The Great American Exodus — Damage to the Economy is Permanent

The Great American Exodus — Damage to the Economy is Permanent

Dear Reader,

Change creates winners and losers.

And there’s no doubt the pandemic has brought about a profound level of change. In today’s edition of the Daily Reckoning Australia, Jim highlights a change you may have overlooked.

That is, the new urban ‘out-migration’ taking place across the US. As Jim says, this isn’t just a social shift. On the contrary, the financial implications are huge.

Until next time,

Shae Russell Signature

Shae Russell,
Editor, The Daily Reckoning Australia

It Will Get Much Worse Before the Exodus Is Complete

In 1790, approximately 93% of the American people lived on farms or in small towns while only about 7% lived in larger cities such as Boston, New York, or Philadelphia. One of the reasons for this was the labour intensity of agriculture. It literally took 93% of the population to feed 100% of the population.

City dwellers were the exception and lived off a relatively small agricultural surplus. Over the next 120 years, the trend was all in favour of the cities. Agriculture became more productive, especially with the invention of harvesters and tractors in the late 19th and early 20th centuries. This allowed larger agricultural surpluses so more people could move to the cities to pursue jobs in manufacturing, transportation, and the professions.

Another wave of migration took place after the Second World War, as reduced racial discrimination opened the door for the movement of poor blacks from farms to northern cities. Today, the US population is less than 20% rural (and only about 3% live on working farms) and over 80% urban or suburban. Yet, according to this article, a dramatic reversal has begun.

Americans are leaving US cities in droves

The reasons have to do with the reaction to the coronavirus pandemic (cities are densely populated and citizens are more susceptible to infection) and fear of rising crime rates and urban violence as rioters destroy and occupy parts of major US cities such as Portland, Seattle, Chicago, and New York.

The trend is more than just a social shift. The financial implications are enormous.

Investors should tread carefully

Those who leave cities are generally the wealthiest and most talented. Many have second homes or can easily afford to buy new ones. They have skills in law, medicine, or engineering that are easily transferable (and indeed welcomed) in new localities. Importantly for the cities themselves, those leaving paid the most taxes.

This leaves the cities with heavier burdens from welfare and crime without taxes from the rich to pay for the bureaucracy and social services. We’re looking at not only a social collapse, but also a financial collapse that will put many major US cities at or near bankruptcy in the next year or so.

Investors should steer clear of municipal bonds that may still retain high ratings but are subject to rapid and precipitous downgrades and defaults once the full impact of this new urban out-migration is felt.

All the problems remain, but almost all the benefits are gone

Life in our major cities has always been a trade-off. On the negative side, you have high rents, high taxes, traffic congestion, noise, and some crime. On the positive side, you have a rich cultural and social life with museums, theatres, great restaurants, clubs, and excellent sports teams. You are surrounded by like-minded individuals in what can be a highly educated and creative milieu.

Today, all the problems remain, but almost all the benefits are gone. The high taxes and high rents are still in place (and the crime is much worse), but the sports teams, theatres, and concerts are all shut down, waiters are wearing masks, and everyone who can is working from home.

As described in this article, it has occurred to people that if they can work from home, then they can work from anywhere if they move their homes. Professionals, young families, and retirees are all fleeing major cities and moving to suburbs or even further out in the country.

They are finding good schools, lower taxes, and good internet connections where they can keep their jobs without dealing with the riots and murders that are the new norm in many major urban areas. Moving van companies are booked solid, and many who want to move are finding waiting lists for those movers.

This new urban exodus is not easy to reverse

The important economic point about this new urban exodus is that it’s not easy to reverse. Moving is a big deal and there is always some resistance to the idea. But once you cross that bridge and decide to move, you don’t look back. These are the kinds of decisions that will not be reversed for 10 years or maybe never.

Those moving out will find a better lifestyle. Those who remain will be trapped in declining cities with more trash, fewer services, and out-of-control crime. The damage to the economy is not temporary; it is permanent and the first effects are just being felt now. It will get much worse before the exodus is complete.

All the best,

Jim Rickards Signature

Jim Rickards,
Strategist, The Daily Reckoning Australia

PS: Free report reveals why Australia is set to become the next ‘gold epicentre’ — which could result in a HUGE spike in Aussie gold stock prices. Click here to learn more.