Monday, May 26, 2008

 

Understatement of the Day: A failing economy and an ignorant public

We have an economy that’s eroding in lots of ways Americans don’t really fully understand yet. —Kevin Phillips, former Republican strategist turned author and culture critic, in an interview on Democracy Now!

One of my Simply Appalling goals over the past few years has been to look at the news in the Business section and make it intelligible to readers who have no greater involvement in finance than a bank account. The level of theft, fraud and greed is staggering, and not only staggering but "reported"—if you read the Wall Street Journal or the Financial Times or the Business section of the New York Times.

Unfortunately almost all this news is passing over the heads of the public, leaving them to sputter about oil and food prices, which are less the cause of our sorry state than the effects. If Americans understood terms such as "tranches," "leveraged buyouts," "CDOs," "hedge funds," "futures markets" or even "liquidity," they'd stop worrying about street crime and join in the fun.

Author Kevin Phillips is making the talkshow rounds touting his new book Bad Money: Reckless Finance, Failed Politics, and the Global Crisis of American Capitalism. In this May 6 interview with Amy Goodman he lays out some of the issues betokening the "global crisis of American capitalism." He likens the American economy to a shark tank—

... I used to say that normally when a country is—United States is—heading into a recession, there are one or two, sometimes three, factors that you worry about. But at this point in time, the American economy, you can think of it as being kind of in a shark tank, and there are like six or seven sharks, and you don’t usually see anything like that number.

An economy based on finance rather than on manufacturing

... we have a financialized economy in which we don’t make much anymore, and finance is up to 20 to 21 percent of the US GDP,1 and manufacturing down to 12. Finance dominates the US economy.

Massive public and private debt

The second problem is that we have massive debt, both public and private. It’s gone up about 700 percent since the early 1980s, staggering numbers where there—we basically have $50 trillion worth of credit market debt, which is tradable debt. And people just have no idea of this. It’s not government debts that’s the problem, it’s private sector debt, both financial and corporate and then in the consumer sector with credit cards and then mortgage debt. We just have this extraordinary level of it. 340 percent of the gross domestic product, that’s how big debt is. And the last time something was close to this—and it was less—was in the late 1920s and early 1930s....

The collapse of home prices

Third shark in the tank is the collapse of home prices. They continue to follow the scary trajectory that has people predicting that there’s going to be a 15 to 20 percent decline in home prices, which would be the sharpest since the Great Depression.

Inflation

Then you can go to shark number four, that’s global commodity inflation—oil and food. People are as worried now about the price of milk as they are about the price of a gallon of gasoline. That’s a global problem, but it makes a mockery of the administration’s pretense that there’s no inflation.

Deceptive economic statistics

The fifth shark is, frankly, lousy economic statistics. I don’t think the average American should believe either the inflation numbers, the GDP numbers or the unemployment numbers. And there’s a lot of complexity and technical terminology involved here, but the long and the short is that over thirty to forty years, we’ve seen a kind of Pollyanna Creep, and administrations of both parties have done this. They want the figures to be friendlier, not to get them in trouble. And we’re at a point now where the figures lie enough that foreign investors are starting not to believe them and, I think, with considerable justice.

Peak oil

Now, the next shark in the tank is obviously the price of oil. And it’s not just global commodity inflation, it’s the problem that we see of oil production peaking in the world sometime in the next ten to twenty years. And the advance signs of this are scarcity in peaking in certain countries.

And the prediction just came out of Goldman Sachs a couple of days ago that within a fairly short period of time, probably this year, you’re going to see $150 or $200 oil.

The falling U.S. dollar

And that’s because, partly at least, of the scarcity, but the US dollar has been tied historically since the 1970s to oil, because of a deal worked out when OPEC wanted a price increase. Henry Kissinger and others were involved in getting OPEC to commit that they would sell and buy oil only in dollars and that they would invest their petrodollars in the US, in Treasury debt. So we have a currency that’s profited from the connection to oil, which sustained it in many ways.

But now oil has boomeranged on the United States. We have to spend $400 billion a year to import the oil we need. We don’t have the basis for controlling oil anymore, after the idiocy in Iraq, which was partly put in motion to solve the oil problem, and instead you’ve got oil prices going up 500 percent in five years. So the dollar is on the ropes, and that’s the other shark in the tank.

Phillips omits a couple of other "sharks" heading our way—(1) insolvency of local governments and devastating cuts to state budgets, and (2) undercapitalization of pension funds—both public and private.

And now the bad news

Phillips sees three consequences to America's economic plight—

Loss of assets and national autonomy

One of the dimensions, obviously, is that if the economy goes sour and if we have a run on the dollar and the value of American dollars declines in a severe way, you’re going to have foreigners buying up a lot more of our industry, and people would want to sell it to them. America’s role as a global debtor would just mushroom. We’d be at the beck and call of other countries. The dollar would be subject to being abandoned by the oil producers. You can have a major league recession in the United States, which of course then would be compounded by all this huge amount of debt beginning to fall in.

Loss of democratic input into economic goals

But I think there’s another dimension that people tend to forget here. If you have the rise of finance, as we’ve seen it in this country, to be the largest part of the private economy, you have on one hand the growth of the Federal Reserve Board in regulating more and more of the American economy, and they’re partly controlled by the banking sector. They’re not elected by anybody. So you’re missing a democratic ingredient in that respect.

Loss of control over one's life

It’s also very true that the growth of finance has involved the growth of a debt and credit industry. And part of what finance has brought as it grows is that more and more people are in more and more debt, and the amount of debt that individuals have and that they have to service is increasingly a burden. And people get into debt to maintain either a living standard they can’t afford or one that’s been nurtured by consumerism and advertising to get people to spend money they don’t have. So you’ve got an element that the public is losing control of its own economic future when you have an economy that’s full of debt and credit industries, which are a mainstay of finance.

Phillips concludes—

The implications of all of this for who controls what within the United States are huge, and that will be especially true if a lot of the debt we’ve built up starts imploding because of higher inflation and higher interest rates.

Quite frankly, Phillips understates the consequences. The problem with his formulation is that he speaks as if these events may occur. He needs to take time off from his book tour to follow developments.

  1. Sovereign wealth funds—the investment arms of foreign governments—along with other foreign investors are gobbling up American assets as if they were oysters on the beach.
  2. "Free-market" capitalism is simply code for the notion that the rich should be left free to pillage and plunder unencumbered by government. The American people have not had control over either their economic future or their government for a very long time now—if they ever had it.
  3. Most Americans already live from one credit card payment to the next and worry about maintaining their credit rating. The only shoe left to drop is if a lot of people come to the decision—either because of "upside-down" mortgages and auto loans or because of lost income—that their survival is more important than their credit rating. Many stocks in the financial sector have already fallen by 50% or more, but any company that has made its fortune by generating consumer debt is a bad buy at any price.

Related posts
The Depression Chronicles – 5: Consumer spending (5/13/08)
Welfare queens, homeowner queens and bailout queens (5/20/08)

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Footnote

1"Gross domestic product" or "GDP" is one of the few statistics—along with the Consumer Price Index—that the average American is likely to hear bandied about in the nightly news. Its most important use is as technical-sounding proof that Americans are really better off than they think they are.

The Wikipedia entry is humorously instructive—

GDP per capita is often used as an indicator of standard of living in an economy, the rationale being that all citizens would benefit from their country's increased economic production.
....

The major disadvantage of using GDP as an indicator of standard of living is that it is not, strictly speaking, a measure of standard of living....

That seems clear enough. If the American economy were a beehive, the GDP would give a rough measure of how busy the bees are—but not of how well off they are. [back]

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