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weekend commentary - the collapse of America's 'service economy'
(snip)"Recent high profile bankruptcies of mainstay American retailers, such as The Sharper Image and Linens ‘n Things, as well as the proposed mergers between Blockbuster/Circuit City and Delta/Northwest, and the admissions from the nation’s leading student lenders that their business models are no longer viable, mark the beginning of a long overdue overhaul of the American economy. In short, the economy will be getting smaller and more expensive.
The success of all of these seemingly disparate sectors depends, to a large extent, on the ability of Americans to continue to borrow cheaply and easily. Now that home equity extractions and zero interest credit card rollovers can no longer be used to fund electronics purchases, vacations or tuition, those corresponding sectors are suffering. The foundation of our bloated service sector economy, supported by overseas savings and production, is now giving way.
This diminished capacity will result in a wave of bankruptcies and consolidations to restore profitability in what will become a much smaller service sector. The days of cheap consumer goods at Wal-Mart and cheap airfares at Jet Blue are coming to an end. It is all part of the process of an unprecedented decline in America’s standard of living, which is the inevitable result of years of living beyond our means.
For retailers, the business model of selling cheap foreign imported goods to over- leveraged Americans was doomed from the start. It is fitting that just prior to the collapse, Wall Street private equity firms decided to jump aboard a sinking ship (Linens ‘n Things was purchased by the Apollo Group for $1.3 billion back in 2006). No doubt the added debt subsequently piled on to the firm by the profit-squeezing buy out boys hastened the company’s demise. As revenues decline and debt servicing costs rise for many retailers (who have been similarly hog-tied by private equity firms), look for additional blow-ups down the road.
As the dollar continues its historic decline, imported goods will become too costly for many Americans. In addition, more of those products still made (or more likely grown) here will be exported to wealthier foreign consumers whose appreciated currencies increase their purchasing power. As a result, fewer products will be available to fill our shelves and those that remain will carry much higher price tags.
In addition, as defaults on credit and store charge cards continue to increase, the market for such debt will soon disappear. As a result, the credit crunch will spread from subprime mortgages to all forms of consumer credit. Therefore, not only will Americans be staring at higher prices, but they will have to pay in cash.
Similarly, the coming airline consolidation will usher in a harsher era for the American airline industry. In truth, given the rising costs of building, flying and servicing aircraft, U.S. carriers currently supply more planes and passenger miles than American consumers can afford to utilize. While this may seem illogical in a time when domestic flights are usually fully booked, it is important to realize that these crowded planes do not translate into profit at current ticket prices. While mergers may help the airlines hold down costs for a bit, the only lasting pathway to profit is fewer flights and significantly higher ticket prices. Of course, this will mean that Americans of modest means will travel less by air. Unfortunately, that fact is simply an inevitable consequence of a sagging currency and diminishing national wealth."(snip)
(snip)"The same mathematics will come into play for our ridiculously expensive higher education system, which can not exist without a well lubricated loan infrastructure. Limit the ability of students to take on heavy loans, and college education becomes untouchable for anyone but the wealthiest Americans. If loans dry up, universities will be forced to slash their bureaucracies and substantially reduce tuitions. Ironically the silver lining here is that with low tuitions students will no longer need the loans that kept tuitions so high in the first place."(snip)
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Re: weekend commentary - the collapse of America's 'service economy'
I've said for a long time that the service economy is unsustainable because you have to actually make things in order to bring in real value and jobs including supporting those service jobs. I got laughed at by a number of members here.
I know I am right but it is a pyrrhic victory considering I am in the industrial manufacturing business.
FBR
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Re: weekend commentary - the collapse of America's 'service economy'
Who will be the wealthy foreign consumers? Won't the fall of the US economy cause global depression?
Who will be on the winning side?
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Re: weekend commentary - the collapse of America's 'service economy'
all foreign consumers automatically become 'wealthier' from a US viewpoint when their home currency gains value against the US dollar. But the wealthy foreign consumers being referred to in the article is most likely in reference to potential buyers of private yachts / private planes / American made durable and luxury goods of all sorts. Same point applies at a corporate level to American made heavy machinery / electrical system components / machine tools / etc. Same point applies to gov'ts i.e. American made weapons systems.
Because of the above, Germany and Japan for example face an even worse prospect of depression than America does.
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I've said for a long time that the service economy is unsustainable because you have to actually make things in order to bring in real value and jobs
well SOMEBODY actually has to make things to add real value. So far the American retail service sector has been 'cashing in' on the Chinese / Vietnamese workers who make things for $1 per hour, but that is about to come to an end as the hourly cost in Yuan versus US dollars is rising inexorably. And without somebody actually making something as a base i.e. actually creating added value, a service sector economy is little different from a parasite whose 'host' has died. The 'fleas' and 'ticks' cannot continue to buy and sell things to each other once the 'dog' (whose blood really fed them) has died !
The ultimate example of this is of course 'public sector' workers i.e. cops, teachers, bureaucrats ... who in the final analysis create nothing and must be paid by extracting 'blood' from other people who DO create value. Functionally speaking, retail clerks and salespeople, workers at banks and insurance companies, restaurant workers, recreation and tourism workers, even exotic dancers, are also paid by extracting 'blood' from other people who DO create value. The days when these workers could be paid via 'borrowed' money rather than value creation money are rapidly coming to an end.
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Re: weekend commentary - the collapse of America's 'service economy'
I do not think a service economy is all to unrealistic. (Long enough the service isn't the creation and handling of red tape.)
Should we bad mouth doctors and dentists because they are part of a service economy?
America's problem as of late is that it manufactured something alright - it manufactured debt. This isn't a service economy - this is a debt economy.
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Re: weekend commentary - the collapse of America's 'service economy'
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Should we bad mouth doctors and dentists because they are part of a service economy?
no, but ultimately the doctor and dentist must be paid via wealth that was actually created somewhere. In any functional economy, there will always be a certain percentage of service based spending - be it 'public sector' employees, be it professional services providers (i.e. doctors, lawyers, engineers), be it retail or whatever.
But there is a stability limit on the maximum percentage of 'service sector' versus 'value added' sector i.e. industries that actually CREATE added value / wealth. Ultimately an economy that consists only of people trading services with each other, thus whose paychecks are all derived from either taxing or spending the paychecks of others, will collapse due to actual consumption needs. When consumption enters the picture, money must be 'withdrawn from circulation' among service sector workers and paid to those that pump Middle Eastern oil or Chinese vegetables. Expecting this hypothetical 100% service sector only economy to continue functioning on its own is in some ways analogous to expecting a 'perpetual motion machine' to supposedly keep running forever without an additional 'input'. Unfortunately, there is always consumption ... which in the case of the 'perpetual motion machine' comes in the form of friction acting on the 'flywheel'.
Prior to say 1980, America still had enough domestic industries capable of producing sufficient added value to cover the cost of consumption, and then some. As America's economy went global in the 1990's the theory was that the US could get rid of the domestic added value sector (i.e. manufacturing, mining, etc.) as long as a foreign based added value sector was inexorably linked to the US service sector to supply the necessary added value to keep the American economic 'flywheel' turning. However, through the 2000's the foreign countries that have been 'exploited' in order to provide high levels of added value into the US economy in return for low REAL payment (via $1 per hour labor rates, via nonexistant worker safety costs, via nonexistant worker benefits costs, via nonexistant environmental compliance costs etc.) slowly became fed up. Thus the payment gap for foreign value added goods was then bridged via the assumption of greater and greater debt on the American end - as were payments from one American service sector worker to another American service sector worker.
But we are now at the stage where additional (personal) debt can no longer be used to funnel additional money into a service sector dominant economy in order (apparently) to pay for consumption (i.e. food, energy at minimum). In order to be 'stable', real added value must be generated at a level that is at least in equal measure to consumption. Without the addition of more real value, like the 'perpetual motion machine' analogy, the 'flywheel' of the US economy will turn slower and slower. But America doesn't have the ability to produce a sufficient amount of value added goods any longer to re-establish a 'stable' balance. When combined with a cutoff in the ability of American individuals to obtain more credit / debt to fund their consumption, the American economic 'flywheel' started slowing down.
To provide a 'stopgap solution', the US Fed has now substituted it's own credit for a lack of creditworthiness of individual Americans. But as you pointed out, when the Fed prints up new money, it is not creating wealth it is still creating debt ! That newly created debt is now serving as the 'input' to prevent America's service sector heavy economy from coming to a halt due to it's own 'friction' (i.e. the need for service sector workers to also consume things a la food and energy if nothing else). But this could not continue forever (or at least not since Chapter 7 banking laws were changed) for individuals, since the day eventually arrives when additional credit is cut off by lenders and repayment must be made but can't be afforded. The same thing will wind up being true for the US Fed / Gov't, as bond repayments and currency depreciation will also make repayment unaffordable to the US taxpayer / consumer. You can refer to Weimar Germany or present day Zimbabwe as to what usually happens when the rest of the world figures out that a country's heavy debts can never be repaid !
that's the explanation I received in a Manhattan VIP room anyhow !
~
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Re: weekend commentary - the collapse of America's 'service economy'
All outdated and frankly stupid analysis.
Why should anyone need to 'pay' for a manufactured item, when you can manufacture items at $0?
We are moving towards a state where manufacturing most of the things costs $0, so you really don't need any money and hence employment to live a great lifestyle. Sure there will be bumps on the road, because of the very idiotic reasoning made here that'll make countries to take populistic views for votes and we will take backwards steps.
There are more than 15 Billion things to do in achieving that state of Nirvana. So, there are plenty of jobs for everyone and printing money isn't that bad if it goes to the systematic investment of creating those 15 Billion Jobs
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Re: weekend commentary - the collapse of America's 'service economy'
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Originally Posted by
xanfiles1
All outdated and frankly stupid analysis.
Why should anyone need to 'pay' for a manufactured item, when you can manufacture items at $0?
We are moving towards a state where manufacturing most of the things costs $0, so you really don't need any money and hence employment to live a great lifestyle. Sure there will be bumps on the road, because of the very idiotic reasoning made here that'll make countries to take populistic views for votes and we will take backwards steps.
There are more than 15 Billion things to do in achieving that state of Nirvana. So, there are plenty of jobs for everyone and printing money isn't that bad if it goes to the systematic investment of creating those 15 Billion Jobs
So this would be the "star trek federation" economy?
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Re: weekend commentary - the collapse of America's 'service economy'
Thank you, Melonie. Xan, you'll soon find out just how correct Melonie is.
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Re: weekend commentary - the collapse of America's 'service economy'
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so you really don't need any money and hence employment to live a great lifestyle
I have to admit that this portion of your theory is (temporarily) true ... for social welfare benefit recipients at any rate ... but only if you don't count the money paid out in taxes by other Americans to cover the cost of those benefits !
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Re: weekend commentary - the collapse of America's 'service economy'
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Originally Posted by
Adelina
Thank you, Melonie. Xan, you'll soon find out just how correct Melonie is.
If governments all over the world turn to socialism and protectionism, I wouldn't be surprised.
Robots: Perfect for material things; Produce things cheaply, can mass produce, produces quality items
Humans: Perfect for One on One services: Compassion, Care, Sex & Listening
You'd want material costs to $0, so that you can pay other human beings for services at $300 / hr.
Think about it from a strippers point of view.
If you have to pay 10 times more for all the material items, nobody can pay $300/hr for just getting naked and listening
You should all thank free trade and the outsourcing manufacturing for allowing you to make income level equal to a doctor/lawyer/engineer.
If you wish to go back to old ways, then you'd all be digging the fields for 50c/day.
Of course you'd all be much happier than you are now. Because your only objective is to put food on the table and every time that happens you'd be happy. If Material things came freely to you, you'd all be worrying about actualizing your self-potential (which you know can never happen to anyone) and you'd all be unhappy.
Moral of the story; Never confuse happiness with wealth
Modern industrialized world are in general unhappy and hence feel they are unwealthy.
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Re: weekend commentary - the collapse of America's 'service economy'
Melonie. Correct me if I'm wrong, but you state that people who provide a service of some sort create nothing/no wealth, and are actually, sort of, figuratively speaking, sucking the blood out of the real wealth creators...those who produce a product of some sort. Did I get that wrong? This is what you believe?
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Re: weekend commentary - the collapse of America's 'service economy'
what you describe is an attempt to equate a tangible object of intrinsic value with human labor of debatable value. The human labor value component of the tangible object is transferred to the now more valuable object itself i.e. a pile of steel, copper and plastic being converted into an automobile. However, with human labor performing a service rather than creating a more valuable object, the true value of that service labor is still debatable. In the absence of a tangible object of intrinsic value to trade, the only time that human labor does translate into tangible value is if that human owns and operates an oil well, a farm etc.
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Re: weekend commentary - the collapse of America's 'service economy'
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Originally Posted by
Melonie
what you describe is an attempt to equate a tangible object of intrinsic value with human labor of debatable value.
But Melonie, one cannot occur without the other.
How do you produce a good without the labour? How do you sell it without consumers? Not to mention distributing it...building the roads and ships and railways, and the vehicles to transport it.
By the time that product goes from idea to money in the bank, millions of people will be directly or indirectly involved. They are all intrinsic. They all support each other. We are all equally important in this equation imo.
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Re: weekend commentary - the collapse of America's 'service economy'
^^^ The key point is that building a road / ship / railway / vehicle DOES add tangible and durable value, because it creates something that did not previously exist. However, OPERATING a road / ship / railway / vehicle is a service of debatable value that creates nothing.
Obviously you are correct that some amount of service providers are indispensible to any economy. However, this does not mean that service providers can exist independent of a source of value added wealth generation. As per your example, how can a toll road / shipping company / railroad / limo service trade their 'services' exclusively for receiving another service ? In a broader context, how can a doctor, lawyer, insurance salesman, lawn mower, dog groomer etc. only trade services with each other and still obtain the necessary food / energy etc. they must consume ?
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Re: weekend commentary - the collapse of America's 'service economy'
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Originally Posted by
Melonie
^^^ The key point is that building a road / ship / railway / vehicle DOES add tangible and durable value, because it creates something that did not previously exist. However, OPERATING a road / ship / railway / vehicle is a service of debatable value that creates nothing.
I think the key point is that creating the vehicle doesn't happen without the lady twisting the nut onto the thingamajig on the assembly line. And what good is a vehicle without an operator...or the dude making his coffee at 3am at a roadstop to keep him awake?
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Obviously you are correct that some amount of service providers are indispensible to any economy. However, this does not mean that service providers can exist independent of a source of value added wealth generation. As per your example, how can a toll road / shipping company / railroad / limo service trade their 'services' exclusively for receiving another service ? In a broader context, how can a doctor, lawyer, insurance salesman, lawn mower, dog groomer etc. only trade services with each other and still obtain the necessary food / energy etc. they must consume ?
I'm saying that both are equally indispensible. Dude can create all the widgets he wants...a mountain of widgets, but if nobody wants to buy them, he's got squat. People who have a talent for attracting money to them are just people with a particular talent that is greatly admired by some. They're not some great creators. How much 'creating' would they be doing without the bean-counters, and the dude growing the food to feed him, or the lady pushing the button on the valium producing machine in the factory to make his meds.
We all convert our goods and services to money for ease of trading. That is how we can trade service for service. And all of these services have value. You can't walk down the street without bumping into someone who supports you in some way, whether it's working in hydro plant making the juice to power your alarm clock, or pumping the water to your home for your morning shower, or whatever. You can't function without all the little people supporting you, and all the people who support them. Neither can these great 'creators'.
We all support each other, and all of us are necessary. We are the wealth.
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Re: weekend commentary - the collapse of America's 'service economy'
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Originally Posted by
Melonie
what you describe is an attempt to equate a tangible object of intrinsic value with human labor of debatable value. The human labor value component of the tangible object is transferred to the now more valuable object itself i.e. a pile of steel, copper and plastic being converted into an automobile. However, with human labor performing a service rather than creating a more valuable object, the true value of that service labor is still debatable. In the absence of a tangible object of intrinsic value to trade, the only time that human labor does translate into tangible value is if that human owns and operates an oil well, a farm etc.
This looks like straight out of Karl Marx and we all know how wrong he was about basic economics.
Lets say there is a robot that can build a house, hdtv, latest car, any gadget, all kitchen appliances and any imaginable material items and even basic services like lawn mowing, street cleaning, vaccuming etc.
Create another robot that can create, maintain, service the above mentioned robot.
The nation that has the super-robot is the wealthiest of all that can create anything including mini planets for every citizen.
So, you ask the question. What the fuck has labor has to do anything with Wealth Creation?
Wealth creation has nothing to do with Labor. If that were the case China and India would be the wealthiest nation of all.
Karl Marx was the biggest idiot who filled clueless idiots with this exact labor theory. Many countries subscribed to his idiot theory and look where they are now.
The only way for a nation to prosper is to manufacture everything for $0. If you can do that you basically distribute every product/service for $0 to every citizen requiring no employment but the nation itself operating at full capacity
Any policy that requires labor (and thus higher compensation) for manufacturing is basically saying we'd rather be Soviet Union, Old India and China than the US
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Re: weekend commentary - the collapse of America's 'service economy'
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Originally Posted by
hockeybobby
We are the wealth.
Fantastic. At least somebody gets it.
Human Capital is the Wealth, period. Manufacturing by labor is not wealth, As explained in my previous post
If tomorrow, if it rains HDTVs, AC's, Fridges from the sky on the US. US is instantly much more wealthier.
When you get HDTV's, iPhones for cheap from China, it is exactly this effect for the US. It is almost like it rained of HDTV's and we all became wealthier.
A nation which has completely turned itself into a human capital nation is the wealthiest of all
i.e I think of a Movie ===> It gets instantly downloadable to home screens
I think of a Product ===> Instantly delivered to homes
I think of a drug ===> Instantly delivered to caring units
If you need Gazillion dollars to manufacture it, nobody can afford it or have it and the nation is poorer
When you can outsource everything, you are really wealthy.
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Re: weekend commentary - the collapse of America's 'service economy'
I guess we'll find out what our human capital is worth soon...
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Re: weekend commentary - the collapse of America's 'service economy'
again the main point is being missed in favor of ideology. Yes if the true cost of goods was actually to fall to zero, i.e. if food and energy were somehow given away for free, then a theoretical 100% service economy could hum along toward infinity. But in the real world, buying food and energy commands a stiff price, and every service worker from lawyers to US gov't bureaucrats to dog groomers need to buy food and energy to live. The problem then becomes the source of actual value that the lawyer or US gov't bureaucrat or dog groomer can offer to to the Chinese farmer or Venezuelan oil field worker in exchange for their consumable product. At the moment they are attempting to offer 'worthless' pieces of green paper that the US gov't continues to print up in equal measure to the foreign exchange payments necessary to cover the cost of importing Chinese vegetables and Venezuelan oil. There is no added value created by the services of a lawyer or gov't bureaucrat or dog groomer being provided to each other ... there is only additional debt created by the US Fed in the form of newly printed money.
Your theory does apply in one notable way though ... the ultimate implied value of the US dollar on an international basis is zero ! However, when the rest of the world realizes this, the 'wheels' will come off the entire system [email protected]
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Re: weekend commentary - the collapse of America's 'service economy'
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Originally Posted by
Adelina
I guess we'll find out what our human capital is worth soon...
Strippers sell fantasy and compassion (even imagined) at $300 / hr. This is possible only because manufactured goods are close $0.
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Re: weekend commentary - the collapse of America's 'service economy'
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Originally Posted by
Melonie
again the main point is being missed in favor of ideology. Yes if the true cost of goods was actually to fall to zero, i.e. if food and energy were somehow given away for free, then a theoretical 100% service economy could hum along toward infinity. But in the real world, buying food and energy commands a stiff price, and every service worker from lawyers to US gov't bureaucrats to dog groomers need to buy food and energy to live. The problem then becomes the source of actual value that the lawyer or US gov't bureaucrat or dog groomer can offer to to the Chinese farmer or Venezuelan oil field worker in exchange for their consumable product. At the moment they are attempting to offer 'worthless' pieces of green paper that the US gov't continues to print up in equal measure to the foreign exchange payments necessary to cover the cost of importing Chinese vegetables and Venezuelan oil. There is no added value created by the services of a lawyer or gov't bureaucrat or dog groomer being provided to each other ... there is only additional debt created by the US Fed in the form of newly printed money.
Your theory does apply in one notable way though ... the ultimate implied value of the US dollar on an international basis is zero ! However, when the rest of the world realizes this, the 'wheels' will come off the entire system
[email protected]
You'd have to be pretty clueless like the Venezuelan and Iranian heads to dismiss the strength of the US$.
Manufactured goods in the US have continuously trended towards $0. Of course nothing goes in a straight line. There will always be short term fluctuations.
Just calculate the % of GDP spent on food in US and finished goods over the years.
I can discuss with facts and actual research if you have even basic idea of economics (and not the one dished out by clueless shady web-sites or failed theories by Karl Marx).
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Re: weekend commentary - the collapse of America's 'service economy'
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Originally Posted by
Adelina
I guess we'll find out what our human capital is worth soon...
Yea. It's about the ability to distribute value and reap income from service.
The thing is, that value from human labor is made material and distributable when they create an object. Even a little sliver of value in an object (say a paperclip) when reaching 100's millions can add up to some money.
Now, how far can a food server distribute their value? Perhaps to 40 or 50 people per day?
Of course, if the value was "embedded" in a frozen food product - then that value would yield more income from a larger group of people from a diverse economic spectrum.
As a software developer I know what I offer is a service. Luckily the value of that service can be distributed across multiple groups of people who have a computer...
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Re: weekend commentary - the collapse of America's 'service economy'
no matter how important of a service one provides, when he/she is a part of a 70% (at least) service based economy, the rest 30% have to come from somewhere esle outside of the economy. Meaning dependance of foreign supply of manufactured goods and grown food. If this supply is ever cut off for whatever reason, no amount of service will put food on the table if there is no food to buy!
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Re: weekend commentary - the collapse of America's 'service economy'
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Originally Posted by
Deogol
I do not think a service economy is all to unrealistic. (Long enough the service isn't the creation and handling of red tape.)
Should we bad mouth doctors and dentists because they are part of a service economy?
America's problem as of late is that it manufactured something alright - it manufactured debt. This isn't a service economy - this is a debt economy.
I think you hit the nail on the head!
The biggest worry shouldn't be the fact we are or we are not a service econmy. The real concern is the fact we have financed the majority of our consumerism with credit. Now that credit is harder to come by and more people have bad credit how will we maintain the level of consumerism that has kept our econmy going for the past twenty years or more?
Without that level of consumerism it doesn't matter what happens; everyone in the world will be effected by it. Why? Because we purchase most of the goods produced in the world!