Friday, April 20, 2007

The New Math Of A False Economy

(graphic courtesy tengrain at

As my long-time readers know, I'm a wonk for economic stuff. Hazard of my avocation, I suppose, needing to stay on top of the economy and make decisions based on my observations. So I stumbled across this story, and started reading it, when I found a paragraph that I think can help explain and tie together some loose threads that have been floating on the periphery of your field of perception lately:
"The negative housing wealth effects on consumer spending could be more pronounced than anticipated," Zandi warned, estimating that a third of U.S. households tapped a substantial amount of home equity in recent years to support spending.

But with stagnant or falling home values, and rising mortgage delinquencies, consumer spending's sole support looks to be wage and income growth, and this at a time when households are being heavily taxed with higher energy prices.

Energy costs rose only 2.9 percent in 2006. But in the first three months of this year, they shot up at an annual rate of 22.9 percent, accounting for about 41 percent of the increase in U.S. consumer prices.
The Consumer and Producer Price indices that are so heavily reported by the mainstream media purposely ignore energy and food prices, due to their volatility. Personally, I think that's a mistake: first, we have much better tools to measure these and to factor out volatility now, and second, these are two core purchases that consumers must make, so to say "inflation was only 3% last year," while food and energy prices were up together anywhere around ten percent is a lie designed to make the administration look good.

But I digress.

Take a closer look at the excerpt I posted: you'll note that the past several years' economic growth has been generated not by wage and income increases (which have remained stagnant to down. It wasn't until 2004 that the final leg irons of recession, consumer income, surpassed the levels at the end of the Clinton administration and even that's not factoring in inflation), but by borrowing against the equity in our homes.

An increase in debt, in other words. Debt can be defined as an advance against income you hope to receive in the future, and interest payments a hedge against the lender losing all that money if your gamble fails.

The optimistic presumption the average American lives on is things are going to get better: my company will make more money. They'll pay me a higher wage. I'll be able to pay off my debts.

Not so much, anymore. Wages have stagnated for nearly thirty years while the banking industry has gone to great lengths to fool consumers into believing they are worth more money than they truly are.

I suppose to a large extent, bankers can be blamed for this situation. Anyone with half a brain who spends a little time studying the overall economic state of this nation would have tightened their lending rules, not expanded them, in order to keep their balance sheets honest and their mortgages current. And banks are chock-a-block with MBAs from Ivy League schools who are trying desperately to learn the lessons I learned on the streets of Noo Yawk: don' lend someone money what can't pay youse back, unless youse is prepared to break deir bot' legs.

See, another side of this comes out in the quarterly earnings report that banks have to prepare for their shareholders. Obviously, if I'm Chase Manhattan, I have to keep my earnings higher than Citibank in order to keep my investors from moving their money there. New loans generate gobs of short term income. Old loans do not. The shell game is to keep those fees and surcharges rolling in (which is why the penalties on credit cards have also become so exorbitant: that's pure profit).

That "immediacy culture" pervades right down to the administrative level, as those Ivy League MBAs are thrown into competition with each other to come up with "the next insanely profitable cash cow." To the winner goes the spoils: make the bank the most money, and you get the corner office, the bigger bonus, the trips to Hawaii.

No one thinks long term, so no one looks long term, so in truth, no one saw this coming, but it is.

We're already in the soup on this, and there's not much to do to bail Americans out. The government could try but thanks to Bush and his tax cuts for the wealthy and his invasion of Iraq, the government has no money either and the money it has borrowed is not going to be allowed to go to its people who need it most.

In effect, we'll all be wage slaves to China. And we've seen what their standard of living is like.

After that, the future gets murky. Obviously, taxes on the wealthy will skyrocket. They have to, particularly as baby boomers retire in greater numbers each year and the pool of productive tax paying Americans dwindles. Taxes on all of us will go up, as well.

Suppose for a second, though, that they don't. Some political pressure keeps honest politicians from talking about tax increases. It becomes a political third rail.

We can't cut spending sufficiently to offset the loss in revenue. Aside from Social Security (which is funded separately anyway) and defense, there's not a whole lot the government spends money on that could scale up to free hundreds of billions of dollars for domestic spending programs that would now go from discretionary to mandatory, unless the sight of people dying in the streets is somehow magically made palatable to Americans. Events of the past week indicate Americans wouldn't want that on their TVs.

About the only places we could cut are defense. And defense. And homeland security.

I think we all know what that means.

So by destabilizing the American economy for decades if not centuries to come, Bush has created the single most dangerous breeding element for the domestic security of Americans: a weakened economy with not enough money to spend on protecting us all.

Thanks, Dumbya.