Saturday, June 11, 2011

The center cannot hold...

Things do fall apart. And it would appear there are worrisome signs for the fabled American middle class.

But the reality may be even more chilling: Perhaps U.S. business is learning to get by just fine, thank you, without middle-class U.S. consumers. And while that may be good news for chief executives and shareholders, it could be the beginning of a new and socially wrenching political logic that leaves the great American middle behind.Wall Street, which is paid for smarts, not sentiment, has this figured out. In a newspaper interview this month, Robert C. Doll, chief equity strategist at BlackRock, the largest money manager in the world, pointed out that the fortunes of U.S. companies and the fortunes of the country as a whole were diverging: “The U.S. stock market and the U.S. economy are increasingly different animals.”Mr. Doll’s explanation for the shift was the increasing importance of international markets rather than the domestic one — of the rising middle class in emerging markets, rather than the stagnating one back home. He said that over the next five years, 70 percent of the incremental earnings of S.&P. 500 companies would come from outside the United States.Among the most high-ranking executives, capitalizing on that shift has become standard operating practice. Speaking this week in Washington at an Ernst & Young conference on emerging markets (disclosure note: I moderated some sessions), Steve Taylor, a senior executive at the energy and water company Nalco, explained, “In most cases, it is dismantling something you have in mature markets to build in emerging markets. So you have to take that step. It is very painful, but you have to take that step.”The move to consumers from emerging markets is just part of the story. Within the United States, the advertising agencies on Madison Avenue are discovering that the age of the American mass consumer may be drawing to an end. Instead, a new white paper by Ad Age, the industry’s trade journal, argues that growing income inequality means the only buyers who count are those at the top.“Simply put, as the discrepancy between the rich and poor has become more and more stark, a small plutocracy of wealthy elites drives a larger and larger share of total consumer spending,” the paper concludes, citing research that shows the top 10 percent of U.S. households account for nearly 50 percent of all consumer spending. “It appears that mass affluence may be a thing of the past — and that luxury marketers should reconsider how their products appeal to elite consumers.” [More]

Unlike some observers, I think it is possible for the US to continue to divert economic returns to a few for some time.  Of course, I think this is a really, really bad idea, but the forces I see assembled in Congress and boardrooms are formidable.

The tipping point might come when and if we move beyond a consumer economy and technology wrings the last few suckers' games out of the financial sector (when all the player are equally fast and savvy and governments have little to throw into the pot).

Currently the finance sector contributes about 8% of our GDP. I have a hard time seeing how they provide that much value, and believe the essential smoke-and-mirrors aspect of the industry will not endure forever. With fewer newbies to fleece (since the folks with growing incomes won't be in the US and will be "protected" by restrictive governments), and tapped out public sectors, profits will have to be made from commerce with entities like themselves: large financial firms. I think those will tend to be low margin stalemated outcomes.

Meanwhile, the vastly depleted ranks of the middle class will not be able to provide the steady tide to support the economic froth of the ephemeral finance industry. It may take some time, but making money by sleight of hand will not prove, I think, a permanent part of our economy.

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