/MediaMentions/4-19-06_ZMagazine.pdf
http://www.news.com/Will-India-price-itself-out-of-offshore-market/2100-1022_3-5180589.html
http://www.corpwatch.org/article.php?id=11106
http://www.gusmorino.com/pag3/greatdepression/

3 comments:

an average patriot said...

Anok what happened? I commented here this morning. In fact I saw someone elses here too. What happened?
Anyway you know I agree and like everything else Bush has interfered with and screwed up this will dwarf anything else the world has seen. The thought of the chief worm speaking tonight turns my stomach. Hell I'd rather watch flies mate. Ha!

Anok said...

I have no idea what happened. I heard that Blogger did some maintenance around 4 today...and some reported that information was lost from their blogs.

Yeah, the "State of the Union Address" it's more like the "State of the Union's a Mess....."

Ooh, I think I'll use that for my second to next post title....

Anonymous said...

Interesting. Thanks for the article.

You can also find outsourcing services at ICanFreelance.com.