BusinessWeek Opinion: Welcome to the Frozen Economy

I read this interesting opinion piece in BusinessWeek last night; it strikes on many chords we've been both predicting and outlining over the past year+ of time in the blog. I always like to know the background of the writer of opinions so

Shoshana Zuboff is the author of The Support Economy: Why Corporations Are Failing Individuals and the Next Episode of Capitalism. She was the Charles Edward Wilson Professor of Business Administration at Harvard Business School.

Below are some snippets from the opinion (keep in mind in Maine and much of the Northeast they use heating oil rather than natural gas to heat their homes) and as we've pointed out a few times this winter is going to be a period for some in the lower tranches of our society deciding between heating and eating. [Jun 1: AP Heating Oil Shock to Hit New England] It sounds over the top but this is a reality. Below the story I copied some comments from a slideshow that was attached to the online version of the story and this story has 182 comments which for BusinessWeek is a huge amount of interest as this is not that popular of a site. Again, I'm not a liberal nor conservative - just a very concerned person about the direction of this country and the "out of touch" nature of our leaders and those in the >$100K set about how most live in this country where the median wage is $34K. [Do the Bottom 80% of Americans Stand a Chance] This type of story below which touches on a town in Maine doesn't really apply to the $50K+ crowd but again, when your median wage is $34K that means a great many are living on $23K, $27K, $30K, $36K, $40K - certainly not the type who is reading this site or investing in mutual funds. But that's how the great many do live in this country and that appears lost in the "theories" of NYC traders when they shout from rooftops about the malls filling back up as "commodities deflate" and the "economy rebounds in 6 months". That's just not the reality for the bottom 2/3rds of Americans. We've just exited an epic historic credit bubble in which many were using borrowing to get by - now as credit is eradicated for many of those people - there is no "coming back" anytime soon. This is the great disconnect on the Street in my mind. We are a consumer culture, where 70%+ lives paycheck to paycheck, regardless of income strata. That works in a low inflation, borrowing rich era. That's not what we are in now nor do I think it's one we return to anytime soon.

This competitive world is changing faster than we are reacting. It also angers someone when you see Congress fighting over renewable tax credits which could actually help people in this country when many struggle to pay expensive energy bills. It also is why I mock a drop from gas from $4.29 to $3.59 as a sign the "consumer is back" - yes it helps, but $25 a week is not going to save the vast majority currently in trouble with their cost of living increases across the board, and lack of wage growth. Before you can address a problem you need to come out from behind the denial of it - we're still in denial and hide behind the "We're #1. USA! USA! USA!" rhetoric (see out of touch national convention last night)

I call this the Pooring of America but whatever you call it, it's going to be a significant long term change in our consumer culture as we compete for resources worldwide and our relative wealth shrinks as our middle class is being eliminated step by step. This is "any Town USA" once you leave the bright lights of Chicago, Seattle, New York, or Miami.

• The polar ice cap may be melting, but the U.S. economy is frozen, starting right here in my small town. Gradually rising levels of dismay at the gas pump and in the supermarket gave way to paralytic shock last week when "lock-in" notices from the local fuel company arrived. This year's advance price for home heating oil is nearly twice what people paid last year. A collective gasp of disbelief from my tough, resourceful Maine neighbors echoed across the meadows and up the rocky coast. Many claimed they would never sign the contract. "What's your alternative?" I asked a friend.
• In the days that followed, a new quality of dread settled over the place like soot, as people weighed their options. Heat or food? Gas or electricity? Medicine or mortgage payments? What to give up? What to cut back? The conversations were everywhere. In the supermarket, I heard one man tell another: "When I was a kid, you woke up, went into the bathroom, and broke up the ice in the toilet. Now my kids will have to do the same. America is moving backward."
• My neighbors are like deer caught in the headlights: frozen in fear as something sinister, implacable, and wholly unanticipated lurches toward them. A reckoning has begun to unfurl like a dark flower, slowly at first, then gathering urgency and force. This is not a short detour after all, but an untraveled road to an unknown place from which there is no return, no escape…and we are not prepared.
• The economic crisis has been triggered by what economists call "structural shifts" in the global supply and demand for commodities, coupled with the meltdown in the mortgage markets and the ensuing credit squeeze. But this crisis is now moving into a whole new gear, creating a new set of economic conditions that have yet to be named. Call it "the frozen economy."
• As pain reaches deep into the daily lives of ordinary Americans—irrespective of their creditworthiness—it will trigger unforeseen consequences for every corner of the marketplace. Nearly two-thirds of Americans already say they are cutting back on nonessentials, according to a new survey by Information Resources. But what's nonessential? Heat? Asthma medication? Shoes for your kids?
• At the same time, 57% of Americans interviewed last month by the Survey of Consumer Confidence reported that their financial situation had worsened—the poorest response since 1946, when the survey began.
• The statistics tell a dramatic story, but people tell it better. So I went to Moody's Diner to listen. Moody's welcomes us back to the world of childhood, of Grandma's kitchen, when all was innocence and order.
• Three working men in the booth behind me wondered about alternative energy. Wind? Solar? Pellets? The very notion was mysterious, and it wasn't clear how to figure it out. "We have to do something," they said. "But what?"
• Next to me, Shirley and Irene recalled how their parents coped the last time no one could afford heat, during the Great Depression. Back then, three generations moved into Grandma's farmhouse for the winter. "It was the only way they could survive. Now it looks like we may have to do that again." Irene looked dazed. "I feel sick about it. We don't know what to do."
• Seventy-three-year-old Arlie Fretner sat in his usual spot, the last seat at the counter, with his back to the wall. "I don't know what to do, or what to think, or what direction to go in. It looks like those folks in Washington don't know, either. The whole system has just seized right up. There's nothing I can compare this to, except how my people talked about the Depression." "The government should assist us," Arlie said, "but we've given up on that. They want to pacify us, not help us."(<--- Bingo)
• Robert had been listening quietly. For decades, he taught shop at the local high school and trained many of the skilled carpenters around town. "People are asking themselves, 'Will things go back to the way they were, or is this a fundamental change?'" he said. "Everything hit us at once. Now we are running scared for the winter. My business is off 75%. People want the products, but they're afraid to make a move, because they have to save everything to heat their homes. We have to choose between heat, gas, food, and medicine. Most of us have never lived through a time like this, where we can't afford the basics of a decent life. It's hard to believe that this is America."
• The G8 leaders appear powerless and irrelevant. At the U.S. Federal Reserve, the curtain has been ripped aside, and the once omniscient wizard looks startled and uncertain. Keep rates low to support growth? Raise rates and try to stem inflation? You know the banking sector has seized up when federal funds lend at 325 basis points less than a year ago, while 30-year mortgages are two full percentage points higher. Frozen.
• Prices are up: Dairy products and bread have jumped 15% over last year, eggs 26.7%, and poultry 73%, according to the Bureau of Labor Statistics. Gasoline is 36.7% more than a year ago, according to the Energy Information Administration. Health insurance premiums have increased 91% since 2000, according to the Commonwealth Fund. (not to worry though - inflation just popped up over 4% in the past year) Meanwhile, real hourly earnings are falling—down 0.8% from a year ago, according to Bloomberg Economic Indicators.
• There are more opposing forces: Consumer borrowing is up, while home values have fallen precipitously and mortgage delinquency rates are reaching record levels. The U.S. trade deficit continues to rise, while the cost of shipping a standard container from China has tripled since 2000, and many goods now cost more to transport and distribute than to produce.
• Home prices have fallen back, but the Conference Board indicates that the number of people intending to purchase a home in the next six months is at a 25-year low.
• We've been lulled into escapism by opportunistic leaders. We chose to be pacified. Now decades have been lost while we've kept our heads in the sand. Most Americans alive today cannot recall the Depression—the last great shattering of our economic life—and what it felt like to be frozen. Will the economy mark the onset of our lingering decline, or will it finally rally us from denial?
• Discontinuous change will require a bold reexamination of our social contract and the rules of wealth creation in a global system. Thawing the frozen economy will entail reinvention of our public and private institutions, especially as they bear on health, education, finance, and energy. These are themes I plan to address in my next columns. In the meantime, here's my advice to the candidates: Start at Moody's Diner. Lose the cameras. Bring a notebook.

I'll post the next entry next week as I'm curious what she has to say but when I look at the Congress my hope is basically extinguished. Our leadership is useless, and "head in the sand" is about as good of a description as I can find. I think the political leaders have turned from "neutral" (the good they did offset the bad) to now acting like spikes in the road ahead of the 18 wheeler that is the US. I think the American people in the middle and lower class have a better idea of reality than those making the stewardship decisions. Not that we should rely on government for everything, but I truly believe these latest incarnations of leadership the past 2 decades now work against the common people (and for the corporation). Where is the help for the businesses (small business) that actually employ 80% of our people? They don't have powerful lobby groups so they are virtually ignored. Lobbying to the extent it has grown has simply poisoned us. And the one party that is supposed to be fiscally responsible is just as bad as the other on spending and bankrupting us - so there is no recourse among the "2 choices".

Some reader comments from the slideshow

• "Isn't it time we all learn what got us to this point and take responsibility for our decisions and actions? How about all of us who carefully bought homes we could afford, live on a realistic budget, save, are disciplined in our savings and have not traded our financial security for 'lifestyle?' People, we got ourselves into this mess, it's time to get ourselves out. No one is to blame but ourselves."
• "Many people have been living within their means and have still been hit hard by the economy. In the end, whether you lived beyond your means or you were a hard working, penny-pinching retiree, it looks like we're all headed to broke-land. In the end does it matter what train we took to get there?"
• "This country needs another 'Great Depression.' That will get US away from 'the government should do something' mentality and back to self-sufficiency. America, stop whining and get busy."
• "We need to start over, on a global scale. The kind of trade and investment we have schemed for isn't really helping the masses. It's a global freight train to the bottom of the resource pile. We have all kinds of needs for investment in ourselves as a country. Let's start there. Other countries will follow suit. Others still need help. But not the kind that gets pilfered off under corrupt regimes."
• "People should get used to a lower standard of living. Much lower. The part of it attributable to the gouge from the health care industry and oil and gas is tough to stomach but they are only a part of what is a huge shift in the American way of life for millions of folks."
• "Here on the left coast, in NorCal, we're a bit slushy, not yet frozen solid — yet. Mostly we are apoplectic at working four months every year to feed our ogreish govt. Government has grown 58% in eight years. That's the frigid chill, the larceny creating the frozen economy. Want to thaw out? Give Robert at Moody's back a month or two of his earnings."
• "No one wants to try to rethink the American dream, but I am afraid we are going to be forced to very quickly. We are in the process of waking up to the unpleasantness we collectively will face as this imbroglio proceeds. The sooner everyone acknowledges the problems, the sooner we can all begin to work past them, as best we can. I only hope the perpetrators can be identified and punished."
• "I am one of the millions of Americans that have to decide whether to buy medicine, food and/or gas. GM, Ford and other car makers have made poor progress in making cars that get decent mileage. It is a shame what our country is facing and that our political leaders have chosen to keep their heads in the sand so long."
• "I have no credit card debt. My house (not a McMansion) is paid off, my truck (a used made-in-America Toyota 4-Runner, because Detroit couldn't match its quality) is paid for and gets 21mph in town. I have money in the bank and work for myself. Cheap? I prefer to think of myself as sensible. I've never spent more than I made and now I truly understand the story of the Ant and the Grasshopper. It's wintertime in America and the Grasshoppers are in trouble."