Tuesday, August 18, 2009

Soaring Real Incomes! Why?

Real incomes are leaping off the tops of charts as consumer prices fall. In 1995 it took more than 30 weeks of average pay to buy the average new car. Today, it takes 22 weeks of average pay to buy the average new car. The Producer Price Index just fell by the largest amount in 60 years! The home affordability index hit an all time record level a few months ago (still at very high levels).

Why are real incomes rising so fast? I've said it before and I'll say it again that the law of substitution is far more powerful than is commonly understood.

Tough times cause people to cut unnecessary expenditures. Some of the things they cut become permanent savings. When an expensive item is cut, a less expensive thing is typically added.
"There is an app for that" is the iPhone slogan. There are 65,000 software applications available for the iPhone. There are fewer Google Android apps but the growth rate of Google apps has averaged 50% more per month for the past 6 months! Listen to an iPhone commercial carefully and you will hear that there is a massive amount of substitution taking place all around the world.

The buzz this week has been about the TOM TOM GPS iPhone app. For $100, iPhone owners can acquire a sophisticated turn by turn GPS system that would have cost $3,000 a five or so years ago. But, it is not the substitution of software for hardware that is most significant. The real savings comes in the miles driven due to better directions. The avoidance of wrong turns saves huge amounts of time and money. As the cost of owning a GPS system falls, the number of owners will increase dramatically and the cumulative miles saved will become a huge number. The price of gasoline will be lower than it would be otherwise because so many miles were avoided.

A research report sent out last week details the savings environmental savings achieved by the downloading of a CD versus the physical production and purchase of a CD. The savings is estimated to be 40 to 80% of the cost of the product! Apple has plans to build a new one billion dollar solar farm because the demand for downloads (apps and media) is so large. Every time Apple builds a billion dollar server farm, I believe Google will build at least two.

US mail volume declined by 20 billion pieces year over year; while Google saw a 46% increase in email users! Yahoo, which has 106 million email customers, saw a 22% increase! Clearly a large quantity of electronic delivery is being substituted for a large quantity of physical delivery. When one listens to advertising supported music on Pandora, instead of driving to a store to buy a CD, the savings achieved are perhaps two or three times the price of the CD.

Electronic delivery has become a huge snowball with a lot of hill left. Electronic delivery is scooping up all the snow, leaving our government in the position of trying to roll the US Mail snowball up hill. The bigger the electronic snowball, the fewer the customers to help push the US Mail snowball. In two or three years, US mail delivery will be down to 3 days a week and postage stamps will cost 64 cents each, making all the more customers leave.

What is difficult for many to see is that spending on postage is falling not rising. The move from 44 cent stamps to 64 cent stamps will be a nominal increase of 45%. But if the volume of physical mail falls by 60%, there will be a net decline in spending. A few days ago, a friend suggested that we would be better off paying extra for mail because good postal jobs would be eliminated. If that philosophy had won in the 1700's, women would still be working long hours spinning thread.

Another amazing thing is how much substitution is now taking place "up the line". AOL, ATandT, Comcast, Incredimail and others are losing email customers to Google and Yahoo. AOL is now the fourth largest email provider after falling from 45 million users to 36 million users. AOL is king of dial-up but dial-up is the Stanly Steamer of the car business. The Stanly was the best of more than 100 steam powered cars but the internal combustion engine replaced them all.
Did the largest wholesale price decline in 60 years make it into your consciousness? Do you appreciate how big the Economic Tech Boom is going to be? All the money saved on fuel will go somewhere; much of it will go into spending on new electronic gadgets and services.

Dave Ramsey has a growing cadre of fans. His disciplined saving approach has merit, however, the investment opportunity available today is huge. Put $5,000 into the right investment today and it will be worth $2 million or more in 10 years. Put an extra $5,000 into saving today and it might be worth $10,000 in 10 years.


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