Friday, May 25, 2007

America's "Indebted Prosperity"

The US is kept afloat not because our economy is strong but because it is not. The US may be thought of as an empire but only because the rest of the world cannot afford not to keep us afloat.
The relationship between the dollar and the yen has been affected primarily by the adverse trade balance that we have with Japan. At the last summit meeting in London, for instance, we discussed the very high positive trade balance that Japan enjoyed then. The goal established by your own leaders was that this trade balance would be reduced. Instead, it's continued to go up.

I think, as the economic market leaders have recognized, the high export of Japanese goods and the relatively low imports into Japan of other goods, the yen has strengthened in comparison to other currencies, including, of course, the American dollar.

- President Jimmy Carter, Interview with Western European and Japanese Reporters, July 11th, 1978

In the meantime, the dollar continues to lose ground against stronger currencies and fundamentally stronger economies. I remember reading recently that our dollar is worth about 4 cents on a dollar of 1895. If I am wrong about that, I am sure someone will correct me.

Most recently, my good friend, Matthew Stevenson, contributing editor of Harper's Magazine, wrote both an explanation and a history of our "indebted prosperity" while reviewing a new book [The Money Men: Capitalism, Democracy, and the Hundred Years' War over the American Dollar] for the Texas Observer. Matthew's terrific review is an essential but often ignored American History.

Matthew starts by asking you to imagine a new, sponsored Constitutional Convention. I immediately imagined electronic, animated billboards arranged around the revered meeting hall in Philadelphia. The result is the "auctioning off" of the office of President of the United States, an eventuality emobodied in Mussolini's term: corporatism.

Something similar occurred on March 28th, 193 AD, when the Praetorian guards, literally, sold the Roman empire to the wealthy senator Didius Julianus for the bargain price of 6250 drachmas. I haven't tried to buy drachmas (lately) but it sounds like a bargain compared to the absurdly high prices that are paid by US corporations for control of the US Presidency, indeed, the US government. Our modern day "Didius" has fared better than Julianus.
A magnificent feast was prepared by his order, and he amused himself until a very late hour, with dice, and the performances of Pylades, a celebrated dancer. Yet it was observed that after the crowd of flatterers dispersed, and left him to darkness, solitude, and terrible reflection, he passed a sleepless night; revolving most probably in his mind his own rash folly, the fate of his virtuous predecessor, and the doubtful and dangerous tenure of an empire, which had not been acquired by merit, but purchased by money.

- Gibbon, The Decline and Fall of the Roman Empire; See also: Edward Gibbon: General Observations on the Fall of the Roman Empire in the West

An important point must be made here. Gibbon reports that Julianus paid for the Roman Empire in "drachmas". "Drachmas" denotes Greek currency. At that time, the basic unit of currency in Ancient Rome was a bronze coin called an as or aes. A sestertius, another bronze coin, was worth four asses. A silver coin, the denarius, was worth 16 asses. [I will not go there!]

If Gibbon is correct, it is an indication that Rome, by that time in decline, had suffered a catastrophic devaluation of its coinage. Even now "real" money is considered by some to be "gold" if anything at all has intrinsic value. That Didius Julianus would pay in Greek currency, not Roman, indicates to me that the smart money had already dumped the as, the asses, and the sestertius for drachmas. At last, bronze would seem to have little intrinsic value as "real" money unless you had enough of it to melt down for public statuary. I would wager that only very wealthy Roman aristocracy possessed denarius, which they might have held against the complete collapse of bronze coins.

Here's where everything begins to hit us where we live. Gibbon is remembered not only because he wrote a comprehensive nine volume history of the Roman Empire, he ventured a thesis: the Roman Empire, he claims, fell to barbarian invasions because of "a loss of civic virtue". The citizenry had become lazy. The empire had taken up the habit of "outsourcing" to barbarian mercenaries the more odious jobs, primarily the defense of the empire itself. By the time the Emperor Valens faced the "barbarians" at Adrianople, it is probably true that none of his some 40,000 legionaries were, properly, citizens of Rome. They were, perhaps, the 379 AD version of Blackwater, composed largely of Syrians and "barbarian" troops from Gaul. [I can't resist a trivia diversion. Gibbon, who devoted his life to his history of Rome, left London to complete his work in a less hectic environment: Lausanne on Lac Leman, otherwise known as Lake Geneva.]

Confident of his victory, Valens committed his force of barbarian mercenaries to battle but hadn't counted on the arrival of the barbarian cavalry. The Roman empire did not fall that day. But it would never regain its military dominance. Alas, among the lessons of history is the fact that no one ever learns the lessons of history.

Like many another, I have fallen into the trap of making analogies between the US and the Roman Empire. Who can resist? My good friend Matthew Stevenson, however, is much better at sticking to the point. His article is more than just a quick look at a perilous situation, it is a succinct history of our nation's "financial" founding. Many of us recall long lectures about the Constitutional Convention. But how many recall more than a cursory mention that Alexander Hamilton favored the creation of a National Bank and Jefferson, an agrarian visionary, did not? If you have time for only one "financial history" of the US, I recommend Stevenson in the Texas Observer. Where else will be found the connection between Hamilton's vision for America and our current Asian debt?
At almost every level, what is sustaining the U.S. economic miracle is Hamilton’s beloved debt. The federal government balances its books with paper laid off to Asian bondholders under the Faustian bargain that they buy our securities and
we buy their exports. Domestically, the lender of last resort is not the Fed, but the U.S. consumer, sadly as innocent about speculators as Abraham Lincoln.

- Matthew Stevenson, The Best Government Money Can Buy, The Texas Observer

Exploding budget deficits had their beginning with what is correctly called the "parlous economic stewardship of Ronald Reagan". Reagan cut the marginal tax rate for the very wealthy from 70% to 38% amid raised expectations that wealth would "trickle down". It didn't. The many presentations by Dr. Daniel Weinberger at the Census Bureau make the convincing case that the reverse occurred. Wealth did not trickle down. It flowed up!

Reagan's promises of an "orgy of investment" that would drive the economy to new heights failed to materialize for all but about one to five percent of the population. As even his Budget Director, David Stockman, would later admit amid his public recantations [See: Atlantic Monthly, The Education of David Stockman], “supply side economics” produced the longest and deepest recession since the Great Depression.

Bush pushed through Congress a trillion dollars worth of tax cuts. Like Ronald Reagan, Bush has waged a "war on terrorism" during which acts of terrorism increased. The final numbers have not yet been tallied for Bush. Again, like Reagan, the result is that after 9/11 and the war in Afghanistan, the budget deficit ballooned.

The phrase "debtors death spiral" is used to denote what happens when borrowers have to borrow to cover just the interest on previous loans. When new debt compounds old ones, bankruptcy is just around the corner. Many writers have speculated that the US has already entered such a spiral. What keeps us afloat? A "Carvellian" quick response is simply: the rest of the world which cannot afford an American black hole.

Will the American economy blink out in a big bang or Ross Perot's "giant sucking sound"? Whether a bang or a whimper, Herbert Stein, Chairman of the Council of Economic Advisers under Richard Nixon, may have summed it up: “Things that can’t go on forever, don’t.”

In the last six years, to pump liquidity into the market, the government has not only run record deficits but laid off further indebtedness on its citizens, who have been forced to borrow against the equity in their houses just to pay for college. Mortgage debt is now almost $11 trillion, up from $6 trillion in 2001. More than half of this debt floats with interest rates, leaving borrowers exposed to a credit squeeze. The same is true of consumer credit, which in the last 10 years has increased from $1.1 trillion to $2.4 trillion. (Popular T-shirt: “I can’t be overdrawn. I still have more checks.”) No wonder candidates for president are judged as collection agents.

So long as the carousel of indebted prosperity keeps turning, consumers can buy a new car every few years, and the executives of major investment banks can pay themselves salaries and bonuses that routinely exceed $15 million annually. The winners from this great wheel of fortune are the financial intermediaries—banks, investment houses, hedge funds, and stockjobbers—that issue credit cards, securities mortgages, collect monthly payments, package bonds to pension funds, and process payments at the mall. (As Mark Hanna crowed when William McKinley was elected: “God’s in his heaven; all’s right with the world.”) When the merry-go-round stops, the well paid executives will have retired to Boca Raton, but citizens will be left holding IOU bags that put their houses financially underwater and their government hocked to the Chinese. At that point, leasing the country to Hamilton’s speculators will not look like much of a deal.

-Matthew Stevenson, The Texas Observer, Matthew Stevenson is a contributing editor to Harper’s Magazine. His books are available at Odysseus Books .

At this point, it is impossible to talk about how the US continues to finance its spiraling deficit without some consideration of the billions wasted in the pursuit of phantoms, delusions, and outright lies. Here's a pertinent presentation by Congressman Henry Waxman of Santa Monica, CA:

Qui Bono? An answer:

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