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(18 May 2011) Traffic in Indianapolis consists of small bursts twice a day.  Residents wish to believe they have traffic problems. But cars and trucks move swiftly on 6-lane highways around this city of 800,000 people.  Traffic runs more freely than a race car on the tracks of the Indy 500.  You could think that the local economies would be as fluid, but high speed highways can be deceptive.  Things are not looking as bright as before for the middle class in Middle America.  The writing on the wall tells us that  it could get a lot worse before it could get any better.

Suburban man is feeling severely pinched nowadays.  Manufacturing jobs have marginally but steadily slipped out of the region for quite some time.  New jobs look elusive and part-timers are a growing lot. The economic recovery is looking brighter for Wall St than Main Street.  House prices have tumbled and remain sickly attached to the bottom.   The US dollar is following the same path.  A lower dollar might throw a saving line to exporters, but suburban man is finding imports and foreign travels a good deal dearer.   It turns out as well that 2011 is the year of belt tightening in state and municipal budgets:  Transport and education services are down or else cost more.  Petrol prices at the pump hurt all gas guzzlers and cereal boxes in supermarkets have downsized.   In a nutshell, salaries remain capped while running expenses are ballooning.    Middle class is asking when will their outlook turn around?    Perhaps, not for a long while.

Official inflation has generally remained subdued in the USA, helped by a neat trick dreamed up by bureaucrats:  that of excluding food and energy from the official indices.  This adjusted rate worked wonders when the Fed was preoccupied to constrain wage inflation, in the later part of the 20th Century.   Inflation in manufacturing goods and services used to transmit into wage inflation. This self-feeding mechanism was dreaded by central bankers.   The rise of China as the factory of the world broke down that relationship.  For the ten years before the financial crisis, middle class enjoyed what looked like a free ride:  the recurring benefits of lower prices on manufactured goods from China.  And it played wonderfully into the business model of Wal-Mart.  But the relentless growth of China and other BRIC nations is changing once more the economic picture for the West. 

China’s own middle class is rising and their wealth is now reaching a point where the demand for metal and food commodities and energy is creating rarity situations. Jeremy Grantham, from GMO, a well renowned investment outfit, published a bell ringing report (  ‘Time to wake up, days of abundant resources and falling prices are over, forever’.    In a nutshell, commodity price curves have shifted upwards.  It is not just a question of prices being pushed up in a cycle before coming down, but of a permanent shift in the price curve, upwards.  This could just indicate a turning point:  After 10 years of deflationary prices exported by China, we might just be in for 10 years of soft inflationary prices in food and energy.  Exactly those items kept outside the official inflation rate!  Suburban man should be worried.  If interest rates eventually move up, as they should, there will be one more hole in the belt tightening.

Can Washington reverse the economic predicament for the middle class?  Not immediately if key interest groups keep charging their political masters with missions to protect their specific interests. This could escalate into a war of lobbying and protecting.  From what I heard on radio and television shows, smart bi-partisan policies working for the long term good of the country are likely to remain the exception in the near term.  Observers are troubled:  What policies will allow the economy to grow beyond the point needed to repair balance sheet damage and kick up employment?  Wall St is showing an amazing resilience as the elite companies have been quick to adapt to new conditions.  But Wall St, keen to arbitrage the low costs of Asia, will not come to the rescue of suburban man.

Washington politics, and in many other Western countries, will remain a risky business:  How to redesign lifestyles in the face of rising anger amidst the ranks of middle class.  Bad omen.

André Du Sault.

Posted in Country visits, World economy.

Tagged with , , , , , .

3 Responses

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  1. Javaid Ahmed says

    Interesting reading and probably fair inferences drawn.
    What about my country? The US is still supporting unconditionally the institutions who have played havoc within the country and the region. When will this double game end from both sides?

    • Lakesha says

      With the bases loaded you struck us out with that asnewr!

      • Chne says

        I have to admit, because siinifgcantly when i enjoyed reading through whatever you needed to declare, I could not assist nevertheless get bored after a few years. Its that you stood a excellent comprehension around the material, however, you forgot to feature the future prospect. Perhaps you should think of this specific coming from far more than a single perspective. Or maybe you should not generalise much. Its far better if you believe in what other folks may need to point out rather than just at risk of a gut a reaction to this issue. Think regarding adjusting your own way of thinking and also offering individuals that may well see this the advantages of the particular hesitation.

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