The Explosive Growth Of Luxury And Debt—-A Leading Indicator?

By Charles Kolb at Huffington Post

In 1979, as a law clerk to a Federal district court judge in Baltimore, I earned a whopping annual salary of $17,500. For a newly minted law-school graduate, the compensation was well below the starting salary at major law firms, but I was nonetheless able to live reasonably well and, memorably, launched a wine collection that year by purchasing a bottle of 1973 Chateau Petrus.

Petrus – a first growth Pomerol from Bordeaux – is, perhaps, the most famous (and expensive) red wine in the world. My bottle was not from an especially good vintage, but it had sentimental value, since I graduated from college in 1973.

I finally opened my Petrus in 1998, convinced I had kept it too long. Once the wine had time to breathe, it opened up remarkably and was like drinking liquid silk. This was a great wine in an off year. I wondered: what would Petrus be like in a stellar year?

The amusing part of the story? The price tag was still on the bottle: a modest $19.95.

What caught my attention was a recent e-mail advertisement from a prominent New York wine merchant offering a 2000 Petrus. Today’s price was a less modest $4,295.00. Per bottle. Wine guru Robert Parker scored the 2000 Petrus at a perfect 100 and noted that it would be drinking quite well until at least my 115th birthday.

Do the math: a case of 2000 Petrus at that price runs $51,540. With tax and shipping, we’re looking at a price tag around $54,000. That figure is important, because it roughly equals the median income for a family of four, not to mention a price multiple of 215 times what I paid for my 1973 Petrus.

There will always be luxury goods in the world, but query whether what we are seeing now in the U.S. economy is sustainable or, perhaps, the harbinger of a coming collapse. Billionaire’s Row along New York City’s West 57th Street boasts penthouse apartments for $100 million. CEO compensation keeps growing at remarkable multiples of average employee compensation. Income disparity is reportedly the greatest since the 1920s.

Since 1982, health care costs have risen at roughly twice the growth rate of the Consumer Price Index. Recent changes to the nation’s health care delivery system appear to be yielding significant premium increases and sticker shock, as many Americans pay higher premiums for less coverage, plus higher co-pays and deductibles.

Postsecondary education costs during this same period rose at twice the rate of health care. That’s four times the CPI growth rate. If rising health care costs are unsustainable, then what does this fact say about our postsecondary education system that was once considered a ticket to the American middle class? These unchecked cost increases have now brought us $1.3 trillion in student loan debt – itself a drag on consumer spending, economic growth, and family formation.

David Stockman (Ronald Reagan’s Director of the Office of Management & Budget), believes that we’re at the end of a 20+-year global debt binge that has created an “albatross of peak debt and the gale forces of global deflation.” He pegs aggregate global debt at $225 trillion.

Stockman further contends that U.S. Federal Reserve policies like 84 months of zero interest rate policy (finally ending in December 2015) plus three rounds of Quantitative Easing have resulted in (1) mispricing important assets (e.g., the cost of capital is not zero), (2) adding $3.5 trillion to the Fed’s balance sheet, and (3) fueling Wall Street’s casino-like speculation rather than enhancing productive capacity. What he calls “fiat central bank credit” grew globally from $2 trillion in 1994 to today’s $22 trillion.

U.S. government debt is approaching $19 trillion, and, according to a 2015 report from the McKinsey Global Institute, China’s debt is a stunning $28 trillion, up from $7 trillion in 2007. This Chinese debt level represents a debt-to-GDP ratio of 282 percent. Stockman puts total U.S. debt – households, business, finance, and government – at $60 trillion. Combining public and private debt, Japan’s debt-to-GDP ratio exceeds 450 percent.

Many European Union economies are burdened by high debt, unsustainable levels of government spending, and slow growth. Emerging market economies, particularly in South America, are now sputtering, largely due to China’s slowdown, which is putting deflationary pressure on oil, iron ore, copper, and other raw materials.

The critical economic question facing today’s global economy is whether we can generate sustainable economic growth without having to rely on unsustainable levels of individual, corporate, and government debt?

The global economy still hums along singing the same old tune of “buy low, sell high,” but when the underlying fundamentals – namely the price signaling sent by the price of capital – have been damaged, you get the type of asset bubbles and market distortions that have characterized the U.S. economy in recent years.

There are now so many “unsustainable” economic trends around the world that it is natural to ask how this scenario will end. Stockman sees a global depression far worse than what we experienced eight years ago. I hope he is wrong, but I cannot make a convincing rebuttal.

The late Herbert Stein, former Chairman of President Nixon’s Council of Economic Advisers, is justifiably famous for his quip that if something is unsustainable, it will stop. These global, regional, national, and individual debt figures are cause for immediate alarm, but you wouldn’t know it given the insouciance of the 2016 presidential election campaign.

Bad news is never welcome. At the same time, if your apartment is high enough above the canyons of Wall Street, then perhaps you can just sip your overpriced claret and pretend that the next crash won’t happen.

Source: Leading Indicator? – Huffington Post