In reading Barry Ritholtz’s post Will Retailing Ever Fully Recover ? I was inspired to consider the implications of what it means to see our service economy contract.
Our “service” economy is now exposed for what it was, a highly levered temporary utopia built on wealth extraction and cheap foreign labor. The 70%we enjoyed will soon be a relic of the unsustainable past.
Wealth creation will be what drives consumption over the next cycle, not wealth extraction. Too many Americans were not just living beyond their means, but more importantly beyond their incomes, guided by cheap easy credit and the idea that incomes andwould continue their meteoric ascent. This drove eye popping growth in retail, restaurants, and a host of discretionary income spending zones and we are now getting the early signs that we have simply been over consuming as retailers, one by one, retract their footprints and/or go bankrupt.
This poses two problems. One is that as asset values implode, and wealth destruction ensues, people are underwater in interest burdens. The other is that they then have to combine solutions of restructuring their finances by spending less, using up and liquidating personal inventories, saving more and working more (more hours or for more money or both!). In an economy that is bleeding jobs, efforts focus on defense instead of offense, reducing assets and consumption. The liquidation process of inventories (using that last tube of toothpaste from Costco) and the liquidation process of assets (think of the infomercial to sell your gold by mail) becomes self reinforcing. Think ebay!
On the flip side, there is no better motivator for innovation than the necessity to improve one’s lot in life and the knowledge that the playing field has been thoroughly culled. With the numbers of highly skilled and highly educated underemployed today, do expect some significant breakthroughs over the next 5 years from people’s garages much like Microsoft did in the trough of 1974-75, or as Michaeldid just after the deep consumer recession of 1984. And to think that those were just college kids inspired by a bleak job market then, imagine the levels of skill and inspiration today!