Wednesday, June 10, 2009

How We Got Here (More or Less)

Charles Hugh Smith enumerates the stages that America has passed through from prosperity to the unfolding Greater Depression:

Let's recount the chain of events which partly parallel the Great Depression and partly diverge in meaningfully more destructive ways from that previous era:

1. The postwar income convergence (i.e the rise of the great middle class, the reduction of poverty and the relative reduction of the Plutocracy's share of national income) reverses in the early 1970s as the "true prosperity" of the postwar era ends and is replaced by income flowing increasingly to the top as stagflation, globalization and the decline of dollar gut the purchasing power of the middle class.

2. The rising productivity of the 50s and 60s slips to the flatline through the 70s and early 80s, only picking up again as computer software and hardware revolutionize the back office, sales, manufacturing, just-in-time shipping/production, etc.

3. Concurrent with this gradual return to productivity is the rise of finance as the key profit-center of corporate America. As income skews ever more heavily to the top 1%/5%, then capital (productive assets) become ever more heavily concentrated in the hands of the financial Plutocracy. The top 1% now owns some 2/3 of the nation's entire productive wealth.

4. As profits rise (from rising productivity) then the profits flow not to wages (which remain flat to down 1975-2009 for all but the top 10% professional class) but to those who own the capital.

5. As the middle class experiences a decline in their income and purchasing power (for reasons cited above: declining dollar, rising income disparity, and wages falling due to global wage arbitrage) then they turn more and more to borrowing and ever greater debt to fund what they have been brainwashed by the media to believe is "the American dream" of imported luxury goods, bloated homes, vacuous cruises, etc.

The only other mechanism available to the middle class to increase household income is for Mom/Aunt/Grandmom to enter the workforce, which she does in the tens of millions, with sociological consequences which are still unfolding.

6. This advert/media-driven desire to borrow to fund the "good life" is hugely profitable to the money-center banks, which expand rapidly into mortgage securization, derivatives and consumer credit to the point that they come to dominate corporate profits.

7. The financial Plutocracy, observing that actually producing goods is not very profitable unless you can fix prices as per ADM (Archer Daniels Midlands) or gain government subsidies and tax giveaways (oil lease depreciation, etc.) sinks its capital into the FIRE economy (finance, insurance and real estate), eschewing real-world investments as comparatively unprofitable.

Though rarely noted, this is a longstanding trait of capitalism stretching back to 1400-era Venice. When trade became less profitable than mainland farmimg, the Venetian Elite stopped funding trading and bought farms on the mainland. As a side effect, Venice ceased to be a military and trading power. But the Elite remained immensely wealthy.

8. As the tech bubble expands, middle-class investors see the Plutocracy (those with enough capital to qualify as angel investors and vulture, oops, I mean venture capital) reaping huge gains, and they enter the dot-com stock bubble buildup with a vengeance.

9. In a happy accident, the Soviet Empire collapses just as productivity begins its computer-fueled rise in the U.S. In a so-called Unipolar World in which U.S. military, political and financial influence is unrivaled, non-U.S. investors seek the relative safety and high returns (based on appreciation of the dollar) of U.S. financial instruments.

10. The dot-com bubble implodes in a speculative meltdown (dot-bomb), and retail investors (a.k.a. the middle class 401K investors) are devastated. The ephemeral wealth they once possessed, however briefly, fuels their speculative desire to get into the next get-rich-quick game, which just so happens to be "something everyone understands:" real estate and housing.

11. Having exhausted the dot-com play, Elite capital is seeking a new high-profit home. The miracles of derivatives (CDOs, credit default swaps, etc.) and securitized debt (mortgage tranches, etc.) open up vast new opportunities for leverage, off-balance sheet shenanigans and outright fraud/debauchery of credit. As chip wafer plants disappear from Silicon Valley (too dirty, too costly, etc.) then they're replaced with paper: mortgage-backed securities.

12. Sniffing gold in them thar exurban hills, the under-capitalized and over-indebted U.S. working class and middle class reach for the chalice of easy-money gold: leveraged real estate.

13. With the Federal financial regulatory agencies in a Republican/Democrat-enforced somnambulance, the coast is clear for brigands, shysters, fraudsters, con artists, liars, cheats, and assorted riff-raff in the realtor, mortgage and appraisal businesses, who all feed the ravenous maw of the money-center banks' apparently limitless appetite for real estate assets to securitize and leverage in exotic and highly profitable ways.

14. For a wonderful five years circa 2001-2006, the game is afoot and no-down-payment Jill and $100 million bonus Jack are immensely enriched. Meanwhile, the underlying real economy is becoming ever more imbalanced and ever more fragile as real production and real productivity plummet as everyone rushes to the speculative riches of exurban McMansions and malls.

15. This last best speculative leveraged bubble pops, gutting a Wall Street which had grown utterly dependent on leverage, debt, gamed/fraudulent accounting and bubbles for its rising profits.

16. Doubly devastated by the implosion of housing and their stock investments (mostly in retirement funds), the middle class faces the terrible consequences of its 26-year stupor of ever-rising debt and leverage. Alas, the Emperor's clothes are revealed as remarkably transparent.

17. Just as in the Great Depression, to its great surprise, the Elite has also suffered catastrophic losses and declines in capital and income.

18. Having borrowed and squandered trillions of dollars since 1981 on unaffordable entitlements, military misadventures and assorted worthless bridges-to-nowhere pork spending, the Federal government (The Fed and the Treasury) finds that its ability to borrow its way out of its current debt hole somewhat annoyingly limited. The rest of the world has finally caught on to the con, and Chinese university students are openly mocking Treasury Secretary Geithner's Orwellian claim of "we support a strong dollar." The miracle is that he was not pelted with tomatoes and tarred and feathered for making such absurd statements.

19. With the global media concentrated in a scant few corporate hands (less than 10), this pulling away of the curtain is deleted/excised from media coverage in a ruthless campaign of pure "green shoots" propaganda.

20. As the wheels fall off the U.S. economy and the bubbles cannot be re-inflated, fruitless attempts at holding back the tide with incantations (stop, tide, I am Obama/Geithner/Bernanke!) and loopy sand castles (the bottom is in, buy now! Green shoots are sprouting everywhere except in the real economy!) abound. Unresponsive to propaganda, the real world grinds down into a global Depression without visible end.

The chronology and events are correct, but Smith should have emphasized the decline of the dollar and identified its cause: fiat money and central bank-engineered inflation. It wasn't just commercial advertising and keep-up-with-the-Joneses envy that tempted the middle class and working poor into credit card debt, mortgages, and stock market speculation. Primarily it has been the Federal Reserve's steady, sinister erosion of the dollar's purchasing power. Chronic monetary inflation makes cash savings a sucker's game for the non-wealthy. Most people understand this as a matter of common sense: all their workling lives, they see prices rising faster than their wages. They conclude that cash does not hold value over time. To avoid eventual destitution, especially in old age, millions of Americans have tried to accumulate as many dollars in as short a time as possible, through gambling in stocks and real estate. A much smaller "survivalist" segment has avoided this doomed financial strategy, and concentrated instead on accumulating skills, knowledge, and hard assets (precious metals, land, barter items, etc.)

1 comment:

  1. For some reason, I cannot get my own comments to appear in the post above, so here they are:

    The chronology and events are correct, but Smith should have emphasized the decline of the dollar and identified its cause: fiat money and central bank-engineered inflation. It wasn't just commercial advertising and keep-up-with-the-Joneses envy that tempted the middle class and working poor into credit card debt, mortgages, and stock market speculation. Primarily it has been the Federal Reserve's steady, sinister erosion of the dollar's purchasing power. Chronic monetary inflation makes cash savings a sucker's game for the non-wealthy. Most people understand this as a matter of common sense: all their working lives, they see prices rising faster than their wages. They conclude that cash does not hold value over time. To avoid eventual destitution, especially in old age, millions of Americans have tried to accumulate as many dollars in as short a time as possible, through gambling in stocks and real estate. A much smaller "survivalist" segment has avoided this doomed financial strategy, and concentrated instead on accumulating skills, knowledge, and hard assets (precious metals, land, barter items, etc.)

    Inflation, like other forms of deception and cheating, distorts human thinking, and makes stupid ideas seem smart.

    ReplyDelete