Creditors are forcing borrowers to cut back. Borrowers won't like it...
BUSINESS PROFITS have been near record highs. This is not a good reason to buy stocks, warns Bill Bonner in his Daily Reckoning.
Profits are famously "mean reverting." That is, they go back to normal pretty fast. Which should mean lower profits in the future.
When profits are high it is usually because labor costs are relatively low. That is the case now. But that's not good news. In the US, labor's share of national income is the lowest it has been for almost 100 years. People who own and run corporations enjoy higher earnings. The rich get richer.
But the working stiff doesn't share the joy. He feels he has been cheated. He just doesn't know who cheated him. With 25 million people looking for decent jobs, he has no pricing power. He can't threaten to walk off the job. There are too many people ready to take his place.
So what happens to him? Does he take his losses philosophically? Does he cut back his standard of living…spending less time driving his big SUV and more time reading the classics?
Or does he become bitter…and feel like he has a score to settle?
We have an uncomfortable feeling this morning. It comes from reading before we go to bed. Next to our bed is The Forgotten Soldier, a personal history of war on the Eastern Front in WWII. The author – a private soldier in the Grossdeutschland division – knew nothing of the strategies, logistics, or politics involved. He merely tells us what he saw…what he did…and what he lived through.
What disturbs us more than the events – which were unbelievably shocking and brutal – is the caste of characters. They sound like normal people. But what sensible man would invade Russia – without winter clothing – and let himself get bogged down in a four-year war of hellish slaughter in nightmarish weather? And yet, millions of apparently sensible people did.
The author of The Forgotten Soldier, Guy Sajer, seems like a decent sort. He joined the Wehrmacht willingly, happily and proudly. And he wasn't even German. He was French. He barely spoke German.
Which just proves our point. People are neither good nor bad, but subject to influence.
In England, CEOs got huge pay increases last year. Their compensation rose 32%, thanks largely to such high profit margins.
We haven't seen comparable figures for US CEOs but they are probably not too different. Bankers, for example, are partying again, just like it was 2005.
In Britain, as in America, the middle and lower classes got no raises last year. Or the year before. Or the year before. In fact, their real incomes are going down as the cost of living goes up and their wages stagnate.
Who will they blame for that? Will they carefully analyze the situation…and see how their central bankers and politicians misled and betrayed them? Or will they point their fingers at softer, easier targets.
People are always the authors of their own success. Their failures are always written by someone else.
What kind of influences will be felt by the American people…when they realize that they are no longer on top of the world…when they have lost their houses…and their jobs? And the Chinese try to force an austerity program on them!
Yes, borrowers may want to spend, but creditors demand austerity. In Europe, the Germans are trying to force the Greeks to cut expenses. And now, America's major creditor – China – is demanding that the US put its finances in order too.
There are bound to be some feelings of resentment.
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