The Gathering Economic Tsunami

We think of a tsunami as a great wave thundering ashore causing massive death and destruction. For this article, though, the gathering economic tsunami will cause immense changes in American society, but not the negative ones implied by the word. These changes will start slowly, but they will compound over time. Viewed from the perspective of 50 years hence, American society in the last few decades of the 20th century and the first decade of the 21st century will have seemed a strange and alien place.

To understand the business and social ramifications of this gathering economic tsunami, it is best to start with a simple example and them progress from there. Let’s say you own a widget factory. For simplicity, let us call it the Acme Widget Company. Funny thing about your company— you have absolutely no competition.

How do you run your company in this envious business environment? I would guess rather loosely and inefficiently. Why not! You have no competition. Your salespeople are acting more as order takers than salesmen. I would also venture to speculate that your widget prices are rather extravagant. Your high widget prices are needed to pay for the gross inefficiencies of your business.

Good times do not last forever. A competitor moves in. This competitor is the Zenith Widget Company and makes the exact same product you do.

Do you think for a moment that you will still be able to run your business in the same inefficient manner as before? No way! Competition changes the business landscape. Now you must shed the excess pounds and become a more lean and mean company to survive.

Let’s elevate this example format. There is a country that is considered the dominant economic and military power in the world; its currency is used as the world’s only reserve currency. For argument sake let’s call this country the USA and its currency the dollar. Since the USA’s dollar is the world’s only reserve currency (no competition), the citizens of this country can lead a rather lavish lifestyle of high consumption and very low savings. Savings— they do not have to worry about this. Foreigners will willingly supply the funds necessary to continue the lavish lifestyle of the USAers. They will accomplish this via the massive dollar trade deficits the USA has incurred with the rest of the world. About 15 years ago the USA almost had a reserve currency competitor. Unfortunately, this competitor (Japan) came upon hard times and its currency no longer has reserve currency status.

Today, things are changing for the USA. They now have a viable competitor that rivals its dollar as a reserve currency. This strong competitor is the European Union and its currency is the Euro. No longer will foreigners have to lend their funds to the extravagant USAers. They now have an alternative to dollar based investments. They can place their excess funds in Euro assets (stocks and bonds for example).

Just like the example with the Acme Widget Company, do you think that the USAers can indefinitely continue their high consumption–low savings lifestyle now that they have a reserve currency competitor?

The answer is a definite NO. Change in behavior will come. It will be slow at first, but will compound over time. If the citizens of the USA do not change their behavior and start to save more and consume a little less, foreigners will not lend them the funds at relatively low interest rates. In other words, foreigners will not continuously subsidize the excessive consumption habits of the USA citizens. They can’t–because they can only absorb so many dollars before they demand a higher price for the funds they lend.

The financial markets will put pressure on the USA’s national legislative body to change the tax laws to treat saving and consumption equally, or have a slight bent to favoring savings. Compounded over time, this marginal change in behavior will be immense. Look at a dollar! There are only two things you can rationally do with it. First, you can spend it; secondly, you can save it. As you give incentives for people to save more, they will spend a little less. For business people this means that the current competitive business environment will become even more intensely competitive. Top line growth will not be achieved by simply raising prices.

How to survive in this environment? Increasing your sales and revenues will be contingent on gaining market share in your core markets. The future does not belong to the big and powerful or the small. The future belongs to the swift. The swift are those businessmen and women who have the liquidity or free cash flow to pounce on opportunities ahead of the others.

Slight changes in individuals economic behavior when compounded over time can result in quantum changes on how individuals act and view the future. For example, when our tax system promotes consumption (as opposed to savings), peoples’ perspectives are no further than the tip of their noses. They live in the present. But, when the tax system tilts to favor saving over consumption, peoples’ time horizons move further out. They seriously consider their financial futures (and that of their families) instead of focusing only on the here and now. To put it in a different perspective, when individuals start focusing on the future and their well being, they start to become more conservative both socially and politically.

The classical definition of economics fits the motif of this article. It is the study of human behavior in its historical setting. Life is not linear (straight line). It is cyclic. The pendulum swings back and forth. Small changes in economic behavior are compounded over time. America by the mid 21st century will be a much different place from what has transpired over the last few decades. It will be a more conservative place both socially and economically. The social and economic behavior that has transpired in the last 30 years or so will have been seen as an aberration by 2050. The new trend is already in motion. The future will reward saving and investment.

Sanford Kahn, Business Author/Speaker, has been a professional speaker for over 30 years to both the corporate and national trade and professional association markets. He was the host and producer of the popular Times mirror cable vision series “Ask the Economist”. Mr. Kahn has authored many articles on the business impact of future economic trends. His most recent publication is The Great Economic & Business Myths That Dominate Our Lives. For more information please visit his web page at []

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