If it was not obvious when Kevin Phillips' new work Bad Money was published in April, it should be obvious now: the U.S. economy - and thus much of the world's economy - is in decline. The book pivots around events of August 2007, making me wish that Phillips had held off writing the book for another year - or his given option now, to wait another year and see how the system, the financial dynasties, play out over the first part of Barak Obama's tenure as president.
Phillips is a writer who crafts his arguments well, providing a solid thesis, supporting it well, and providing summaries that accurately reflect the trend of his arguments. The big argument in this work is of "bad money" - money tainted by false economics data, by manipulations in many stock devices that are inscrutable to anyone, including apparently those that created them, and money or wealth created by huge amounts of private debt.
Phillips' main concerns are money and oil. For the former, money, it is the size of private debt rising from $11 trillion to $48 trillion within two decades, promoted by a financial sector as "the largest sector of the U.S. private economy" at twenty-one per cent of the gross domestic product (GDP) that has overtaken the manufacturing sector, now only twelve per cent of the GDP. His description is not of risk but that "Bingeing on debt is reckless." Added to these money problems are the changes in official statistics that occurred over the same time period that minimized downturns, underestimated inflation, and overstated growth.
Oil is the second main concern, albeit tied to the first, as the dollar is the de facto reserve global currency having at its base oil transactions priced in U.S. dollars. Factors considered by Phillips are U.S. peak oil (1971) and possible/probable current global peak oil occurring now or in the very near future (accompanied by more misleading statistics about "liquid equivalents" to the barrel of oil from other sources). The effects are twofold: first, the U.S. increasingly relies on imports of oil for its transportation, heating, and industrial activities (what few remain in the U.S.); and secondly, as oil resources dry up, the costs will increase significantly. Oil has become an "incipient strategic albatross."
Oil and debt have combined to show what the U.S. "had ceased to do - produce enough of its own manufactures and oil - as well as what it had started to do: fantasize about military and financial imperialism....Few miscalculations have been so tragic.[italics in original]"
Within all these concerns is Phillips' emphasis on mortgage debt, the money that has kept the U.S. economy afloat. "In short, borrowing against homes enabled stressed consumers to keep consuming." That is all too familiar - after every major crisis (9/11) or within every downturn (acknowledged) arrives the rhetoric exhorting the public to spend, to get out and go shopping. Within the past five years mortgage money "provided some 40 per cent of the growth in U.S. GDP and employment," making the GDP highly dependent on accumulating more and more debt.
A missed historical factor is emphasized here, a factor normally ignored during economic hard times. While the public is frequently, even overbearingly, reminded of economic slumps caused by stock markets and the related woes of the financial/industrial sectors, the historical case indicates, "Real estate slumps...had unleashed greater economic dislocation...than comparable stock market downturns....property bubbles have historically been the regular main causes of major financial crisis." The difference perhaps being that the financial/industrial sectors are continually bailed out, while the private debt sector is left to their own devices, entangling the banks and other financial institutions along with them.
In the chapter "Finance - The New Real Economy?", Phillips describes the path to our new economic order. Three prerequisites allowed the transformation of the economy: the closing of the gold standard which allowed trading in currency futures; the advent of computers; combined with new economic theories that promoted a "speculative universe." From there the history of finance capitalism is presented, including clearly defined charts, my favourite being "U.S. Financial Mercantilism: Bailouts, Debt, and the Socialization of Credit Risk, 1982-2007", showing neatly the history of "welfare capitalism."
Twice (at least) Phillips emphasizes the difference between manufacturing and finance as economic sectors. "Finance became the chosen sector of the U.S. economy - the one that would be protected and promoted...Manufacturing would receive no such help," and later "In contrast to the old corporate outlays that used to bestow major benefits on communities and workers, the new ones favored but investors and shareholders."
His next chapter "Bullnomics" covers the falsification of statistics that hide the real depth of downturns and the real weaknesses of the good times. "Bull" has a double entendre here. It is the metaphor for the falsely sustained market over the past two decades. It also describes the quality of the statistics and the information provided by the various participants in that market, as in manure.
The economics of "Securitization - The Insecurity of It All" follows. It is the most difficult chapter to read as it delves into the jargon of economics, discussing securities "as a business." The real risk in simpler terms is that of the huge mortgage debt obligations taken on by private citizens, combined with the intertwinement of the various financial institutions without regulation, and the shrinkage of the family discretionary income. At the end of it all is reality - the current downturn of the stock market, the huge corporate bailouts proposed by the government for their financial cronies, leaving the private citizen with the ongoing depression of housing prices and increasing job losses especially in housing construction and manufacturing (mostly automobiles to date), the latter being the dinosaur that leads the discussion back to oil.
Early in his discussion of oil, Phillips hits the scary territory of an empire in decline. With all the political tensions surrounding oil and the petrodollar, with the severe decline in the world's attitude towards the U.S. and the growing financial problems around the world, "The tinder is almost perfect for a war or military strike rooted in the frustration of a great power in decline." Later he says we are approaching "a high-risk decade, when the word "intense" will probably fail to describe global petroleum rivalries." Should this serve as a warning? I think so.
Another part of the discussion is the dynastic nature of the government, how so little changes from one election to the next except the names. It will be interesting to read Phillips in another two years as he outlines the ascent of Barak Obama to the presidency. While campaigning with a fluent oratory on "change" and "hope" Obama's early indicators show a clear alignment with the Clinton side of the dynasties. Obama's current financial team has four members directly related to Robert Rubin, the former Secretary of the Treasury with Clinton, now a Citigroup executive who believes we are still in a cyclical downturn (perhaps as historically spelled out by Phillips, the historical cycles of empires and their downfall). Hillary Clinton is on board as Secretary of State, confirming the Clinton tie.
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