Posted by: CS | June 28, 2011

US Economy: Expecting the Unexpected

Not the 72 Virgins we were expecting. Source

Last Thursday, the Wall Street Journal reported “an unexpected increase in first-time filings for unemployment compensation.”

It was not stated why this was unexpected, but according to a CNN poll conducted earlier this month, 48 per cent of Americans expect another Great Depression within a year. And it is likely that, of the other 52%, most fail to see the immediate future as absolutely rosy.

In assessing the outlook for the US economy, should one not, then, be expecting the unexpected?

This year China’s economy overtook America’s.

China’s economy is growing at around 10% per year, America’s real economy is stagnant or shrinking.

Corporate profits plus workers’ wages are inversely related. Capital and technology thus flow from where wages are high to where wages are low.

Average wages are about $4000 per year in China, about $40,000 in America.

America and other developed nations will thus continue bleeding jobs, technology and capital to the developing world until wages equalize. So the big question is how long will that take? How long will Americans have to expect the unexpected, in terms of declining wages and job opportunities?

If China’s economy is growing by 10% a year, real wages can grow at a similar pace, which means that they might double every seven years. At that rate it would take 21 years for wages in China to reach 80% of current American wages.

But if, while nominal wages in America are stagnant, real inflation in America is actually 10% annually, then American wages will decline by half in 7 years.

Shadow Government Statistics estimates real US inflation has been in the vicinity of 10% since 2008, and that the current trend as upward.

It is possible, therefore, that American and Chinese wages will be near convergence within ten years, from which we conclude that Americans had better expect the unexpected until about 2020. During the interim, they can expect continued near depression unemployment rates — which will keep the lid on the demand for even nominal wage increases — and a cut of something like 50% in real wages.

See also: USA Boom or Bust: The Next Decade

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