November 11, 2007


This is a service economy, at least that’s been the plan for over two decades. Simply put our culture of consumption has been nurtured on a steady rise in incomes and for the last twenty years that meant companies needed to find better ways to fatten balance sheets. The lowest hanging fruit was manufacturing, which hadn't become expensive by itself but mostly in relation to the cost of performing the same function at much cheaper costs elsewhere. The obvious solution was to tap the intellectual wealth of our society and leave product building to someone else. In fact this is an idea that neatly fits into the new paradigm. In technology there is a long history of recognizing the value of service. Although building all those desktop PC's helped IBM's bottom line it was eventually phased out faced with competition from foreign desktop producers. However what wasn't phased out were the service contracts that companies were locked into for the oceans of desktop computers that had now replaced the calculator and legal pad in the office. Whether it's the production of software, mainframes, automobiles or cell phones its more efficient to service, or only bill at a fee with the promise of service if needed than to build a plant, hire low cost workers (this is until the unions get a whiff of your plans) face the cost and hassle of wholesale material vendors (better learn the commodity market) and become bloated with health and liability insurance, and defined benefit regulations.
Sound like fun? But with innovation general comes some downside, consider the current state of the credit derivative market. As American companies moved away from the productions side and move center stage into sales and service new way to cut cost become available in the hunt for balance sheet value. First was reduction in healthcare costs, next the weaning off of societies addiction to pension income. Both, while remaining competitive or in the case of pensions scrapped in favor of 401K plans and other cash balance schemes, sent a message to the worker that ambition and ingenuity was prized over loyalty and muscle. However it also took away two important sources of worker security and herein lays the rub of our story. With the ever compelling drive to consumer heaven Americans need to find other sources of security and they found it in their homes and in their investment accounts. And this is where we find ourselves today as both are in the midst of dose of volatility, lately much of it negative.
This is why the Fed should ease. Simply put, they are wrong and I am right. In the meantime there are the spiral realities.