A Greedy Economy On Borrowed Time: America Under The Sword Of Damocles
Above Photo: Ground crew member Sally Mazzocchi holds on as she tries to steady a 53-foot-tall American Flag hot air balloon in the wind as it is inflated at Dobbelaar baseball field, July 3, 2008, in Hoboken, N.J. (Mel Evans | AP
NEW YORK — On the afternoon of December 31, 1999, I boarded a flight from Chicago O’Hare airport for San Francisco International and found myself seated next to a bear of a man, who, at 6 feet 6 inches tall, and more than 300 pounds, squeezed into the middle seat of an emergency row. His unkempt sandy blonde beard contrasted with a ratty, tent-sized red plaid shirt. As we hit cruising altitude, he introduced himself as “Gary” and began to tell me his life’s story.
He’d run with a wild crowd in Illinois, smoked way too much meth, gotten locked up, then released, locked up again, released a second time. With the help of a good woman, he said, he finally kicked his drug habit — though he’d gained nearly 100 pounds in the process — and decided a change-of-scenery would do him good. Hence, he was relocating to the backwoods of northern California.
He was also a survivalist, and he was preparing for the Y2K disaster that hordes of Americans were anticipating when the clock struck midnight and a computer glitch plunged the entire world into chaos. He had stocked his RV with food, water, flashlights, batteries, a generator, medical supplies and, of course, handguns, should anyone covet his supplies. And he urged me to do the same, because, he said, “this Y2K thing is going to be the big one, Jon.” At this, he clutched his heart theatrically as though he was the comedian Redd Foxx in the 70s sitcom “Sanford and Son.”
“The big one.”
As our plane landed, he made me promise that if I didn’t do anything else, I would at least buy enough bottled water to last me a week. Not wanting to disappoint my new friend, I lied and said that I would, and went on my merry way. But I thought of Gary the other day: Sitting in the locker room at my gym after a workout, a casual acquaintance, a retiree nicknamed “Tug,” emerged from the shower, and told me about a nearby store that was selling a dozen 8-ounce bottles of water for less than $2.
As he toweled off, he said that he’d purchased 20 of the packages earlier that day, and planned to buy another 20 by the weekend. He urged me to do the same.
“You gotta get ready for this next recession Jon. This next one is going to be the mother of all recessions. This is going to be the big one.”
And with that, he clutched his chest theatrically and laughed.
With every downturn, more powder in the keg
Gary and Tug warned of a catastrophe 19 years apart but the difference is that while the media droned on and on about a Y2K disaster that never came, it is practically mute about a very real Damoclean sword hovering above our head today.
Signs of the apocalypse abound.
The first sign is history. During America’s Golden Industrial Age, between roughly 1933 and 1973, recessions were characterized by oversupply: domestic manufacturers made more stuff than consumers could buy. But when Federal Reserve Chairman Paul Volcker raised interest rates sharply in 1980, he essentially weaponized monetary policy and took aim at workers’ wages that fueled the economy but also caused inflation to spike. The Fed’s contractionary policy, combined with Reagan’s austerity budgets, deregulation, and attacks on labor to gradually begin to hollow out the domestic manufacturing sector.
The recession that began in September of 1987 did not result from oversupply but over-speculation — or “irrational exuberance,” to use the term coined years later by Federal Reserve Chairman Alan Greenspan — which sent the stock market into freefall.
Since then, recessions have occurred roughly every five to seven years, with each downturn being worse in severity than the previous one.
The last global financial crisis, of course, began a decade ago this month and was the worst since the Great Depression.
Then there’s the little matter of math. The 2008 financial crisis was caused by reckless borrowing but rather than launching a program of debt forgiveness to restart the stalled demand economy, the Bush and Obama administrations left the debt intact, and merely piled on more. Donald Trump has doubled down on that approach, combining an increase in military spending with massive tax cuts.
The deficit for this year is expected to rise to $890 billion or roughly $230 billion more than what his administration inherited from the Obama. The shortfall in government expenditures is expected to rise above $1 trillion next year.
The U.S. today owes more money than any country in the history of the world.
In an article published earlier this month, John Feffer, the director of Foreign Policy in Focus, wrote:
Deficit spending makes sense during a recession. What Trump is doing now is essentially allowing the rich to siphon the cream off the top, providing the middle class with some skim milk, and leaving the sour dregs for everyone else. And unlike during earlier economic expansions, government revenues are actually falling, which is what small-government advocates are secretly cheering: less money, less government.”
And as Feffer notes, it’s not just public debt that is a drag on the economy. Total household debt reached a new high in August: $13.3 trillion, roughly equivalent to the country’s total economic output for a year — including a record amount of student debt, $1.5 trillion; mortgage debt of $9 trillion, which is perilously close to the $10.5 trillion it reached during the 2008 mortgage meltdown; and credit-card debt that surpassed $1 trillion for the first time.
Capitalizing on low-interest rates intended to re-inflate the asset bubble that burst in 2008, corporations have also been bitten by the borrowing bug. This summer, corporate debt reached a new high of $6.3 trillion, lowering the cash-to-debt ratio to 12 percent. That’s $1 in cash for every $8 of debt, worse even than it was in before the last recession.
Moreover, in an article published earlier this month, the sociologist and author Walden Bello wrote:
[T]he products that triggered the 2008 crisis are still being traded. This includes around $6.7 trillion in mortgage-backed securities (MBS) sloshing around, the value of which has been maintained only because the Federal Reserve bought $1.7 trillion of them.
U.S. banks collectively hold $157 trillion in derivatives, about twice global GDP. This is 12 percent more than they possessed at the beginning of the 2008 crisis. Citigroup alone accounts for $44 trillion, or 50 percent more that its pre-crisis holdings, prompting a sarcastic comment from one analyst that the bank seems “to have forgotten the time when they were a buck a share,” alluding to the low point in the bank’s derivatives’ value in 2009.”
Economists and financiers fear that the Treasury will have to print more and more money to service that debt, ultimately devaluing the currency and triggering hyperinflation, similar to what Germany experienced in trying to repay its onerous foreign debts following World War I.
Intentional, inexorable, and soon
It’s impossible to predict when these storm clouds will converge but hedge fund manager Ray Dalio told Bloomberg News earlier this month that he believed the U.S. would slide into recession in two years when the government begins to feel the shortfall from the Trump tax cuts. He said:
We have to sell a lot of Treasury bonds, and we as Americans will not be able to buy all those treasury bonds. The Federal Reserve will have to print more money to make up for the deficit, will have to monetize more, and that’ll cause a depreciation in the value of the dollar.”
None of this is accidental. Indeed, inequality was the objective of the policymakers following the 1973 stagflation crisis that was caused by high wages at home, driven by militant labor unions; and high energy costs abroad, driven by militant, oil-producing Arab states.
Whenever the next crash occurs, it’s not likely the U.S. can return to a functioning economy that is like anything we’ve seen before. Banks that were too big to fail a decade ago, are even bigger today. And, with interest rates already low, central bankers have exhausted the last tool for fixing a broken capitalist economy. In an article published earlier this month, Bello wrote:
[F]inancial operators are racking up profits in a sea of liquidity provided by central banks, whose releasing of cheap money has resulted in the issuance of trillions of dollars of debt, pushing the level of debt globally to $325 trillion, more than three times the size of global GDP. There is a consensus among economists along the political spectrum that this debt build-up cannot go on indefinitely without inviting catastrophe.”
“The big one.” Time to lay in those supplies.