More On Normalization

It seems as though we get interesting and unusual news about the world economy each and every day. What is going on here?

One theory that is worth watching is that we are undergoing a worldwide normalization of price, cost, and value. Historically, the value, price, and cost for the same or similar things has been completely different depending on where in the world you were. For example, a quadruple by-pass in Mumbai costs about $3000. The same procedure in New York City is more than $100,000. The two have identical mortality and success rates. Per capita income in India is a bit more than $5000, in the United States a bit more than $53,000. Are people in the United States more productive than in India? Yes, but not by a 10x factor. Even for the same jobs with similar results the labor cost in the United States is about 5x that of India.

The idea behind this normalization theory is that  a re-balancing is occuring. If this is true, it will be very deflationary for the United States. If wages ‘normalize’ to be in line with what most of the world experiences, then we can expect wages in the United States to drop dramatically. This is not necessarily horrible if prices of goods and services drop proportionally, except for two major traps: debt and government regulation.

The  debt trap is due to repayment challenges. If a borrower’s income drops, it becomes more difficult to repay the debt. For example, if wages were to drop from $45,000 a year to $30,000 a year, then the house the borrower paid $150,000 to purchase recently may then be worth only $100,000 based on the prevailing local wage. If the mortgage is $125,000 the borrower is now underwater.

The government regulation trap is created by government action intended to keep prices artificially high sometimes coupled with keeping the wages that go into building these products artificially high. For example, the automobile industry is highly regulated. Those regulations effectively place a floor on car prices. You can buy a new car in India for $2,000 but the least expensive new car in the United States is around $15,000. By placing an artificial floor on automobile prices in the United States via regulation, the government is able to support wages set by collective bargaining. The catch — if this normalization is true — is that fewer and fewer people will be able to afford one of those new cars, leading to fewer sales and less employment for those highly-paid workers. The situation quickly spirals out of control if those regulations remain in place.

An additional part of this theory is that the actions by the government and Federal Reserve to maintain the distorted markets are necessary to fight off this normalization. How long can the United States, Europe, Japan, and related economies continue to fight this off? It’s an open question, but if this normalization is occurring, then we can expect expect them to eventually lose the battle.

Act And React

“Sometimes societies just collectively go insane.” – James Kunstler

Just peruse social media a bit and the pattern is evident – if the cult of anti-Trump is for something the immediate reaction from the cult of Trump is to be against it.  If the cult of Trump is for something the immediate reaction from the cult of anti-Trump is to be against it. One can no longer call these ideological divides because ideology would imply some degree of principle and thought and principles and thinking were banished to the cornfield some time ago. All that society is left with is action and reaction.

“If everyone is thinking alike, then somebody isn’t thinking.” – George S. Patton

Society has become dominated by two groups of people, the cult of Trump and the cult of anti-Trump, who no longer appear to think at all. They simply act and react. Obama reports 200,000 low paying jobs created and the anti-Trump cult called it a great accomplishment and it is evidence of the brilliance of the esteemed leader while the cult of Trump called it an unmitigated disaster. Trump reports 200,000 low paying jobs created and the Trump cult calls it a great accomplishment and it is evidence of the brilliance of the esteemed leader while the cult of anti-Trump calls it an unmitigated disaster.

About where we are at.
I would argue that the majority of people are in neither the Trump nor anti-Trump cults but as Taleb pointed out last week they are subject to the tyranny of the stubborn minority. Objectively evaluating what is going on becomes difficult due to the avalanche of fake news and clickbait and actions and reaction. The cult of anti-Trump will automatically claim that everything happening is an unmitigated disaster predicated on evil and racism and ‘Trump is Hitler’ and ‘Resist!’ and void of anything actually true or factual. The cult of Trump will react to these accusations by proclaiming everything is wonderful and successful and the best.
That neither the cult of Trump nor the cult of anti-Trump draws from anything objective or factual is indeed the evidence that sometimes societies just collectively go insane – their narrative is predicated on how many people they can con into agreeing with them rather than if it is true. Trump has done some things that are vast improvements on what Obama did. Trump has done a few things which are truly terrible ideas but most importantly Trump just as Obama before him has avoided addressing the truly difficult issues which pose a lethal threat to our future.
There is simply no political gain to be made at this time in addressing the truly difficult issues which pose a lethal threat to our future. None, it is in fact the path to electoral defeat. I do not dismiss the possibility that these issues are past the point of which they can be successfully addressed. Debt, QE, ZIRP, NIRP, unwinding the balance sheet, ending the asset purchases and liquidity injections by central banks – I understand these things are fraught with risk and danger if an attempt to bring these to an end is to be made. I also understand the overwhelming majority of Americans do not perceive the issues as critical at this time.
That will change and by the time the overwhelming majority of Americans do perceive the issues as critical it will almost certainly be too late to do anything other than play out a disastrous hand with all of your chips on the table. Hint: if you are in the cult of Trump or the cult of anti-Trump these issues will have the same detrimental effect on your life and at that point you will care less where Ann Coulter speaks or does not speak.
All of this act and react is often if not primarily about made-up problems which talking heads and clickbait will tell you are critically important to your life at this moment and require you to mobilize in order to defeat the other side. Meanwhile the really critical problems to your life – Debt, QE, ZIRP, NIRP, unwinding the balance sheet, ending the asset purchases and liquidity injections by central banks – go all but ignored in the popular conscience.
Yes, sometimes societies just collectively go insane.
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