US Addiction to Debt

[fuji]

The median income for middle class families
has been virtually flat for nearly 30 years.

The Reagan Revolution tilted the board in
favor of corporate America and the wealthy.
Tax cuts for the wealthy, cuts in assistance
for the poor and elderly, increases in corporate
subsidies, the demise of labor unions, etc.

The middle class is struggling and
the rest of US are collateral damage.

I could go on and on, but why bother.

That may all be true. Nevertheless consumers AND businesses AND government in the US are all reliant on debt. The standard of living you think these people "deserve" can only be obtained in a sustainable way if output is increased.

Sooner or late reality will set in. Well... I think some of that reality is setting in right now in the stock, bond, and currency markets. Reality is setting in as people are evicted from homes they could not afford. Reality is going to set in a little bit more when people are thrown out of jobs.

It's all well and good to bleed for the suffering of poor Americans who can afford one the highest standards of living in the world... hard done by becaue they are being screwed over for living an even higher standard that they cannot afford.

The reality is that at this point America, for whatever reason, has declared "normal" a standard of living that the average person has NEVER been able to afford--and yet the average person is living it now (or was until recently), but only by going into debt, only by taking the whole country with them into debt.

By the way, that includes the rich: 40% of those profits in recent years were driven by leveraging up, in other words debt, and that is why they are being screwed over so hard right now. Ask Bear Stearns employees, formerly a rich lot, how much money they've lost in the past month.

 

[S.C. Joe]

Bear Stearns employees were not the only ones, look at all the airline workers who lost all their stock when the company's went under. Same with many auto part company's.

Theres been many company's the past 10 years that have went under. Bear Stearns is just the latest.

 

[onthebottom]

The median income for middle class families
has been virtually flat for nearly 30 years.

The Reagan Revolution tilted the board in
favor of corporate America and the wealthy.
Tax cuts for the wealthy, cuts in assistance
for the poor and elderly, increases in corporate
subsidies, the demise of labor unions, 50 mill.
without healthcare, etc.

The middle class is struggling and
the rest of US are collateral damage.

I'm an attorney that represents the median
wage earners and personally experiences this
through the problems of my working clients.
I could go on and on, but why bother.

I'd really love to see some documentation of that....

OTB

 

[onthebottom]

That may all be true. Nevertheless consumers AND businesses AND government in the US are all reliant on debt. The standard of living you think these people "deserve" can only be obtained in a sustainable way if output is increased.

Sooner or late reality will set in. Well... I think some of that reality is setting in right now in the stock, bond, and currency markets. Reality is setting in as people are evicted from homes they could not afford. Reality is going to set in a little bit more when people are thrown out of jobs.

It's all well and good to bleed for the suffering of poor Americans who can afford one the highest standards of living in the world... hard done by becaue they are being screwed over for living an even higher standard that they cannot afford.

The reality is that at this point America, for whatever reason, has declared "normal" a standard of living that the average person has NEVER been able to afford--and yet the average person is living it now (or was until recently), but only by going into debt, only by taking the whole country with them into debt.

By the way, that includes the rich: 40% of those profits in recent years were driven by leveraging up, in other words debt, and that is why they are being screwed over so hard right now. Ask Bear Stearns employees, formerly a rich lot, how much money they've lost in the past month.

I suggest you go and look at the productivity gains made by the US economy in the last 2-3 decades. You will find there, and not in excess leverage, the source of US economic success.

OTB

 

[fuji]

I suggest you go and look at the productivity gains made by the US economy in the last 2-3 decades. You will find there, and not in excess leverage, the source of US economic success.

OTB

I suggest you compare those productivity gains to consumption growth. You will find in that contrast the source of US debt, of which the corporate addiction to leverage is only one symptom.

 

[fuji]

The average American doesn't view themselves as
being privileged. Its a dog-eat-dog world down
South. Don't assume too much until you've lived
here for some time.

I lived in California for a year, and in Manhattan for half of one, but all of this is beside the point. This is not a question of feeling or a question of view. It's a simple fact that the average American is consuming more than he or she produces. It is a simple fact that the entire country as a whole is consuming more than it produces.

How Americans view their over-consumption, whether they see it as over-consumption, is really a different issue. You can go on viewing yourself as being underprivileged or hard done by for as long as you like--what matters is whether you bring spending under control. It's simple economic reality that the standard of living Americans seem to think they "deserve", and go into debt trying to achieve, is one that is currently beyond their means.

Now there are two ways of fixing that: Increase production or cut consumption.

In any case it is economically unsustainable to go on spending more than you earn forever.

 

[danmand]

Now there are two ways of fixing that: Increase production or cut consumption.

In any case it is economically unsustainable to go on spending more than you earn forever.

There is actually a third way, namely to maintain an empire of other states,
which ressources and peoples are controlled and exploited.

It has repeatedly been done through history.

 

[fuji]

There is actually a third way, namely to maintain an empire of other states,
which ressources and peoples are controlled and exploited.

True, though in the long run that is also unsustainable. It can be kept up for much longer though--Rome managed on that model for some thousand years.

However there's no evidence that the US is following this policy, despite US military interventions around the world: No tributes are extracted and sent back to the United States. By all accounts these military actions are a straight cost to the US. Goods flowing back to the US appear to flow at fair market values.

If the US continues its current policy of trading with other countries at fair market value then it will either have to cut its own consumption or raise its own production. (The US has raised productivity a lot over the last while--the problem is it has risen consumption even more.)

 

[onthebottom]

I suggest you compare those productivity gains to consumption growth. You will find in that contrast the source of US debt, of which the corporate addiction to leverage is only one symptom.

Oh, I know we have a negative savings rate, and that this is unsustainable. It's just not as one dimensional as you're saying.

OTB

 

[fuji]

Sure, macro economics has feedback loops. As the economy tanks and the interest rate cuts designed to bail out the indebted inevitably start running up inflation the dollar will also tank. That will make American exports cheaper on the world market, which will eventually spark some sort of a recovery.

Here's an even more interesting loop:

Debt problems on Wall Street spur interest rate cuts, which drive up commodity prices, which make OPEC countries rich, which cause them to buy out American firms, which recapitalizes Wall Street (though now under OPEC ownership).

 

[FOOTSNIFFER]

Sure, macro economics has feedback loops. As the economy tanks and the interest rate cuts designed to bail out the indebted inevitably start running up inflation the dollar will also tank. That will make American exports cheaper on the world market, which will eventually spark some sort of a recovery.

Here's an even more interesting loop:

Debt problems on Wall Street spur interest rate cuts, which drive up commodity prices, which make OPEC countries rich, which cause them to buy out American firms, which recapitalizes Wall Street (though now under OPEC ownership).

You're forgetting something Fuji. Foreigners (mainly foreign central banks) are sending vast quantities of their savings to buy US assets, mainly Treasuries. Unless the US wants to artifically discourage these inflows through some tax, they can't stop people from buying discounted future cash flows denominated in US dollars, either debt or assets.

By using foreigners' savings, americans can do their investing without bothering to curtail their consuming. All of this has made debt probably too cheap and ubiquitous but that's not really american's 'fault'. They're just following the incentives where they lead. Should foreigners shut down their buying of US debt/assets at some future date, then the incentives will shift again more in favour of frugal types who only buy things when they can pay for them in cash. Real interest rates will rise alot, and everyone will adjust.

 

[fuji]

By using foreigners' savings, americans can do their investing without bothering to curtail their consuming

Don't get me wrong, there's absolutely nothing wrong with foreign direct investment. It's good for everyone and cracking down on that would be the wrong answer. I also have no issue with the productive use of debt.

The problem is simple and fundamental: Every day Americans consume more than they produce.

So you're right by going further and further into debt Americans can continue on without curtailing their consuming... for awhile. At some point it's unsustainable. At some point you actually have to start producing more than you consume (to pay down the debt).

Eventually either production has to rise to match consumption, or consumption has to fall to match production.

 

[FOOTSNIFFER]

The problem is simple and fundamental: Every day Americans consume more than they produce.

So you're right by going further and further into debt Americans can continue on without curtailing their consuming... for awhile. At some point it's unsustainable. At some point you actually have to start producing more than you consume (to pay down the debt).

Eventually either production has to rise to match consumption, or consumption has to fall to match production.

You're right. Another way out is devalue the 'claim on future production of real goods', or Treasuries denominated in the US dollar, that americans are currently giving foreigners to satisfy thier current consumption of REAL stuff...

ie. For japan to make a car to satisfy US demand, it theoretically denies her citizens all the elements that went into the production of that car. And all they get in return is some promise to return some REAL elements in some configuration (almost certainly to satisfy some other need than transport) that an average japanese person can make use of....tourism is also classed by the US as an export. So if the claims just accumulate so much over time that the actual capacity of the US to actually make stuff just can't them, then the japanese have just gave the equivalent of valuable beaver pelts for a few beads of glass. That's what's going to happen.

You're onto something Fuji....but actually there have been reports in the Financial Times that European companies are having a hard time reconstructing a viable supply chain in the US, as it's now far cheaper to use a US production base, because the US manufacturing base has been so hollowed out from years of outsourcing. David Rosenberg of Merrill Lynch has been writing for awhile now that he's expecting the dollar debacle to herald a renaissance in US manufacturing......I guess we'll see.

 

[fuji]

You're right. Another way out is devalue the 'claim on future production of real goods', or Treasuries denominated in the US dollar, that americans are currently giving foreigners to satisfy thier current consumption of REAL stuff...

In theory, but in practice if American debt instruments start to look unreliable then interest rates on American debt will shoot through the roof.

The federal reserve has burned through 1/3rd of its capital base so far dealing with the subprime crisis. If there were a massive loss of confidence in the US govt. the fed. would lose the ability to set interest rates.

Foreigners would then be holding "devalued" treasury bills, but the interest rates on new ones would be sky high, and presumably the only people with money to buy them would be foreigners.

So it doesn't work out quite as well as you'd like, and it totals the American economy in the process (businesses can't borrow at rates lower than the govt. does so many debt laden businesses would go belly up, new ones would have a hard time raising the necessary capital).

David Rosenberg of Merrill Lynch has been writing for awhile now that he's expecting the dollar debacle to herald a renaissance in US manufacturing......I guess we'll see.

That's true. There are some self-correcting mechanisms: As the dollar falls American exports become cheaper which creates new jobs. For that to be some sort of salvation, though, consumption and production still have to come back into alignment with one another at some point.

 

[fuji]

...this is wrong and clearly shows someone who is actually missing whats going on.

Don't be so sure you know what's going on.

At least one professor of economics disagrees with you and until I see what your credentials are, or what you're reference is, I'm going to take his word over yours.

It is simplistic to blame this economic crisis on currency, interest rates or excess debt ... it is far more complex and dangerous problem that may rear it's true ugly head in 2009, 2010.

It would be too simplistic to assert that those are the ONLY factors, however it is correct to assert that they are key factors.

 

[fuji]

...this is wrong and clearly shows someone who is actually missing whats going on.

Don't be so sure you know what's going on.

At least one professor of economics disagrees with you, meanwhile a different economics professor argues that high oil prices will lead to OPEC bailing out wall street so if you put those two together you get a debt crisis leading to interest rate cuts leading to high commodity prices leading to OPEC sovereign wealth funds recapitalizing wall street.

Now I've backed up my opinion with authoritative statements. Your turn.

It is simplistic to blame this economic crisis on currency, interest rates or excess debt ... it is far more complex and dangerous problem that may rear it's true ugly head in 2009, 2010.

It would be too simplistic to assert that those are the ONLY factors, however it is correct to assert that they are key factors.

 

[fuji]

What he's saying WRT interest rates is that, among other things, they are used to discount future profits.

If you own a gold mine or an oil well you have an asset on your balance sheet representing all the proven reserves you have in the ground that you haven't extracted yet. The value of that proven reserve depends on when it is sold: It is discounted back to today's dollars by the interest rate. When rates are high that asset is worth more if you get it out of the ground earlier; when rates are low that asset is worth about as much no matter whether you get it out of the ground this year or next.

So when rates are low it's not necessary to race to extract materials. You won't lose much by leaving it in the ground a little longer, and you probably save some cost by running your facilities at a reduced rate of production. On the other hand when rates are high you likely run your facility at its maximum capacity--even if that costs you a little more, because it doesn't cost you as much as the losses you suffer year by year as the high interest rate devalues your proven reserve.

It's not that stock is building up in warehouses and such, when rates are low, just the opposite: Producers simply leave it in the ground. They do not run their refineries or their oil wells at full capacity, so supply drops, and therefore prices rise.

- - -

As for recapitalizing Wall Street it's already underway. Morgan Stanley, Citibank, to name two, have received large cash injections from foreign sovereign wealth funds--including big cash injections form OPEC countries.

 

[onthebottom]

I don't get the concern about sovereign wealth funds investing in Wall Street - all that money has to go somewhere.

OTB