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April 24, 2006
Design economy gone wrong
The Wall Street types have found a new "new economy" to hype. According to Andy Kessler, a former hedge fund manager and now techie investment pundit, its The Design Economy:
Perhaps here's how the world works these days. No need to borrow billions and build big ethylene plants anymore. You invent something here (chip, movie, iPod, medicine, financial instrument), email the design overseas for manufacture in $1-an-hour factories (OK, not financial stuff), and then ship it back for consumption. Sure, this runs up trade deficits, and our precious dollars leave the country, but that's only half the story. Those dollars come back and invest in the U.S. Most go into long bonds, 10-years and 30-years. That's why Alan Greenspan left with a puzzled look on his face. Foreign buying is keeping long rates low; the yield curve is flat.
But maybe the stock market has figured out that we're running out of long bonds. Maybe, just maybe, the surprise is fiscal discipline being voted into office in November and shrinking red ink in D.C. Marginal rate tax cuts and lower rates on dividends and cap gains might actually work and increase revenue. If we run smaller deficits, then there'll be fewer bonds for foreigners to buy, so they have to buy something else with those dollars and the next big pot of liquidity is -- hmm, let me think for a second, oh yeah, on Wall and Broad, the $15 trillion stock market. When bonds are scarce, foreigners are going to have to buy our stocks, or so the stock market might be screaming.
That scenario may be great for the Wall Street speculators looks for the next big score. But it is a disaster for the economy. Yes, those dollars come back and pump up an inflated bond market (higher bond prices = low interest rates) and could pump up an inflated stock market. But, they still represent the selling off of our assets (either IOUs or equities) to foreigners - leading to what Warren Buffett calls the "sharecropper society" (in this case, where we labor to come up with those wonderful designs that make other rich.
I must say this scares the beejeeze out of me. When the folks who were involved in stoking up the last big hype of the dot.com bubble have discovered "design" - I worry that a great idea is once again going to be inflated beyond recognition and lost.
Let me repeat what I said before: design is a key factor in maintaining our competitive advantage. The combination of design-manufacturing-marketing-service can lead to a sustainable intangibles-based economy in the US. That kind of "design economy" would also be good for Wall Street over the long term, a fact that most investors (rather than speculators) might appreciate.
Posted by Ken Jarboe at April 24, 2006 2:45 PM
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