An important concept to understand ... and particularly so for dancers whose incomes derive exclusively from the 'discretionary income' of customers !
(snip)"A 28% Plunge In Our Standard Of Living
by Daniel Amerman
Crisis & Globalization I
For the average person, what is the immediate danger from the financial crisis? Not just the financial crisis itself, but the government and Federal Reserve's response to the financial crisis, which is essentially to create trillions of dollars out of thin air? For you and me, what's the immediate, tangible danger of this limitless bailout of the most politically powerful special interest group in America, the bankers of Wall Street?
Some people would say a high rate of inflation, others would say a depression - or both. For the average person, let me suggest that there is something we don't usually think about -- a third danger -- something that could drastically transform the day to day lives of 300 million Americans within a space of weeks or months, because the fastest collapse occurs with what wasn't real in the first place.
In this article we're going to discuss why about 10% to 30% of your day to day standard of living hasn't been "real" for a number of years now. Because this standard of living we take for granted is actually based on our running a massive trade deficit, meaning that the United States consumes much more than we produce.
If we were suddenly forced to consume no more than we produce -- which is exactly what the financial crisis risks -- there would be catastrophic consequences for the American consumer, potentially almost immediately. It's not too late for the US as a nation, for us as individuals, but time is running out fast, and if we are to find effective personal and societal solutions, then we need to clearly understand the extraordinarily dangerous combination of a nation in the midst of a severe financial crisis even while it has been running a huge trade deficit for many years.
What the trade deficit represents is the difference between what the United States produces as a nation and what the United States consumes as a nation. For instance, in 2008, the US exported about $1.8 trillion, and imported about $2.5 trillion. The difference between what we sold and what we bought was a shortfall of $700 billion: the trade deficit. Huge number, but what does it really mean?
Let's make it personal. There are 111 million households in the United States. If we take $700 billion and we divide it by 111 million households, we come up with a trade deficit per average American family of about $6,300 a year. The median income per American household is about $50,000 per year. So when we put the deficit into personal terms, it means that about 12% of the standard of living of the average American family consists of goods we consume from other nations, for which we don't produce enough with our own goods to pay.
What does that mean for your family in practical terms? For an answer, go to any Wal-Mart or other big-box retail store, or massive retail mall, and walk the aisles. You will see row after row of goods, ranging from baby clothes, to shoes, to DVD players, and what they all have in common is that they are made in other countries and that we actually can't pay for them.
This may sound theoretical, perhaps even crazy, but there is nothing more real and tangible than the trade deficit when it comes to the day to day standard of living of the average American family. We're not talking about paper wealth, or stocks, bonds or options. Goods and services that are consumed daily are the ultimate reality. A $700 billion annual national trade deficit represents $6,300 worth of goods and services per household, per year, that we can't pay for. Instead of esoteric theory, let me suggest that every time you bring something home from the store, you are relying upon our national trade deficit to pay for part of what's in the bag.
28% Of Discretionary Income
So if other nations stopped letting us have what we can't pay for, we suddenly have many less goods available and they would cost much more. Unfortunately, this doesn't translate to going down from a 50 inch flatscreen TV set to a 44 inch TV in order to cut 12% from cost. Because the key measure here is what's referred to as discretionary income.
Do you get to decide how to spend your entire paycheck every month? Of course not. We have to pay the mortgage or rent, which is about 37% of income for the median household, and we have to pay income taxes and social security and medicare as well. For the average family -- the median family -- housing and taxes take over half their income.
Meaning we've only got about $22,500 left per household, after housing and taxes. And when we compare our $6,300 per household share of the national trade deficit to what's left after housing and taxes, then we just lost about 28% of our income.
Twenty-eight percent of our income. In every household in America. We're no longer talking about new TVs, we're talking about putting gas in the tank, because over half of of our oil is imported. We're not talking about steak dinners but about whether we can go to McDonald's. And instead of the latest fashion, we may be rediscovering a quaint historical artifact known as a sewing machine. Except that we buy those from overseas too, so I'm not sure that will work.
How Did This Happen?
Depending on your perspective - this is either a pretty horrible situation, or a pretty neat trick. How have we been getting away with this? How did we end up in Lotus Land these last few years?
Basically, other nations and -- we'll use China as the biggest example -- produce all sorts of goods for much cheaper than we can produce them ourselves, with the biggest difference being that its laborers work longer hours for less money. With globalization, we dropped our trade barriers, and let these less expensive goods effectively destroy our own domestic industries, that used to produce everything from cameras to clothing tissues to consumer electronics. We have hollowed out our own economy, effectively moving our industrial strength as a nation overseas.
Now from an ivory tower theory perspective, we pay for these goods using our supposedly superior intellectual resources. But in reality, the rest of the world doesn't value America's so-called intellectually superior knowledge nearly as much as we would like them to. The proof? Look at the size of our trade deficit in the real world. Because we don't have the goods to sell to them, they buy US treasury bonds instead, and effectively use the US trade deficit to fund the US budget deficit. Neat trick eh?
An Unstable Relationship
So how real are the chances of our having a precipitous drop in our national standard of living because other nations will no longer provide goods that we can't pay for?
Well, relationships like this are always unstable when we look back over world history, but this is one that exists for a reason. China doesn't buy our treasury bonds because they like us -- they buy them to prop up the value of the dollar, keeping the dollar artificially high, so their goods stay artificially cheap, and their industrial base can grow while ours shrinks. In other words, through currency manipulation, they hollow out our real economy, build their real economy and we get a temporary, artificially high standard of living. If they cut us off too abruptly, the dollar plunges in value, we can no longer afford the goods they sell, and then their own economy also likely goes straight into depression."(snip)



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