Sunday, March 9, 2008

Hard Times

A nice break. No computers, anywhere. Lovely.

But, back to reality. And a hard one indeed. Of the many news items that I've scoured upon my return, this one leaps to my attention. A brief and easily missed report amid the controversy over whether Obama was offered a pillow by the Press or not: namely, that personal credit card debt rose by $6.9 billion to $2.52 trillion during the month of January alone. According to one Chris Rupkey, chief financial economist at Bank of Tokyo-Mitsubishi UFJ Ltd. in New York, "There's not much gas left in the tank. In the early stage of a recession, consumers tend to rely on credit cards to see them through the hard times." The story further explains, "People once dependent on home-equity financing are turning to other forms of short-term financing after the collapse in subprime mortgages made it harder to qualify for loans. Personal income in January rose at a slower pace than inflation, and credit card usage in January rose for a second straight month."

What we're seeing then is people who have dug themselves into a hole digging deeper in the hopes of finding light at the bottom. Funny - we were told as kids that if you dug deep enough you'd eventually get to China. Lo and behold, those old tales were absolutely true: if you dig deep enough into debt, it turns out that we find it's held by the Chinese. We shouldn't be surprised when they'll be telling their children to finish eating their rice, or they'll send it to the starving people in America.

Our current downturn is provoking great anxiety throughout the land, and while our political and financial leaders are quite worried, we're mainly told that what we're experiencing is a normal downturn in the business cycle, a temporary step back that we need to go through before we can take two or three or forty steps forward. In short, we'll continue our upward climb to endless and eternal growth. Don't worry - be wealthy.

Well, maybe. But this one has a different feel, and the deepening dip into our credit lines is just one indication. The current economic miasma - one that is dragging the world into a deepening recession - might be easily mistaken as a normal downturn in the business cycle as an economic expansion results in loose and irresponsible risk-taking and financial failures. Underlying this normal and expected part of the story is a deeper and more disturbing subtext - namely, the offshore transfer of American wealth in the effort to prop up a declining domestic economy. America's post-war wealth was largely the result of domestic-based production and export of plentiful goods - particularly, but not exclusively, petroleum. We were throughout the mid-part of the 20th century the world's largest oil exporter, supplying the world with what was believed to be plentiful and nearly endless streams of black gold. That illusion came to an abrupt end in the early 1970s, when suddenly we reached the top of Hubbert's peak and became an net oil importer. From that date forward, we began the slow but steady transfer of wealth that had been accumulated throughout the late 19th and early to mid-20th centuries. We had an enormous nest egg to spend down, to be certain - vast wealth that had been piled up over decades of world domination, and in particular - even when the wealth began to give out - a singular military dominance that could be offered as "protection" to any of our client states. The depletion of our nest egg was almost unnoticed and largely unfelt. It was morning in America.

This was precisely the time when "globalization" became the official economic policy of the nation. While this appears to be a neutral and mutually beneficial arrangement, "globalization" was in fact the next logical step to be taken once it was realized that the nation could no longer produce its own wealth, but only purchase it by spending down what it had accumulated in previous decades. "Globalization" was a U.S.-friendly policy - at least short term - that ensured free and open markets in which we would avoid the consequences of our policy of wealth depletion by ensuring cheap products from low-cost labor markets and unlimited access to commodities which we no longer produced on our own (especially petroleum). Other nations - particularly the Chinese and Saudis - readily signed on to the deal, knowing that they would ultimately be the beneficiaries of an enormous transfer of national wealth. The very short-term benefits of the policy - ensured to keep the populace happy for another decade or two before the game of musical chairs ended - far from being a disadvantage, was its attraction. In a world in which immediate electoral gratification was the aim and short term power and a last-ditch wealth-grab was the only real option short of belt-tightening, the policy stood to benefit those who could foresee the endgame while allowing the short-sighted to blithely come along for the ride, unaware of the looming empty coffers.

A series of bubbles ensued - junk bonds, dot.coms, housing - all of them premised upon the faulty notion that wealth could be created by producing nothing of real value (that's the message of the movie "Pretty Woman" - a financial system that was feeding on itself by selling everything off. The prostitute teaches the tycoon how to fall in love, but the larger story was the prostitution of the nation's wealth). The accumulation of wealth throughout the 20th-century was real wealth, based in the production and sale of real things, like cars and steel and oil. The wealth of our post-peak years was all fictional, mostly electronic images flickering on a trader's screen, or, more recently, the flipping of wood frame, drywall and vinyl coated houses that were worth less than the mortgages that were taken out on them. The Ponzi scheme went on as long as possible, hitting the wall when lenders and real estate cronies tried to maintain a frenzied market by extending credit to people who had no business getting loans.

Why this economic downturn bodes to be so severe and damaging is that it shows all the signs of being the bubble of all bubbles: the sign that the party is now over and we're holding an empty bag. Having transferred the lion's share of our national wealth roughly since the beginning of the Reagan administration, all the while running up enormous household debt along with our national debt, we have hit that wall when debtors realize that they have nothing left with which to pay back. We've mortgaged ourselves to the hilts, pawned everything of value, we've "let 'em roll" on every credit market possible, we've borrowed to cover our loans elsewhere, we're now either printing money publically or walking away from our obligations privately. We have childishly run up an enormous tab that will be handed over to our children without any reasonable means of being able to pay it back. The fact that commodity costs are rising even as our economy is faltering is an ominous and telling sign: we are running out of the stuff that once powered us through the downturns of the "business cycle." This is no normal downturn, but a nasty confrontation with reality that will leave us all poorer in the end, but maybe a bit wiser too, and - if we don't panic, which we very well may - could in fact be the start of a better way. It's a big "if," however, and nothing we've done this far gives me much confidence that we're likely to come out of this in the short or medium term with more wisdom and moderation. In the long term - well, we'll be dead, but that's always struck me as a deeply individualistic and short-term way of viewing the long term. Those who care about their children and future generations think of the long term in different terms than solely the concern with our own mortality. At the moment, I see little evidence of such a perspective.


Anonymous said...

Good to see you back. But my, you come out swinging! Relax. Have drink. Breath...

The wealth of our post-peak years was all fictional

Really? Look at the following:

1950-2000: home sizes doubled, yet hold half the family size. Houses aren't real wealth? Tell that to all those guys stripping copper wiring out of them...

New technology: phone calls becoming nearly free, computers allowing thousands of new activities, the internet allowing thousands more like ebay and email, the birth of inexpensive flying technology, food and clothing at lower prices than in the history of mankind, material science allowing for new products weekly.

It's a simple fact that we are richer than ever before. Real wealth and technology that is going to stay with humanity forever. The cost of nearly everying has been plummeting for hundreds of years. Things like LED lighting make light, the very reason oil was drilling to begin with, nearly free. Look around you.

I agree that the twin problmes of peak oil and social decay will create pain and lower growth over the long term. But in summary, your claim that our wealth is "all fictional" is obviously false.

We shouldn't be surprised when[the Chinese tell] their children to finish eating their rice, or they'll send it to the starving people in America.

Snort. Come back to the real world with the rest of us! Our current GDP is 6x that of China. The US has 5% of the world's population, yet rice production in the U.S. accounts for 12% of the world's rice, and half of it is currently exported. We use 10% of this rice for pet food. China is suffering real hunger, and has terrible pollution, politcal and demographic family problems at a level we can't even dream of. Without us buying their goods, they are hurting big time. Peak oil will shatter them far more than us.

A good US-China comparison: they eat cats. We use 10% of our rice to feed cats. Let's keep our eye on the ball.

Patrick Deneen said...

m_david -
Two more weeks before I can have that drink - Lent continues to stretch out before me... Maybe it makes me even more ornery than usual.

But, really, I have to chuckle at the evidence of our wealth in our housing. Stripping copper wires? That may be what it's come down to. Indeed, there was an article I read a few days ago about people who are doing just this in the hours before they foreclose. The wiring is worth more than the whole damn house...

The larger point of my post was not that we don't have STUFF - we've got LOTS of stuff - it's that they are false signs of our purported bounty, bought with the accumulated wealth of previous generations on a titanic credit card. Only a fool considers himself wealthy by looking at all the stuff he "owns" without subtracting the debt it took to buy it.

I was kind of kidding about China sending us their food (relax! breathe!), but the fact is that they OWN us at this point - at least a lot of our debt. They may not be sending us (cat) food in the near future (though, if we keep farming the way we do, you never know), but they are buying up our failing banks at an astounding rate. Then again, the last laugh may be on them when they realize that they'll be the ones having to manage the runs on banks that Bernanke pretty much predicted during his last testimony...

Anonymous said...

I was kind of kidding about China sending us their food (relax! breathe!)

Touché. But hey, doomsday is serious stuff!

the last laugh may be on them when they realize that they'll be the ones having to manage the runs on banks

I owe $100 grand, I've got a problem. $100 billion, somebody else has got a problem. The world, not America, is sweating bullets as the dollar declines.

My point: any way you slice the bread, America is doing great compared to every other country out there: demographics, environment, natural resources, political freedom, protection of law. We even have the last surviving social conservatives holding the line on cultural morals needed for long term economic growth.

Education "fire in the belly" is the singular weaknesses I see in America when graded on a curve against other nations. As the smoke clears from the world's economic troubles (peak oil) and social decay (boomer hangover) I'm betting America is the last man standing. Who else you gonna call? Oil supported Saudi and Russia as they pass peak? Demographically and socially imploding Europe and Asia? Africa? My money stays here.

Peter Y. Paik said...

M_David, you might be correct that the US is in a better position than most, though Dmitry Orlov in his famous presentation on the "collapse gap" ( argues that the Soviet Union was better prepared for severe economic hardship than the US. One of the advantages enjoyed by the Russians is that during the "shock therapy" years of Yeltsin, though conditions were terrible, nevertheless people could not be evicted from their homes. Also, urban Russians had recourse to an extensive public transportation system, which did not stop working during the harsh transition years. Russians were also more accustomed to living in closer quarters, with multiple generations living under the same roof. People were also accustomed to growing their own food and fixing old appliances. The American lifestyle (our individualism, our reliance on cars, our belief in material progress, disposable consumer items) makes it far more difficult to endure economic hardship.

It seems to me that we will require some kind of collective effort in the way of green jobs, green technologies, rebuilding infrastructure, restoring public transportation, to make through the coming years without suffering the fallout from severe social disintegration. The challenges that we face are no less daunting than those of the Second World War, but the dangers we face today, because they are so inextricably bound up with our conceptions of what constitutes the good life, make it difficult for us to try to remedy them. At least during World War II, the enemy was on the other side - it wasn't our own habits and desires that were threatening us. Perhaps a large-scale religious revival is what is needed to help us right the ship in the direction of sustainability, given that the Bible warns against greed and selfishness.

You could be right, m_david, that the US might still come out on top, but this might simply mean having the best view of the rubble and ruins.

Anonymous said...

pa, the US might still come out on top, but this might simply mean having the best view of the rubble and ruins.

Now this we can agree on. The future's so bright, I'm afraid to open my eyes.