Reply #23: the service economy

[rapier]

The biggest structural changes in the economy is the long term trend to the so called service economy. This long term trend reached the blow out stage by the mid nineties and has continued to accelerate. The deindustrialization of America, a trend beginning in the 50's, has reached it's end as production accounts for only 15% of the economy and in aggregate that is showing no profit. (For instance all GM and GE's profits come from lending money. I don't have GM's number but US auto makers are currently losing $180 per vehicle according to a recent calculaion)

I'll spice up this pat answer by proposing that the service economy is at root a financial phenomenon.

What do I mean by that? I mean that the success, or apparant success, of the service based economy as opposed to a production based economy is contingent upon the wonders of mondern accounting, easy credit and profligate monetary policies.

Few understand that corporate profits have been sinking relentlessly for years and are now at the lowest point since WWII. Most of those 'profits' are financial in nature. In other words not real cash flow but rather money that is made by accounting practices. Against these low profits corporations, like government and households, have ever growing debt loads. In other words there is ever less real cash flow to pay off the ever growing debt. In 1929 corporations had 1 dolar in cash for every dollar in debt. Today that number is $1 dollar in cash for ever $11 in debt.

Oopa, I've spun off...

As most know it is not easy making money making things. Long ago the elites learned it was so much easier making money on paper. Thus the entire economic system has been structured to inflate paper assets. If your good with finance your rewarded hugely. If you have a skill for making things your a loser, a chump, a has been. Thus billions flowed into the dot coms which never stood a chance of making a single dollar and their promoters took a nice portion of it. In the meantime any company making things was falling all over itself moving to China.

All this was made possible by a gross rejection of the primary rule of capitalism. Sound long term investment in real things lost favor as the rush into paper of every sort was made so much more 'profitable' by modern accounting.

In so many ways Enron was emblimatic of the age. It never was a very profitable enterpise and the bulk of its bussiness was services. BY 96 its profits were non existent. Yet it was a shining star of the new economy. Just recently the bankrupstsy was finalized. Debt holders are getting 14 cents on the dollar. This number is a monumental disaster. Typically the number is over 50 cents on the dollar in large corporate bankruptsies.

Enron was a 'service' bussiness don't you know. Masterful in the arts of accounting, lending practices and self promotion. A select few made billions in total from Enron. Except for poor Fastrow it will forever be a gigantic success. That it is gone now is no matter.
No matter to them. In total we are all poorer for Enron's waste of capital. Enron, like much of our 'investments' are simply malinvestment. As a nation huge swaths of our investments are have been speculations and are doomed to go down the rat hole. Much of that will be in the service economy.