This is no mere recession we are entering; rather, it is a darkening prelude to hard times whose eventual depths may lie beyond imagining. Since August, the U.S. has thrown more than a trillion dollars of rescue money at the banking system in a desperate attempt to restore confidence. This effort, while unprecedented in scope, if not to say in recklessness, has failed miserably. Lenders and borrowers alike have completely lost their appetite for credit, with the result that yield spreads between government and corporate paper have ballooned to twice their pre-bailout size. Lenders have turned niggardly, consumers have begun to save as though there actually were going to be a tomorrow, and debt deflation is about to wring from the economy the final gasp of speculation-induced commodity inflation.

Although the U.S. and global economies are headed into a perilous void, it is nonetheless possible to see the broad shape of things to come. For one, Americans can put aside any notions about emerging from the downturn as a financial powerhouse. There won’t be much need for financial titans during the next boom, since the very idea of sophisticated financial products will be dead for at least a generation.  A back-to-basics simplicity will prevail in the banking business, and lenders will find ways to profit by doing things the old-fashioned way – i.e., by making loans to purveyors of goods and services that consumers actually want and use.  Shunning reverse floaters, eurodollar swaps, synthetic put options and other arcane types of financial derivatives, we will be forced to become, once again, formidable producers of widgets and better mousetraps.

Only Three Possibilities

Of course, this implies that U.S. workers will have to become competitive with the most efficient widget producers around the world. Only three things can bring this about: 1) a big pay cut for American workers; 2) massive capital investment, presumably from mostly foreign  sources; and, 3) innovation. The most immediate of the changes we face is lower wages. Much lower.  After all, how much of a pay cut would it take to make a General Motors factory competitive with a car plant in India that can churn out thousands of $2,500 automobiles per week?  In theory, we could build an auto plant so efficient that it could be operated by fifty employees. And they could buy parts and materials from U.S. factories that have been similarly transformed. But that would leave millions of workers unemployed. And the money to build those plants would have to come from somewhere – either from savings, which are currently non-existent; or from foreign lenders. In either case, we would have to adjust to a much lower standard of living as we invested out of our own savings, or paid foreign lenders the going rate for the use of theirs.

If there is a bright spot, it will lie in innovation. This has always been America’s great strength, and, unlike the banking system, it is not likely to fail us, even in hard times (or perhaps especially in hard times.)  Yankee know-how is our best hope for avoiding penury, and the avenues innovation could take are boundless. We could conceivably solve the energy conundrum with a technology that would make petroleum-based power completely obsolete long before fossil fuels have been exhausted. Or, we could make giant strides in health care and medicine that would lead the world.

But even under the best of circumstances, such changes will take at least a decade to become economically significant on a global scale. In the meantime, there is a long valley to cross, and the journey is bound to test our mettle to its very limits.

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Seminar in 17 Days

There’s good news if you’ve wanted to take the Hidden Pivot course but have been unable to attend on weekend mornings, when the class has typically been held.  In mid-April, I’ll be conducting the six-hour class over two consecutive evenings – Wednesday and Thursday, April 16-17, from 6 p.m. to 9 p.m. MDT.  Click here, and then on the “Upcoming” tab to register; or here if you would like more information as well as a detailed description of the Hidden Pivot Method and a free Hidden Pivot calculator.