Ecosystem Economics (or Why American Real Estate Prices will Stagnate for a Long Time)

I saw that corporate profits are at an all-time high but we all know that Americans are still feeling economic hardship. http://www.huffingtonpost.com/2010/11/23/corporate-profits-q3-2010-_n_787573.html In the following blog post I will argue for why I think Real Estate Prices in America will fall or at least stagnate for a long time (maybe a decade or more). For a more substantial economics-based explanation of the underlying data check out this link: http://rortybomb.wordpress.com/2010/01/13/stagnant-wages-and-the-financial-bubble/ and here's superhero Elizabeth Warren explaining more in a lecture on youtube...http://www.youtube.com/watch?v=akVL7QY0S8A I say - Think of a company whose earnings are flat for decades but the stock price(market capitalization) keeps rising anyway (i.e. the P/E ratio increases). Inevitably, it has to crash because over time there has to be some reasonable relationship between earnings and stock price(market cap). Note - Just because it falls a lot doesn't mean it can't fall further, especially if the "fundamentals" (earnings etc.) still don't reasonably support the price. Think of an ecosystem. (e.g. Little fish feed on algae. Medium size fish feed on little fish. Big fish feed on medium sized fish etc.)  Now I say something that is obvious but crucial - "if the little fish aren't significantly increasing in number and they aren't significantly increasing in size then that necessarily will eventually limit the number & size of the medium & big fish too." Given the following: 1) U.S. Population size/rate is actually stagnating. (currently less than 1% per year, from 3.7 births per woman in the late 1950s to 2.06 now which is virtually right a the "replacement fertility rate") http://www.census.gov/popest/national/NA-EST2009-01.html https://www.cia.gov/library/publications/the-world-factbook/geos/us.html https://www.cia.gov/library/publications/the-world-factbook/rankorder/2127rank.html and there is no reason yet to believe the public is or will be substantially interested in increasing immigration (which could compensate for Americans' low birth rate).  2) Real wages have been virtually flat for the past three decades. http://www.epi.org/publications/entry/bp195/ http://motherjones.com/kevin-drum/2010/01/vicious-cycle-stagnant-wages http://www.businessinsider.com/plutocracy-reborn http://www.businessinsider.com/15-charts-about-wealth-and-inequality-in-america-2010-4#the-gap-between-the-top-1-and-everyone-else-hasnt-been-this-bad-since-the-roaring-twenties-1 From the link: "I'm happy many more women are in the workforce. But if the real driver of household wage growth is simply that households are working more hours, then that isn't exactly wage growth. "I want to make more money so I doubled my shifts" isn't really the same statement as "they are paying me more money." Winship points out male wages have increased around 8% over a 35 year period, for an annual growth rate of 0.23%." I say - Let's really appreciate those numbers.  I rhetorically ask - If wages are increasing at less than 1% then how can Real Estate Prices for all (except the high end) increase greater than 1%? And if Real Estate Prices have exceeded 1% for a long time and credit is, necessarily and rightfully, contracting to more reasonable standards then mustn't Real Estate Prices similarly fall to correspondingly reasonable standards (relative to wages)? 3) Wages are everything here because nothing else can make up for its historically slow growth. Nothing, including investments. Even when the stock market goes up it doesn't significantly help most Americans because the bottom 90% of Americans own less than 10% of mutual funds, stocks & bonds. The top 1% own half of all those securities. http://www.businessinsider.com/15-charts-about-wealth-and-inequality-in-america-2010-4#half-of-america-has-only-05-of-americas-stocks-and-bonds-3 CONCLUSION: Real Estate Prices will fall further or at least stagnate for a long time until wages come closer in line with reasonable ratios by historical standards.  Just as a stock price has to have a reasonable relationship with its earnings so must Real Estate Prices have a reasonable relationship with wages. QED. SECOND CONCLUSION: These depressed/stagnated wages will have to result in economically hurting the upper class (unless they can surpass that limit with international profits). But international profits in this regard are mitigated against by trade imbalances. (Which I plan to explain in more detail in a subsequent post). My libertarian friends who still pitifully defend "supply side economics", despite overwhelming contrary evidence over the past two decades, must now divert attention to "monetary policy/unstable dollar/inflation" issues. They stick to this conveniently modified dogma even though the dollar hasn't fluctuated massively (by historical & relative standards) enough to be serious evidence that they could possibly be correct. So they'll keep changing the rules of measurement & calibration so that they can hold to their now thoroughly disproved premise that "trickle-down economics works". • http://voices.washingtonpost.com/ezra-klein/2010/04/the_economy_of_the_2010_electi.html • http://currencythoughts.com/2008/08/19/how-the-us-economy-performed-under-democrat-and-republican-presidents/ • http://www.americanprogressaction.org/issues/2004/manage_economy.html • http://currencythoughts.com/2008/09/26/us-gdp-growth-under-different-presidencies/ • http://zfacts.com/p/318.html • http://www.eriposte.com/economy/other/demovsrep.htm FINAL NOTES: Remember Henry Ford's ideas: a) "There is one rule for the industrialist and that is: Make the best quality of goods possible at the lowest cost possible, paying the highest wages possible." b) "Pay employees enough so they can afford to buy the product." c) PJ O'Rourke loves to say "My wealth doesn't create your poverty". I say - The wealthy should start worrying more about the flat wages for most Americas. I'm arguing that the poor's poverty does indeed hurt the wealthy's wealth.  Relative wealth should be virtually meaningless to you unless you'd rather be a Pharaoh in ancient egypt rather than your current station in life (with antibiotics, cable tv, internet, air conditioning etc.). Keeping others' wages low isn't wise. *Notwithstanding the recent scientific research revealing the intuitively perverse psychology of happiness. "Happiness is Earning More than Our Friends" http://www2.lse.ac.uk/researchAndExpertise/researchHighlights/societyMediaAndScience/layardhappy.aspx Not all the research is entirely discouraging, though... http://www.st-andrews.ac.uk//economics/papers/dp0604.pdf MY FINAL CONCLUSION ON THIS MATTER: We should all work towards paying Americans substantially more. RESEARCH LINKS: • http://extremeinequality.org/?page_id=9 • http://extremeinequality.org/?page_id=10