I always am amused when someone tries to tell me the economy and politics aren’t related. It usually comes from someone who also likes to talk about the supremacy of individual achievement and that everyone should make it on their own, usually someone who has inherited well. Politics is about how and where the money is spent, politics the fight for control of policy. Policy determines who the economy serves.
In case you haven’t noticed with all of the hoopla about the presidential races, but the economy is quickly collapsing. It’s a result of poor policy and political cowardice.
As I am typing this, the news is on and they say that $4.00 a gallon gas could be the norm by spring. This is the end result of an economy built on the belief in endless resources, fed by unbridled greed, imprisoned in a hydrocarbon based trap of its own design. And that is what we have.
We treat the earth, our environment, our common natural resources on which economic sustainability depends, like a car that we never maintain and regularly abuse. When we run out of money we sell another part off. So what about that dent in the fender, so it doesn’t run quite as well and smokes a little it still runs. No problem, sell off a bumper and buy some fuzzy dice. Sooner or later the brakes fail and we either crash or just have to let it roll to a stop. The reason we can drive SUV’s at all is because we have the biggest military in the world, even if George W. is trying to break it like another toy he can’t quite figure out how to work.
The Wall Street Journal last week said the unthinkable right out loud, STAGFLATION. An economy where wages stagnate and inflation increases. If the outlook were only that optimistic.
If you want to know what is going on for the average American, take the time to look up a little economic data. You will find millions of personal stories, as incomes dropped, home prices, college education costs and most other stuff inflated out of sight. Americans kept up by putting more people in the home to work and borrowing against their assets and their future. Cheap credit was thrust on the consumer as a life preserver.
What we are seeing is the value of overvalued real estate dropping like a rock. Foreclosed home counting on streets will soon be a hobby of those who still have one. Over half of the foreclosures come from unmanageable medical expense or loss of income. Of course some of those mortgages were bought by people who at least should have asked someone besides their real estate agent how they were getting in this big house for almost nothing. They could have asked the appraisers who inflated the value, or the seller who was flipping houses, or the title company that was making a mint on the land rush of chopping up property or maybe the mortgage broker who sold their adjustable rate, no money down, no document mortgage, almost the same day the made the loan.
The inflated mortgages were then combined and sold as bonds, whose value was also inflated as money for speculation poured in from tax cuts, increased profits and inflated stock prices that benefited CEOs and a few top shareholders and directors. Now we find out the folks who insured payment of those bonds inflated how much they could really cover if the bonds went bad.
And of course the Hedge funds speculated with money leveraged 10-1 on money that their investors had already leveraged 10-1. They trade heavily in commodities, bonds, credit derivatives and other arcane investment tools, all based on the idea that the stock market would rise forever and the party would never end. Investment banks invested into deals they were financing, just to get the bond business.
Private Equity firms used the cheap credit to buy companies outright in leveraged buyouts (LBOs), usually by promising the top people big bonuses for helping the sale happen. They leveraged huge amounts of money to make the purchase, paid themselves big fees and loaded the debt on the companies or broke them up and sold them. Many of the companies will have to make 25% returns to pay off the debt. Wage and benefit cuts, along with “outsourcing” are the norm to keep the money coming in.
Each demand for higher profit demanded cheaper and cheaper labor. After NAFTA many factories moved to Mexico, then moved just a few years later to China. This week an article I read said in one Chinese province 14,000 factories are closing this month because their owners are moving their plants to Malaysia, Bangladesh and India where the poor are even more desperate and therefore slave labor even cheaper.
Ain’t hunger a wonderful thing, creates incentive. Throw up a tin building, move in the machinery and get those sweatshops rolling. Make your own consumer population so desperate to maintain their life style the will ignore slave labor used to create cheaper and cheaper products. Bring on another Wal-Mart, more lead paint toys!
The local banks shut out of the game imitated their big brothers and financed commercial construction in all of the strip malls and condos in those sprawling new subdivisions. Each subdivision just making the commute a little longer, a little more gas, a few thousand more miles a year. Manageable as long as gas is cheap. Then of course you have to include the debt on all those “free” credit cards they kept sending. That debt was bundled and sold too. How long did they really expect us to keep this machine going when we are spending 114% of our income a year, how much debt before we just fall in our tracks?
A burgeoning world population meanwhile is demanding resources faster then a deteriorating planet can produce them, sending commodities from oil to corn sky rocketing.
Government spending is out of control because of Republican tax breaks and corporate subsidies. At the same time the administration contracts to people who will rape the system and appoints people from the industry to destroy government regulation or make the agency so dysfunctional it can’t do its job, then point and say “government doesn’t work.” Our infrastructure is in such bad shape, they say our only choice is to sell it to private companies and throw ourselves on their mercy. Throw in massive spending to support the use of the war machine to defend and expand a model where 6% of world’s population takes 26% of its resources and you get a lot of enemies. Not to mention that you go from a national surplus to a $9 trillion dollar deficit in just eight years.
No problem, sell more debt, print more money. The feds and European banks have pumped 100s of billions of dollars into the market place to keep a full out crash from happening. The result is a dollar falling in value, soaring inflation and the wealthy here and abroad rethinking buying anymore of our debt.