A Self-Employed Carpenter's Thoughts on the Future

The world is changing. Currently, as a nation, we have a large and well-trained section of our work force dedicated to residential construction. Unemployment within the construction industry now exceeds 20%. That number takes into account only workers getting unemployment compensation. There are also many self-employed individuals, ineligible for unemployment compensation, who have simply run out of customers and work.

That is the bad news. Now the worse news: Not only are those jobs not coming back, but the construction industry will continue to diminish for the foreseeable future. The real estate glut is not on hold; it is over. Waiting for its return is similar to waiting for next the big surge in typewriters, 35mm cameras, and home phones.

Why are the construction jobs not coming back? There are three main reasons, the first of which is inflation. Decades of credit expansion and the recent printing of money (quantitative easing) have increased the overall volume of our fiat currency: dollars. Therefore, the value of each dollar unit has been reduced, causing prices to rise. This results in increased costs in construction of new homes. Higher new construction costs make staying in and repairing older structures, or renting, more attractive.

The second reason is fuel costs. Living rurally and working in urban areas is becoming very expensive. Reasons one and two will keep an increasing number of younger workers and couples living and renting closer to work. Why take the financial and mobility risks associated with homeownership?

The third reason is we are broke. Who are “we”? Western civilization, comprised mainly of the U.S. and Europe. Consider this…there are gold and silver coins and bullion: actual wealth storage vehicles. There are paper dollars: temporary wealth storage vehicles. And there are also trillions of “dollars” represented as pixels on screens in accounting software programs.

When I say that we are broke it is because I don’t believe those pixel dollars represent anything. All of the wealth supposedly held in those pixels does not exist. It is a classic Ponzi scheme. If you go today and convert your pixels to actual dollars, everything is just fine. But if 10% of us go today and try to convert our pixels into dollars, the banks will shut down…Why? Because the money doesn’t exist. There is no actual wealth stored in any of those pixels.

Spain and Portugal may require financial bailouts in 2011. Part of the fallout from the Greek financial crisis last year was the creation of a eurozone bailout fund of $1.01 trillion. That fund could be used to assist Spain and Portugal if necessary. Where did that $1.01 trillion come from? Was it removed from another sector of Europe’s economy? Supplied in gold bullion to EU headquarters in The Hague? Removed from the savings accounts of earnest Europeans?

No, none of those could supply that amount of wealth. It was simply created by banking and government officials in pixel dollars (euros). It has no actual, tangible value, because it was created out of thin air. One trillion dollars set aside after a series of business meetings, and no individual, company, or government had to contribute one dollar of actual wealth. The pixels in the spreadsheets represent nothing. They serve only to continue the illusion that everything is fine. Everything is not fine. We don’t have the wealth we’ve been lead to believe we have…we are broke.

What does that have to do with construction? Everything. Cities and counties are broke. They cannot afford to borrow more money, and they cannot continue to raise taxes. States cannot afford the programs and pensions that they’ve promised, nor can they raise taxes. Companies cannot afford the pensions and benefits they have promised. They cannot raise prices either, as their customer base is already shrinking due to cost. Families and individuals are struggling to both get out from under mountains of debt and to mesh sharply rising prices into their budgets.

The federal government spent $3.5 billion more per day than it brought in for fiscal year 2010. It is having trouble borrowing money by selling bonds to foreign entities because our current debt makes those bonds much riskier. The Federal Reserve is administering a program of quantitative easing (printing money or just adding pixel dollars) to keep up the appearance that everything is shipshape. What ship? I’ll get back to that. Point being we are broke. There will be no excess income or wealth to support a large-scale residential construction industry in the near future.

The ship, of course, is the Titanic. Imagine that we’ve already hit the iceberg. But…everything seems to be roughly the same, and the ship’s intercom is continually telling us that everything is just fine. Remember the bailouts and the stimulus packages of hundreds of billions, even trillions, of dollars? That was the crew and the first-class passengers casually heading past you to get into the lifeboats. This current financial system will be on the bottom within a decade. And no, there is not going to be a lot of new residential construction during that decade.

We are already well into a global wealth realignment. How is wealth created? Not obtained, but created? Manufacturing is the application of labor to raw materials to make products. The exchange of those products for tangible assets creates wealth. A nation that manufactures and sells abroad is creating and accumulating wealth. The lower, middle, and upper classes of those nations, whether participating directly in manufacturing or not, benefit from that creation of wealth.

Western civilization in general, and the United States in particular, no longer creates wealth; we simply move it back and forth. Usually to the benefit of those who have the capacity to slowly, without causing concern, convert pixels into actual assets (think lifeboats).

But…the curtain is slowly falling away. The sad state of our current financial situation has become too large, and too smelly, to hide. We are broke. No real wealth means no real money and no real credit, and, therefore, no large force of construction workers will be needed. Take a deep breath and figure out what you want to do next. And yes, I am saying that as much to myself as anyone….

My guess is that it will take at least a generation to recover from this financial predicament. All our debts will have to be paid…the debts that your governments have incurred in your name will be paid by you. Believe it. We will have no choice but to live within our reduced means. The options you have today, the programs and support you have today, the retirement that you think you will have tomorrow no longer exist.

China is not going to be a superpower; they already are the superpower. The Chinese are testing a stealth fighter technologically superior to our best fighter, of which we have scant few. When they move to production, they will be able to produce as many as they think they need. We will not keep pace…we are broke. We will lose air superiority in a wide arc around China, including the Koreas, Japan, Taiwan, and the Philippines within five–10 years. The discussion of whether or not we should be the world’s policeman is moot; we can’t be.

We have to pay our debts, live within our means, roll up our sleeves, and get back to turning raw materials into products with efficient labor. Government’s restrictions and regulations concerning manufacturing will begin to ease…they will have no choice. We as a nation will eventually emerge stronger and more compact. We as individuals will be greatly challenged, but we will be fine, if not finer.

There is no need for panic or despair, no matter what the news brings in the near future. Take this period of relative calm to sharpen your tools, mend your work clothes, and trim the fat out of your budget. We’ll all be back to work shortly, and no doubt working our butts off at something we’d never expect today…

Jim Kearns
Rustic Structures
Whiskey & Gunpowder

February 9, 2011

The Daily Reckoning