It’s the Stupid Economy
Copyright © 2008 by Stephen W. Potts. All rights reserved.
At the end of January 2008, a month in which the American stock market lost 8.8% of its value, the economy has come to dominate the news and the presidential campaign. Once more we wake up from our American Dream to learn that another bubble has burst — like the dot-com bubble that ended the previous decade — and that as a nation we should have known better.
Lest we forget — the tipping point in the current crash was last fall’s sudden collapse of the sub-prime mortgage market. U.S. banks and other lending entities fell victim to a myth rooted in the rise of Reagan (along with other myths like Vietnam war protestors spitting on returning vets): that America’s poor were the nation’s last vast reserve of untapped wealth. If they could afford welfare Cadillacs in the 80s, why not inflated homes in the 00s? Bait them with superficially cheap loan rates and teeny tiny fine print, and once they are hooked reel them in with ever rising payments. What could go wrong?
Uh . . . we could go broke?
And then the dominos started falling. Because of bad loans, the homes were lost. Because of mass foreclosures, the credit companies crashed. Because of the housing glut, all related industries suddenly braked. Like a black hole, the resulting collapse sucked the rest of the American economy toward the event horizon. Because the American economy supplies so much of the world’s economic energy, global markets quaked.
Thus, even if one had properly diversified one’s investment portfolio, one could take no comfort. Conventionally investors are counseled to carry a mix of domestic stocks — say, two-thirds of one’s investments — and split the remaining third between supposedly safe if boring bonds and risky but potentially lucrative foreign stocks. But bonds, being so closely tied to lending, have taken a hit along with domestic stocks, while the increasing integration of the world’s economies in the age of globalization means that foreign stocks tend to mirror American ones to a significant degree. On the international seas anyway, all boats rise and fall together.
One conclusion becomes inescapable: the movers and shakers of our economy — the corporate chiefs, financial mavens, and fat felines who are most generously rewarded by our winner-take-all society — do not know how to drive an economy. The invisible hand on the wheel may in fact be absent.
But seriously, folks — today’s economy, nationally as well as globally, is far more closely monitored than it was in classical times. All ideological pronouncements to the contrary, our state capitalism wants a great degree of government oversight on the grounds that wealth is an entitlement, which is why corporate America turns to Washington in such times of trouble with all its hands out. The Fed responds with a panicky lowering of certain interest rates. President L. Duck and his loyal opposition in Congress agree on some tax rebates, promising a few hundred dollars per taxpayer to get the consumption pump primed again. As Naomi Klein noted in the Los Angeles Times, President Duck would love to use this crisis as he has all crises to push through pet pieces of bad policy, in this case to make his corporate tax cuts permanent — thus rewarding the very class that blew this bubble. Hey, don’t Republicans believe in personal responsibility? I know — rhetorical question.
Bubbles are in fact as old as capitalism itself. The first references to the term in The Oxford English Dictionary (2nd edition) quote Jonathan Swift in 1721 (on the scandalous “South Sea bubble” of the time) and Daniel DeFoe in 1745, the latter asserting that “In the good old days of trade, there were no bubbles . . . .” One wonders what good old days he was alluding to, considering that the first and still most famous bubble of the capitalist era-the Tulip Boom and Bust-had taken place in the Netherlands a hundred years before.
Since our own Gilded Age that followed the Civil War, U.S. culture has done more than any other to keep the accent on the second syllable of “economy.” In the 19th century the confidence man was a characteristically American version of the archetypal trickster, found both on the real frontier (“Sure, Mr. Donner, just point your wagon west and you’ll be in California in no time”) and in our folklore and literature, stretching from Herman Melville’s The Confidence Man through Mark Twain’s various renditions to L. Frank Baum’s eponymous humbug in The Wonderful Wizard of Oz. As others have pointed out ad infinitum, Americans are predominantly optimistic, and most regard the amassing of wealth — or at least of the stuff and status it betokens — as their birthright. In such a society, the Con Man is king — if not president.
Our postmodern capitalism, having shunted the hard work of producing things to other countries like India and China, now specializes in abstracts like creating new needs to fulfill and creating wealth by moving money around. Americans are less important as producers than as consumers, cash cows perpetually penned in by debt and hooked up to milking machines. Personal debt guarantees a steady infusion of interest to banks and other financial institutions. Credit card debt stands at record highs across the country, and many Americans pay nothing but their minimums every month, but there is nothing like a thirty-year mortgage to keep the cash flowing. Continuing to embrace the fallacy that MORE and BIGGER means better, Americans have doubled the average size of their automobiles since the beginning of the 90s and more than doubled the size of their homes. We have been supersized. Of course, this means MORE and BIGGER debt as well.
The lifetime mortgage has become the model for all industries. Another article in the Los Angeles Times traces the blossoming of Big Pharma in the last decade and its search for the ideal drug: one that everyone can take all the time. We have seen the commercials for prescription medicines that treat such subjective states as sadness and anxiety, and fluffers like Viagra and Cialis that produce hard-ons on demand. The next step is a Cialis that has to be taken every day. In the best of all possible worlds, eveyone would have a permanent IV installed so he or she could constantly adjust moods and physical needs, and people would pay a hefty monthly bill to Pharma as they do now for cable TV.
We could literally owe our souls to the company store.
A consumer economy dominated by artificially bloated needs can be sustained only by faith. As we hear every day now, confidence is what keeps our Hummers humming — confidence that the government is feverishly trying to restore with its interest rate cuts and $150-billion tax givebacks. But can the country spend its way out of financial crisis simply by making it easier to get into debt?
Furthermore, it is not just sub-prime borrowers who cannot pay their way out of the red. Living in debt has become the nation’s overall M.O. Listen to the presidential hopefuls at any of the GOP debates, for example, and you hear a mantra familiar from the Reagan years: cut taxes, and give our military everything it needs to dominate the world. No one ever questions how we can continue to spend $171 billion a year in Iraq and Afghanistan, let alone maintain our empire elsewhere. For that matter, you never hear them calling for a cutback on any of our other expensive wars, such as the war on drugs and the war on illegal aliens. Indeed, in the name of De Fence, they will spare no expense to build a Great Wall along the Mexican border.
One traditional American value you never hear any presidential candidate preaching is thrift. Even though the Republicans talk fiscal responsibility, they never practice it. As Atlantic Monthly editor James Fallows observed in a 2005 article that has recently resurfaced on the internet, “fifty years have shown they can’t govern without breaking the bank. Starting with Richard Nixon, every Republican president has left the dollar lower, the federal deficit higher, the American trade position weaker, and the U.S. manufacturing work force smaller than when he took office.” This is the semi-prophetic article (entitled “Countdown to a Meltdown“) in which he singles out the borrow-and-spend, steal-and-spend policies of the Bush presidency as the beginning of the end of U.S. economic hegemony.
So with American private and public debt at hemorrhage levels, where will the money come from to sustain the fevered American Dream? In the short term, from China. Even though the dollars it has earned from selling to Americans over the last decade have of course shrunk in value, “China can’t afford to stop feeding dollars to Americans, because China’s own dollar holdings would be devastated if it did.” So sayeth James Fallows, again, in the most recent Atlantic Monthly. He suggests, however, that China may rethink its strategy if it continues to look to the U.S. economy and sees red. If the current credit crisis demonstrates anything, it is that you can only squeeze so much cash out of a bankrupt.
Perhaps thrift is one old-fashioned American value that is worth fishing out of the attic and dusting off again. We may really need it soon.