Debt Crisis 080311
A Fringe News, Analysis and Opinion
How bad is America’s debt crisis? Bad enough that the main money man of the New World Empire, Zhou Xiaochuan, encouraged the U.S. to continue to take responsibility for debt, and to continue to cut spending in order to protect the value of U.S. Bonds. Zhou, considered to be one of the most intelligent and influential financial leaders in the world, is the past or present governor of several Chinese financial institutions, including governor of the Construction Bank, Chair of the Chinese Securities Regulatory Commission, and governor of the People’s Bank of China, the largest single financial institution in human history. He has a Phd in economic systems engineering.
Zhou spoke to the U.S. as though we were a Third World Nation squandering all our resources on war toys. If the shoe fits…
What brings the brilliant economist and head of a bank which is literally buying and selling us to make such remarks? We’re out of control, we can’t forget the past and we can’t accept the future.
When the Soviet Union succumbed to its own massive arms programs and found itself bleeding out through Afghanistan the world changed. The Wall came down, the European market grew, there was a demand for consumer goods creating new markets for European and Asian manufacturers, and most of all, the U.S. became superfluous.
The European Union, which flourished after the fall of the Soviet Union, is having trouble, too, and as the Global economy shakes and quakes, as energy becomes more expensive (our recent, 600 year global growth spurt came at an increasing energy cost) and populations increase, there could easily be more “Greece” examples ahead.
But, there is more to the loss of hegemony than the rise of a loosely assembled single currency giant. Indeed, Asia, without the aid of a single currency, was already functioning as an economic rival. And, that was before China became a consumer state with a billion of its own customers.
You don’t have to be a brilliant economics systems engineer to see what’s happening. The word “Global” is capitalized when we refer to an economic system which is truly resident in all nations. Humankind has been yearning for this Global system, from Native Americans trading sea salt for tool stone to the Silk Road to the Panama Canal to the supertanker. The system works most energetically when there are large differences in resources and technology, just as global weather is most energetic when there are pressure and moisture differences.
But, the Global system is passing into another systemic phase now. For a short time, the system functioned as an open system, since there were always more resources and more cheap labor. That kind of system existed for Rome, when they entered Britain and cut down the forests to make ships and glass, and decimated the large trees of upper Africa to make larger and larger tables. It existed for Britain when it harvested gold from India, leaving a morphed nation, neither an ancient Asian civilization nor a modern European one. As we see, as the areas of greater resources are used up, and where it becomes more expensive to harvest it, whether it is durable goods or human labor, there is a decrease in the relative wealth in the geographic zones.
That’s part of the situation: the world is changing, America’s brief moment as the bully young cop in the neighborhood is ending, and the great financial wealth we briefly enjoyed is leveling out. We arrived late in the era of empires, and became one when it scarcely paid any more. It costs us dearly to maintain this empire, and it is quickly becoming worth it only on those areas that have oil. That willingness, and ability, to get involved in other nations, to bend them to our will, is diminishing, and other nations know it. A hegemonic nation is one that enjoys technological advantage (because they have an active economy and attract the best educated from everywhere), military advantage, economic advantage (because they can take the best resources from everywhere) and cultural advantage, meaning everyone wants to wear Levis and drive a Caddy. It was great while it lasted.
We see evidence of this loss of hegemony everywhere, but one clear place is the price of gold. Certainly, there is an increasing need for gold, which is the only serious contender for small digital electronic instruments, but the current price of gold against the U.S. dollar is $1668. That reflects the price of gold, but it also reflects the drop in the value of the dollar. It is reflected in the fact that some really great electronic devices come from Korea; not simply built there, but designed there. It is reflected in the fact that increasingly, the things in your home were made in China.
The Soviet Union was not only a problem for Europe, it was a problem for China. There is Communism, and there is Communism, and though there were attempts at mutually beneficial cultural exchanges, ganging up on the U.S. in the Press, or sending Chinese kids to the Soviet Union to go to school, there were also potential military problems. They shared a 2700 mile border which was heavily armed on both sides. In the 1960s there were skirmishes, and even after 1969 there were difficulties in their relationship. The old China, the one struggling to find itself after the end of Manchu (Qing) rule in the early 20th Century, struggling to organize itself after World War II, struggling to feed itself after a horrible famine in the late 1950’s and ‘60s, that China also benefited from the shift in global power. The current China is more efficient, more directed to providing goods to its people. This new China values the market, it values education and produces brilliant economists. This new China is entering the Global market. Obsessed with walling in its people during the age of empires, it emerges to flex its power in the new era, an era when empires exist not on the ground, but in the market.
The changing of the world would not be so traumatic for the U.S. if we could recognize it, but we can’t.
America used most of the 1800s conquering itself, pushing across the continent and gathering states and territories into the 1950s. We’re probably lucky the Philippines and Cuba aren’t states now. World War I was a boon to the U.S. First of all, it didn’t take place here. If you have to go through a war, a war someplace else is the kind you want. Second of all, it allowed us to use the tremendous natural resources we still had then. Likewise, World War II ushered us fully on to the stage of Empire. Britain’s process of shucking colonies that were no longer useful was largely over by the time the U.S. emerged victorious and largely unscathed after the Second War. The European giants were exhausted from the second war, and the U.S. found only a thin, if bitter, foe in Russia. As Russia put the factories of Eastern Europe on railroad cars the U.S. kept its factories running, creating jobs for returning G.I.s and sending women back to the nursery and the kitchen. Even the swollen population of the “Boomers” enjoyed the good times after World War II, when building houses became an “industry” and the U.S. enjoyed a favorable balance of trade with a rebuilding Europe.
In truth, the average wage earner’s purchasing power peaked in the 1970s. Still, most people continued to do well as the nation enjoyed some of the cheapest gas and least expensive food in the world.
Then, in the first decade of the 21st Century housing stumbled as an industry, and it took down the value people enjoyed in their homes. The lending market, greatly over-extended, tumbled. Many who were playing the game took their profits and split, leaving the rest to hold the bag. Further, the wealthy fled the U.S., if not in body, then in investment. Even today, while most people wait for the return of their ability to pay their bills, the very wealthy continue to do well, as the gap between the few very rich and the most of us widens.
When it goes, it all goes; the government has no more money than we do. The war in Afghanistan and our involvement in Iraq continue to drain our coffers, but at least all those Americans are working. There are nearly 250,000 troops and American contract workers in Iraq and Afghanistan alone. The return of all those able bodied workers would dramatically heighten unemployment. The loss of contracts would impact American suppliers. Worst of all, some of America’s most powerful people would lose money.
Without the funds to pay, the government issues bonds to raise money. While the U.S. has the resources to repay those bonds, they’re a good deal.
However, when too much of the economy is debt, when we’re spending far more than we can repay, and when the car gets too old to be worth repossessing and the house has more debt than equity, so to speak, then America’s credit follows its citizens to the poor house.
In the mid 1990s some macro sociologists considered the world and concluded that before very long the standard of living in the U.S. would “normalize” to that of a “Second World” nation. This means we’ll have fewer cars, the things we can buy will be more cheaply made, and we’ll spend more of our money on food and shelter. This has already happened, but to some degree it is offset because things from Mexico and China are still cheap, but even this will come to an end as the “dollar store” becomes the “less than two dollars” store. A big shout out to everyone who remembers the “five and dime” store.
It also means there will be armies of very poor, that not all our children will find jobs.
The current “recession” or “depression” or “downturn” will “end”. But, again, this is likely a “normalization” rather than a temporary downturn. We are going to have to learn to get by with less. We are also going to have to learn to pay more taxes. Taxes mean we buy fewer things. Buying fewer things might mean fewer jobs.
Currently, the unemployment rate is officially 9.2%; the unofficial “real rate” of unemployment is assumed to be closer to 15%. It is likely that some currently out of work older workers will never work again, and certainly not at their previous rate of pay. Their migration to early retirement lowers the unemployment rate, which belies the poverty it causes. This, on top of those who want to raise the retirement age means some older Americans will have a hard time of their golden years.
What should we do about our growing debt, shrinking job opportunities and the increasing division between the wealthy and the rest of us?
Currently, our national dialogue is like a husband and wife fighting over money. The Republicans believe that prosperity comes from capital. Unleash the mighty power of American Industry by releasing the fetters of taxation, employee benefits, and environmental consequences. In short, business will rescue us from the mess it got us into if we’ll just forgive it from the very benefits of a sound economy: a healthy people, a functional environment and a government that can pay its bills.
On the other hand, the Democrats want to rescue the poor from poverty and keep every library open and save every tit and flycatcher. Spend more government money here in America, rebuilding roads here instead of in Iraq. At least in their rhetoric, they are the defenders of old buildings and old people, saving the true value of America in the face of a mercenary Republican party.
Like Bart and Lisa arguing how to split the piggy bank, they are more propaganda than substance, perhaps for two reasons.
First, despite Zhou’s jab at the U.S., our sovereign bonds continue to do well. Though we are suffering, and though the process of normalization is likely to take decades to stabilize itself, the U.S. still has resiliency in relationship to the rest of the world. After all, we still have military power, even if we’re slightly extended, and we have an industrial and technological base, and we still have consumers. There was a certain amount of political one-upmanship in Zhou’s remarks.
But, Zhou’s remarks weren’t all rhetoric. His point is sound; China owns $1,100 billon; if Standard and Poors, the credit rating agency, reduce U.S. treasury bonds from AAA to AA rating, they will have a reduced desirability, meaning a reduced “value”. The president and congress raised the ceiling of the national debt for the 79th time, which, we are told, is not like allowing yourself to raise your Visa card limit 79 times. Still, 79 times since 1960? At some point, shouldn’t “debt ceiling” mean something? If Zhou is good to his implication and China were to decide to dump its chunk of America, the value of our treasury bonds would drop. That means the government wouldn’t be able to pay its debt. Against this, Zhou has slowed the purchase of U.S. bonds.
For the last 79 times it’s been raised, both parties have made much of the part of the others in the creation of the debt. Social security and Medicare have been threatened, the military has been threatened, education and the unions, the environment, BLM, Forest Service and Parks have all taken hits for years. Increasingly, over the last several decades, government agencies have had to pay their own way. We’re losing our local post office because the Postal Service was made a not for profit, not quite government self-supporting un-business.
Even so, our debt is so large, and is growing so rapidly, simply cutting a few billion, or even hundreds of billions of dollars won’t be enough. Still, as Zhou reminded us, cutting spending is part of the task.
As legislators struggle to hold in spending, they have to consider their voters. It’s clear many legislators don’t understand government debt (we can’t all be economic systems engineers) and even those who do have to be careful about closing an air base or cutting Medicare. The military and Medicare consume 20 and 23% respectively. Voters are rarely economic experts, either, and the discussion of national public debt, or gross national product, or national budget or trade deficit. Even those who understand the national economy have a hard time to obtain meaningful facts. Even having the right data doesn’t make prediction easy.
Which is the second issue holding us back from real change, we’re just in denial.
Here’s a little story to show how it works.
In California’s pot growing counties wise and successful growers formed a kind of aristocracy. Prop 215 and the opening of the medical cannabis market seriously impacted the price of cannabis. A few changed with the times but many simply tried to grow more weed, even though the price per ounce decreased even as the competition increased. Now, many are living in debt, unable to accept that the market is tougher, and they have to lower their standard of living or go endlessly in to debt. Welcome to the new America.
As voters, we want two things: less taxes and more services. We want the cost of government reduced and we want our fair share of the pie. We want businesses to make money and provide jobs and we don’t want them to foul the rivers or screw their employees. In short, we want it all, and we should get it because we’re Americans.
As voters, we’re aware that the government is not providing jobs. We are aware that everything costs more. We understand that we can’t maintain the standard of living we’ve had, but we aren’t sure what to give up.
Others have noticed that government help isn’t as great as it seems. It’s expensive and once the government lands, it does things its own way, living by strange bureaucratic codes. Dis-satisfaction with our elected leaders is high on nearly all issues.
From the Fringe’s desk, it’s pretty clear we need to curb spending, pay more taxes, and spend money on local green projects. We need to free our energy needs from oil and come to grips with the reality of a lower standard of living. It’s possible the single family home is a luxury most people can’t afford, and it’s possible no family needs more than one car.
It’s true that we can live with a large national debt, but a sound economy and a fully employed populace are important to a strong country. We need to become more discerning how we spend our national income. That will come from national dialogue, if we can muster honesty in such a dialogue. How important, really, is Afghanistan? What should we do about our dependency on oil for energy and corn for food?