The Physics of Speculative Bubbles
Life seems good. I am an American with a comfortable income, adequate liquid investments, and no personal debt other than a modest home mortgage. I can afford to buy virtually any gadget that I desire, and my wife and I can easily afford such luxuries as cruises and travel abroad. If one were to describe a paradise on earth, I am living in it.
So why do I have a growing sense of apprehension about the state of the U.S. economy?
The Bush Administration assures us that the U.S. economy is expanding briskly and is the envy of the industrialized world. Wall Street gurus tout in veritable unison the "dynamism" and even "hegemony" of the American economy. Federal Reserve Board Chairman Ben Bernanke discounts the possibility of a "hard landing" and considers the American economy to be healthy and robust, a stable and attractive magnet for foreign investors. He assures us that the ongoing (and even accelerating) subprime mortgage crash is a mere "bump" on the road to market innovation.
So why do I mistrust such happy talk? Because the U.S. economy displays many earmarks of a speculative bubble. And here is what can happen when a speculative bubble bursts, as it did in the Crash of 1929:
--By 1933 the Dow Jones Industrial Average lost 89 percent of its value and did not return to 1929 levels until 1955.
--Gross National Product (GNP; these days we use Gross Domestic Product, GDP) fell by 33 percent.
--Unemployment reached 25 percent.
Let us ponder today's cold, hard facts below the break.
Signals and Portents Aplenty
When a canary stops singing and drops unconscious to the bottom of its cage in a mine shaft, alert miners interested in survival have the good sense to take notice and move fast to find better air. As I travel the world, either physically on trips or daily via the Internet, I see canary after canary plummeting before my eyes.
Have we become a nation of fools in a consumer paradise? Are we too preoccupied with accumulating trinkets, luxury cars, large houses with big mortgages, swimming pools, country club memberships for the wealthy elites, and Wal-Marts for the rest to notice the canaries passing out? Here are a few canaries that have been dropping within my admittedly narrow field of vision in recent months.
Money, Debt, and Savings
--The U.S. personal savings rate has been negative since April, 2005, and the U.S. net national savings rate (personal and corporate savings less government borrowing) was at best 2 percent during 2006--territory unseen since the depths of the Great Depression in 1932 and 1933. China, on the other hand, has a gross national savings rate of over 40 percent, and India has a national savings rate of over 22 percent. Japan has a savings rate of approximately 26 percent. Here is a table.
--The U.S. current account (i.e., trade) deficit was $755 billion for 2005 and $811.5 billion for 2006. This deficit is now 7 percent of Gross Domestic Product (GDP).
--U.S. Treasury securities held by foreign creditors, notably China and Japan with over $1 trillion held between them, now total $2,183 trillion.
--By the end of 2006, the total U.S. national public debt was $8.6 trillion, a little more than 65 percent of GDP, and it continues to rise on a steep slope. For comparison's sake, Argentina's national debt/GDP ratio reached 64 percent in 2001, on the eve of an economic/social collapse rivaling the U.S. Great Depression.
--By 2007 total U.S. private and public debt had reached over 350 percent of GDP, as compared the 260 percent ratio achieved at the depths of the Great Depression.
--Some U.S. officials complain that the Chinese yuan is undervalued. But is it not just as reasonable to conclude that it is the dollar which still is overvalued and must face substantial further devaluation, not only against the yuan but against other major world currencies-just as it has been consistently doing since February, 2002?
--China has moved toward pegging the value of the yuan against a basket of currencies, thereby moving away from its past practice of tying the yuan's value closely to the dollar. Could it be that the U.S. dollar has been artificially propped up by being so closely pegged to the strong yuan? What are the implications for the dollar as the Chinese move toward valuing the yuan against a broad basket of currencies and perhaps eventually toward allowing the yuan to float freely against other currencies?
--In my travels I am ceaselessly astonished at how much a dollar can buy in the U.S. compared to what it can buy in Europe. The pricing structure of the U.S. economy--except for medical care and for housing in certain cities--seems unnaturally low when measured against consumer baskets in the rest of the industrialized world. Even adjusting for the burden of the value added tax (VAT) in Europe and for the effects of high price supports for European and Japanese farmers, I would judge that in global terms the dollar is still overvalued by at least 25 percent and perhaps by as much as 40 percent.
--In the past few years the workings of the Federal Reserve have become less transparent. The Fed stopped publishing figures for M3 (which had been displaying a sharp upward slope) as a measure of the money supply in 2006. The Fed argued that M3 added little useful information to the measure of M2. Maybe so. But should we not harbor at least some concern that the Bush Administration really is no better at handling macroeconomics than it is at occupying Iraq or running the Department of Justice?
The Deindustrialization, Looting, and Relative Economic Decline of America: A List of Dropping Canaries
--In 2006 General Motors announced plans to fire 30,000 workers--27 percent of its manufacturing work force--and to close 12 plants in North America.
--Ford, not to be outdone, followed suit by announcing plans to fire 30,000 blue collar workers in North America--over 30 percent of its manufacturing work force, and it may also fire 4,000 white collar employees. Ford plans to close 14 North American plants. Ford had already cut 35,000 workers and closed five plants in a restructuring five years ago, but it had failed to stem its decline. Ford's spinmeisters called latest plan the "Way Forward." (Hmm. Did the Bush Administration plagiarize this Ford slogan for its own ill-conceived, desperate "surge" of troops into Iraq?) Of course, in its first year this strategy brought Ford a record-shattering $12.7 billion loss. Yet Ford rewarded its executives for this performance with the usual millions of dollars in bonuses. If this future for Ford is its "Way Forward," we can shudder to think what "Retrenchment" or"Accelerating Collapse" would look like. Most of us would call this "looting."
--DaimlerChrysler chimed in by announcing that it would slash 6,000 white collar jobs worldwide. In 2005 the company had fired 8,500 production workers. In 2001 it had restructured by firing 26,000 workers in North America. Daimler finally had to spin off Chrysler to Cerberus Capital Management for dismantling, but as of this week the deal is has been struck with sudden indigestion by Wall Street's suddenly septic corporate debt mechanism.
--In 2005, Delphi, the major parts supplier for General Motors and the largest manufacturer of auto parts in the U.S., declared bankruptcy and demanded that its workers accept a reduction in wages and benefits of over 60 percent: $65 down to $20 an hour overall; $27 down to $10 an hour in wages alone. Is Steve Lewis, the Delphi CEO, offering to cut the compensation package for himself and his executives between 60 and 70 percent as well? Don't hold your breath. Delphi is still struggling to emerge from bankruptcy.
--United Airlines fired 25 percent of its work force and gained court approval to default on pension commitments to 122,000 United employees and retirees. More looting?
--IBM decided in 2005 to fire 13,000 employees in Europe and the U.S. and to hire 14,000 new employees in India.
--On a trip to India in 2005, I surveyed the local help-wanted ads and noticed that experienced software engineers were being hired for the equivalent of $1,000 a month--one-sixth or one-seventh the salaries in the U.S.
--In Chennai, India I spoke with an entrepreneur who employs 100 software engineers and has contracts with Palm, Inc. and Microsoft. She and her husband are growing their business primarily by signing contracts with Chinese manufacturing firms. The Chinese have the advantage in engineering and manufacturing products, but they want Indian software expertise to apply to their industrial process technology. No doubt there will be considerable synergy between Indian software engineers and Chinese hardware engineers.
--In the past four years Indian manufacturers have overcome quality control problems and have become major suppliers in the global market for automobile components.
--India's GDP growth rate in 2006 was 9.4 percent, and in 2007 it is poised to be approximately 8.5 percent. Despite its severe difficiulties in upgrading its infrastructure and bringing modernity to its massive rural population, India may match the size of the U.S. economy by approximately 2035, one generation from now.
--China's GDP growth rate for 2006 was 10.7 percent. Even with a projected modest slowdown in growth to 8 percent and with its need to overcome shortcomings in its banking sector and in its capital markets, China is poised to overtake the U.S. as the world's biggest economy sometime during late 2011 or early 2012-and sooner if the U.S. economy suffers a recession or depression. That bears repeating: in 2011 or 2012. (The calculation uses the CIA's purchasing power parity method to calculate China's GDP in 2006 as $10.17 trillion.)
--Chinese car manufacturer Geely has announced plans to build a state-of-the art factory in Hong Kong and to export an upgraded model of its Geely sedan to the U.S. by 2008.
--China is investing heavily in its own higher education system. It now produces each year over 350,000 engineers with four-year degrees. The U.S., on the other hand, produces from 70,000 to 137,000 engineers a year, depending on which set of numbers one believes.
--Indian Prime Minister and former Finance Minister Manmohan Singh, an able economist (degrees from Cambridge and Oxford, and experience with the IMF), deserves much credit for unleashing the entreprenuerial potential of the Indian economy. In China all nine members of the Politburo, including President Hu Jintao himself (a man rumored to be blessed with a photographic memory), are trained engineers, most of them civil engineers. In both countries the top political leadership is intellectually well equipped to deal with facts, perceive reality, and search for optimal long-term economic solutions.
--In the U.S. the current political leadership is...well, you fill in the blanks.
--In December, 2005 China and India won a joint bid to purchase Petro-Canada's 37 percent stake in Syrian oilfields. In January, 2006 these two emerging Asian giants signed five memoranda on energy cooperation.
--China obtains two-thirds of its petroleum imports from Iran and Saudi Arabia. On January 23, 2006 Saudi King Abdullah met in Beijing with Chinese President Hu Jintao, and the two leaders oversaw the signing of five agreements, including one on "oil, natural gas, and mineral cooperation" and another on "economic, trade, and technical cooperation."
--On January 1, 2006 China implemented a Law on Renewable Sources of Energy to begin a long-term effort to promote greater use primarily of solar energy. China already uses passive solar power to provide water heating for 35 million--yes 35 million--buildings.
--U.S. companies tinker with fuel cell technology, but where are the plans for a hydrogen production, distribution, and filling station infrastructure? Where are the fuel cell vehicles in the showrooms? And why is Detroit so slow to move to gasoline-electric hybrid vehicles?
--Income disparities in the U.S. steadily increased beginning in the Gilded Age of the 1890's and then accelerated during the Roaring Twenties and up to the Crash of 1929. Income disparities began increasing again in 1969, are now accelerating, and have reached levels unseen since the Roaring Twenties. While hard numbers are difficult to track down, for the very wealthy seem to be able to evade census takers and to deflect meaningful scrutiny by statisticians, it appears that by the late l990's the richest one percent in the U.S. controlled approximately 40 percent of the nation's wealth. After several more years of Bush Administration income tax cuts and capital gains breaks, that one percent now controls well over 50 percent of the nation's wealth. This richest one percent controls more wealth than the bottom 95--repeat, 95-percent. This is not about leading. This is about looting.
--By the way, In 1929, on the brink of the October Stock Market Crash, the richest one percent of the U.S. population received 22 percent of the nation's income. Our government of the corporatists, by the corporatists, and for the corporatists has now returned us to that level.
--Today fully 80 percent of the U.S. population is deriving no benefit from America's much-vaunted economic dynamism. The gap between rich and poor in the U.S. is the highest in any industrialized country. The average salary of an American CEO is nearly $12 million a year. The average salary of a worker in an American corporation is between $27,000 and $28,000 a year. That is a ratio of 431 to 1. In Japan today the ratio is 10. In Sweden and Switzerland, it is less than 20. In China it is around 21. In short, the income disparity in the U.S. seems to be out of reasonable balance by more than an order of magnitude. This, again, is all about looting. The predators find ways to pack the
corporate boardrooms with passive, inattentive enablers who are happy to raise their hands when asked to vote "Aye," but who go missing (as do the courts) when it comes to defending the interests of the company's shareholders.
--Incredible as it may seem, establishment think tanks, such as the Cato Institute, have begun talking about eliminating the tax on capital gains altogether. Is the goal to breathe one last gasp of air into the speculative bubble in the hope of cashing in just before the bubble bursts?
--While China and India maintain secular governments--the first an authoritarian one-party state, and the second the world's largest democracy--and seek to put themselves at the forefront of science and technology, certain political and fundamentalist religious forces in the U.S. seek to blur the separation of church and state and even to undermine the empirical, scientific method itself by substituting "creationism" or "intelligent design" for the teaching of evolution. These same forces seek to prevent the biotechnology industry from pursuing cutting edge medical research with stem cells. The very same alternative universe mind-set discounts the scientific consensus on global warming and the impact of man-made greenhouse gases, and it ignores the worrisome potential consequences of near-and-long-term climate change. These groups are promoting the disenlightenment of America and its economy.
--Joseph E. Stiglitz, the Nobel Prize winning economist from Columbia University and former leading economist of the World Bank, and Linda Bilmes of Harvard University scrutinized the real financial and economic costs of the U.S. invasion and ongoingoccupation of Iraq. They calculated that the total will end up being a minimum of $1 trillion and possibly as much as $2 trillion.
--The infant mortality rate in the U.S. is 6.4 per thousand. Even Cuba does better, and Japan, Sweden, and Singapore have infant mortality rates of approximately 3 per thousand live births. France, Germany, the Czech Republic and much of Europe have rates around 4 per thousand. Even South Korea has an infant mortality rate of only 6.1 per thousand. All of these countries have national health plans, as does every western industrialized country except the U.S. Yet in the U.S. there is not even a serious discussion of a need for a single-payer, nationalized, universal health care plan.
--The U.S. spends more than twice as much per capita on health care than do Canada, Germany, Australia, the UK, or New Zealand, all of which have nationalized universal health care plans. Yet 50 million Americans have no health insurance coverage, and the overall quality of health care in the U.S. ranks lower than that of the care provided in these countries.
--Approximately $1,500 of the labor cost of each General Motors vehicle can be attributed to the cost of worker health care benefits, yet no American manufacturers appear to be lobbying for a national health plan which could cut overall medical costs and could make U.S. industry more competitive internationally.
--I regularly purchase prescription medications when living or traveling in Asia or Europe. The cost is typically only three or four percent the cost of the equivalent medication sold in a pharmacy in the U.S. Yet the European and Asian pharmaceutical companies are clearly making a profit and staying in business. The U.S. market is clearly skewed in favor of Big Pharma.
--India, along with Thailand, has become a key destination for U.S. "medical tourists," who receive high quality surgery and care for a fraction of U.S. costs .
--Sixty-six percent of Americans are overweight, and fully 30 percent are outright obese. Junk food has won the battle against sensible diet, and the effects--in the increased incidence of diabetes even in the young and in declining levels of physical activity, mental alertness, and overall health--are as insidious and as measurable as the effects of smoking, which itself continues to kill over 1,000 Americans each day. Germans seem to be catching up to Americans in sheer bulk, but nowhere else in the world have I noticed the percentages of grossly overweight people that I see in every public place in America.
--The fate for many of the overweight and obese will be a decreasing quality of life, the onset of adult diabetes, ever higher costs for medical care, and declining life expectancy. Another result will be more sick days off from work and reduced productivity when at work.
--I recently scoured the planet for an affordable high-end component stereo system. The best values that I could find included a tube preamplifier made in China, a pair of speakers assembled in Canada from high-end components made in China, a CD player made in South Korea, and a power amplifier made in Taiwan. And my cherished 60 GB iPod was manufactured--you guessed it--in China. Is everything that we now buy--even high-end gadgets--produced by China, India, or one of the Asian Tigers?
My list goes on, but these canaries illustrate an essential point: we Americans are very good at borrowing and consuming. We are also quite adept at producing expensive military hardware effective for bombing and invading--though not for occupying and pacifying--countries having resources that our corporations covet. But we are becoming less adept at productively investing, producing, and competing economically.
To be sure, there are a few oases on a mostly bleak economic landscape. Boeing, produces world-class products. Caterpillar fills heavy demand for its heavy lifters. Microsoft is still on top of the software industry, despite its blundering with the new Vista operating system. America continues to excel in producing products for mass entertainment--movies, music, and TV. Apple gives us the iPod (though it is made in China). And even Ford has tried to catch up with the demand curve by designing and producing its Escape Hybrid to fairly good reviews, and a second quarter profit of $750 million, its first quarterly profit in the past two years. But these microeconomic success stories do not counterbalance the growing structural and macroeconomic crisis of the U.S. economy.
Aggressively outsourcing high-paying jobs from the American industrial and information technology sectors and replacing them with low-paying positions stocking shelves at Wal-Mart or moving papers or data from in-boxes to out-boxes in the service sector may be in the best interests of corporate executives and the wealthiest one percent of Americans, but the shelf-stocker and the office data clerk surely have a different perception.
In short, the U.S. is in the midst of a rapid, accelerating, even precipitous deindustrialization and an attendant pauperization of the American working class.
Is it not merely a matter of time until the worsening income disparities, debt ratios, trade imbalances, and currency overvaluation reach a critical tipping point, as happened in Argentina in 2001, or the Soviet Union in 1990?
As noted above, Stiglitz and Bilmes predicted that the cost of invading and occupying Iraq will turn out to be $1 trillion to $2 trillion. Will this drain on the economy be the straw which ultimately breaks America's back? Or will the final straw be the cost of, and international reaction to, the next neocon invasion--perhaps of Iran, or Syria, or Venezuela?
What Will Likely Come Next?
How and when will the American financial and social collapse occur? With a bang? Or with a whimper?
Bona fide professional economists, who understand the intricacies of economic trends far better than do I, do not presume to make specific, dire predictions. As Harry Truman famously said, he would have liked to find a one-armed economist, for all of his economic advisers seemed only to be able to say, "On the one hand; on the other hand."
As a non-economist and as a mere amateur canary watcher, all I can do is to ponder the trendlines and make a seat-of-the-pants, largely intuitive guess-in short, a Blink. Here it is: sometime in the next three years-i.e., by the end of 2010--the escalating U.S. current account deficit, national debt/GDP ratio, external debt/GDP ratio, and external debt/export ratio, together with the Chinese yuan's move away from the overvalued dollar to be pegged against a basket of currencies, will lead to a global loss of confidence in the dollar and in the basic competence of U.S. economic management. The result may well be similar to the crash of 1929-1933 in the U.S. or to the collapse of 1990-1995 in Russia.
The Chinese and Japanese, who are not stupid, will eventually tire of buying U.S. T-bills to cover our budget deficit and thereby financing U.S. imperial adventures that threaten their economic interests, as in Iraq. The Chinese without undue strain can move away from their hyper-export-oriented growth model toward more of a domestic demand driven model, as the Indians have done. Indeed, to try to ensure political stability, they will have to do so.
China, Japan, India, most of Western Europe, and even Russia and much of Eastern Europe, which have macroeconomic fundamentals far sounder than those of the U.S., will seek to hedge their bets by diversifying investments and purchases of debt away from the ailing U.S. economy. They will of course be hurt by the collapse of such a major market and debtor client as the U.S., but they will work to maneuver themselves into strong positions to rebound fairly quickly.
I suspect that the collapse of the U.S. capital markets will begin not as a stock market crash, but as an accelerating run away from the dollar. An accelerating unloading of dollars by central banks around the world could result in a swift 20 percent devaluation. The sudden devaluation of the dollar will then trigger a panic selloff of foreign-owned U.S. assets, especially on the securities markets. This selloff may well ignite a U.S. stock market implosion of a magnitude not seen since the Great Depression.
In the attendant panic, wreckage, and economic slowdown, major corporations--General Motors, Ford, United Airlines, Northwest Airlines, and banks that have financed them--will simply crumble and disappear. Highly leveraged companies requiring large doses of the accounting convention "goodwill" to balance their corporate statements will evaporate by the dozens as quickly as did Enron, Arthur Andersen, Worldcom, Conseco, Refco, and Delphi. Small companies supplying and servicing the failing major corporations will themselves fall like dominoes, and many remaining factories across America will close their gates.
Massive unemployment will overwhelm already truncated social services. Government debt load at the federal, state, and local levels will hamstring efforts to cope with the social dislocations of the crash, for there will be few buyers, domestic or foreign, willing to purchase yet more federal, state, or municipal government paper, no matter how high interest rates are pushed. And at the very same time, tax revenues will be plummeting.
The Russian financial and social collapse may provide some elements of instructive warning. I recall driving through the outskirts of St. Petersburg in Russia in 1998 and seeing one shuttered, derelict factory after another. Between 1990 and 1995, Russian industrial production fell by half. The financial system totally collapsed. Russians in many regions were reduced to primitive barter arrangements to survive. Pensioners, their retirement incomes suddenly worthless, were reduced to begging or trying to make a few rubles by selling cigarettes or personal items on street corners. Unemployed workers simply had no options. Mortality rates skyrocketed.
Pull out a copy of John Steinbeck's The Grapes of Wrath to get some sense of what may come next for many suddenly unemployed workers. Americans may even start streaming as refugees across borders to Canada and Mexico (if they can climb southward over that new wall) in an effort to make a new start somewhere, but Canada and Mexico, both heavily dependent on exports to the U.S., will themselves be plunged into severe recession, though perhaps not as severe as the outright depression that will grip the U.S.
That is quite a range of dates: between 2007 and 2010. If forced to choose a year, I would put my bet on later this year (September or October) as a likely time for a major run on the dollar, followed quickly by a selloff of foreign-owned assets and an attendant crash on Wall Street and the NASDAQ.
Classical Friedmanian economics, which places full faith in the rationality of free markets and which utterly dominates economic discourse in the U.S., simply dismisses the possibility of the "hard landing" or, at any rate, any serious dislocations from such a landing. In the statistical world of the Federal Reserve and the neoliberal free market academy, numbers rise and fall to balance one another in a closed, apparently rational, quantitative universe. If the dollar plummets, that is all right, because the value of U.S. assets abroad will correspondingly rise. A declining dollar will help reduce the current account deficit, for American goods and services will then become more attractive to foreign buyers. All is for the best in this best of all possible free market worlds, for the "invisible hand" will naturally correct all imbalances, and at the end of the day the spreadsheet of international accounts will be in perfect numerical harmony.
But the Bernankes and other disciples of Milton Friedman are less adept at explaining the causes and offering remedies for the consequences of the Tulipomania bubble and crash in Holland in 1637, the Mississippi Scheme bubble and crash in France in 1720, the South Sea Bubble in England in the same year, the 1929 crash on Wall Street and ensuing Great Depression, the 2001 crash in Argentina, or the persistent deflationary pressures in Japan.
The devotees of the rational "invisible hand" of the market do not take fully into account the impact of limitless human greed, speculative euphoria and frenzy, gross political incompetence, and ultimately, human fear and panic. Financial crashes do happen and cannot simply be dismissed and ignored, for they have painful consequences for real people, both at the top and especially at the bottom of the income pyramid.
I am not expecting a leader with a sensible, courageous, alternative economic strategy to appear suddenly on the current stage in Washington. The ruling neocons, politically supported by their credulous fundamentalist religious base and financed by their self-serving corporate patrons--and with their ideological message loyally transmitted by a concentrated handful of media conglomerates--blissfully assert that they have found a promised land of free markets, globalization, and perpetually ascendingp rofits for shareholders.
Disquieting numbers, growing income and wealth disparities, rapid deindustrialization, corporate defaults on pension commitments, accelerating outsourcing of high-paying jobs (both production and knowledge-based), pauperization of the working class, out-of-control budget and trade deficits, the financial burden of an irrationally high military budget and of foreign military adventures, ever rising competition from faster growing and better managed economies, increasing dependence on foreign creditors, the obvious fragility of the dollar, and external reality itself are not important to those who rely on ideology and faith and have figured out, for the time being, how to loot the economy and extort foreign lenders.
Ben Bernanke is obviously a very bright man with a Ph.D. from Princeton. But was he appointed to be the Chairman of the Federal Reserve Board primarily because, just like Judge Samuel Alito and Attorney General Alberto Gonzales, he could be depended upon to be a loyal apparatchik and "company man" following the "party line?" I hope that Bernanke is right in his rosy economic assessment, but would he display the independence of judgment and strength of character to take heed of an economic warning sign if it hit him full in the face at high speed? Does he have the judgment and fiber to steer us through a financial crisis? Economists who have dealt with Bernanke have observed that he is not one willing to entertain alternative views. It seems that his role is to spread "happy talk," just as General David Petraeus does to promote optimism regarding the effectiveness of his "surge" in Iraq or as White House Press Spokesman Tony Snow does every day to defend the stumbles and evasions of such hapless apparatchiks as Attorney General Alberto Gonzales.
For their part, the Democrats, with very few exceptions, content themselves with purveying bumper sticker slogans on Republican incompetence, cronyism, and "culture of corruption," but they refrain from offering anything resembling a coherent alternative economic program. Democrats also seem to fear engaging in any meaningful debate over national security and over what might be a sensible, appropriate defense posture and economically sustainable level of defense expenditure on an increasingly multipolar economic globe containing both state and transnational actors.
Larry Summers has at least raised warning flags about plummeting U.S. national savings. A few Democrats (and even Republicans) in Congress pay modest lip service to bringing the federal budget deficit under control. But no one is proposing a new game plan that would stand a chance of averting a crash. After all, a coherent economic program would require clear sacrifice in the near term to try to avoid panic and disaster a later on, and the conventional political wisdom is that voters do not like to vote for immediate sacrifice.
Many voters would rather go on borrowing and consuming, whether to buy trinkets or to preserve existing government subsidies and tax breaks. Many also seem willing to accept the continuing purchase of staggering numbers of expensive missiles, bombs, warplanes, helicopter gunships, tanks, and navy vessels, even though conventional military hardware is of virtually no use against airplane hijackers, subway bombers, toxin smugglers, and home-grown or transnational jihadist nihilists, the key security threats of our era.
If an opposition party cannot articulate coherent alternatives to obvious delusions of a ruling party, is it really an opposition party? Has the U.S. already become a one-party state, incapable of proposing and debating alternative therapies to correct self-destructive behavior? Has the Democratic Party become an alternative-free zone content merely to preach corporatism-lite?
Is there an economist or political leader out there who can prescribe and implement a remedy before it is too late?
And so, though I continue to enjoy living as a fool reaping the benefits of America's consumer paradise, I cannot shake my sense of impending financial and social calamity. I see the plummeting, silent canaries array themselves in piles in front of me, but there is no alert foreman-in-charge to lead us to a ventilated shaft, and there are no credible, competent managers capable of organizing a rescue if the supporting timbers shatter and the ceiling collapses.
The American Century is now rapidly ending, and the American Imperium is collapsing. Yet the American political and economic elites remain in denial and refuse to accommodate themselves to this reality. The key question is whether America's relative economic and strategic decline and necessary readjustment can be managed wisely so that the transformation will be reasonably orderly rather than cataclysmic.
Are the remaining players in the alternative universe of the Bush Administration paying any notice to these events? And if they are, should we give any more credence to their public assurances on the economy than we can give to their claims of WMD in Iraq, their assessment of the role of al Qaeda in Iraq, their assurances on progress in the occupation of Iraq, their assertions regarding the death of Pat Tillman in Afghanistan, their management of the Department of Justice, their conduct of the warrantless surveillance program, or their handling of torture, secret prisons, and indefinite detentions? Can we even trust the economic data published by the Department of the Treasury and the Department of Commerce? If Bush/Cheney apparatchiks can manipulate everything else, why would they stop short of trying to manipulate or suppress economic data?
But the political and economic managers who rule us today simply do not care to notice the canaries in our mine shaft. Or perhaps they notice, but simply do not care. They belong, after all, to the wealthiest one percent (or, to be precise, the wealthiest 1/100thof one percent), and for the moment they and their corporatist patrons continue to make money and build speculative wealth hand-over-fist, while being served and applauded by their loyal apparatchiks, propagandists, and hard-core voters--their enablers. They will do their best to make hay while the sun still shines.
They have established a pattern:
--If key indices, such as the plummeting availability of electricity in Baghdad, do not support policy, simply stop reporting the data.
--If video news coverage of violence in Iraq might raise questions about the effectiveness of the occupation and surge, simply ensure that Iraqi police and military personnel bar journalists from the scenes of violence.
--If a hyper-politicized White House and robotic Attorney General seek to corrupt the administration of justice by turning the Department of Justice into a political commissariat, simply throw sand in the eyes of Congressional investigators by deleting embarrassing evidence, by refusing to comply with subpoenas, and by claiming lapses in memory.
--If M3 displays a troubling upward spike, a portent of inflation to come, then simply stop reporting M3.
--If the Consumer Price Index (CPI) seems to be trending upwards, simply redefine the components and revise the CPI formula to produce less worrisome numbers. A clever alternative is to focus public attention on a CPI figure that excludes food and energy costs.
--If shareholders complain about massive insider fraud and manipulation, as in Stoneridge v. Scientific Atlanta, simply do everything possible to ensure that the big guns at the Department of Justice and elsewhere in the Administration work to undermine the plaintiffs' case.
--If a federal prosecutor uncovers massive, Enron-level fraud in the medical malpractice insurance industry, then the approach of the Bush/Gonzales Department of Justice is to reassign the prosecutor and halt the investigation.
--If the Wall Street Journal, (reliable though its editorial board already may be in supporting the Bush Administration's corporatist policies, domestic and foreign) still employs some genuine investigative journalists who do their best to uncover fraud and corruption in corporate America (such as with Enron and Arthur Andersen), then it is clearly time for corporatist ubermagnate Rupert Murdoch to buy the company and put an end to such troublesome reporting. The corporatists will try to keep the public in the dark so that the looting may continue for a little while longer.
That is how greed works--until it is replaced by panic and fear as the speculative bubble collapses.
Think of the both the housing bubble and the stock market bubble as legalized Ponzi Schemes. Each is a pyramid scheme, a sort of heat sink to soak up liquidity and suppress inflation elsewhere, and a storage locker for perceived values. When is the last time that you held a stock certificate (or a bond) in your hands? Your stock or mutual fund holdings are merely digital expressions of value stored on your brokerage firm's file server--nothing more substantial than that. When the values ascribed by potential buyers to your digital bits on that file server evaporate because of fear or panic, so do your digital bits. The last fool to invest and hold is always the biggest loser.
While Awaiting the Denouement
So what appears to be the bottom line for a prudent investor who simply wishes to survive without having to barter cigarettes or used clothing on a street corner? Well, first of all, do not take my conclusions as gospel. A few economics courses in college and graduate school and a few decades of investing certainly do not qualify me as any kind of guru. I once even bought shares of AOL Time Warner, surely one of the most stupid investments by anyone, anywhere, anytime--though it gave me a hefty capital loss at tax time one year.
Still, other ordinary investors who try to be objective (after all, our life savings are at stake) and even some experts such as Paul Krugman are becoming increasingly concerned about what appears to be the parlous condition of the U.S. economy. Not liking the look of things, I moved completely to cash this spring. I had been invested primarily in foreign ETFs, largely to mitigate risk from the declining dollar and had done quite well during the previous two years. However, if the U.S. stock market takes a steep tumble, other capital markets will surely follow suit, so there would be little point in remaining invested in foreign equities. By leaving the market I have forgone some potential gains this summer, but at the moment I would rather make 5% in a money market account than risk an 89% loss of capital, as happened to investors in the Great Depression of 1929-1933.
Now I can even watch the dropping canaries with a certain equanimity.