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Friday, July 28, 2006

The Last Step - The Trickle Down

Here is something to think about over the weekend. How will corporate earnings and excess cash in balance sheets trickle down to wages? Not exactly the kind of light query that you can talk about over beer. A Marxist cloud hovering above a Capitalist empire if I may say so, begs the pop question, "Where exactly is the trickle down?"

Beggars on the streets are recipients of the trickle down just as much as your Saturday whore is. The biggest recipient of a trickle down (or trickle up?) is The Gates Foundation receiving so many billions from the master himself. Where does that leave us now?

The trickle down is the next logical step that the Fed is anticipating. Unemployment has been at an optimal rate and theories point out that any effort to even push down this rate lower will push inflation higher. Productivity and utilization rates have been highest in years. The ratio of labor to capital has also been at its record levels.

Just imagine an engineer who used to operate one machine for the factory now, with the use of technology, has increased productivity by being able to operate not one but 5 machines using his computer. But his salary does not increase. Because of willing immigrants coming into the US sucking up to lower wage rates, the engineers salary stays the same. Low cost of labor, high productivity. This must be corporate heaven!

Now the engineer is working 8 hrs a day. The factory can either add new labor or increase the engineer's pay. Here is where the crossroads lie. Should corporates increase wages or just hire low skilled workers to add production capacity?

And because of technology, hiring low skilled labor will not be much of a big problem.

But if the factory anticipates slower demand in the future, should it increase its production capacity? Is it logical to do that? What would push companies to increase capacity, increase inventory?

There must be bottle-neck somewhere.



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