Friday, February 5, 2010

Micro v. Macro: Credit and Debt

I have two conflicting feelings, or corresponding scenarios, about the economy. The happy feeling is that we are just going through the normal economic cycling the world has known since the industrial age began. When I got out of college in 1976 there was a recession with no jobs, and I got used to the idea that there would only be brief periods when jobs were available.

The concern is that now that I have finally gotten my economic life together by building a micro-business and saving and investing carefully, is that the U.S. government is going to sink the entire economic ship. Even well-built life boats could be sucked down with the ship.

Within the the worst case scenario is its own best-case scenario. The U.S. will not sink entirely, but will be thoroughly globalized. There could be even larger numbers of people barely surviving than there are today, but the rich will (mostly) survive. Some of us, workers and middle-class types, will be closely enough tied to the global means of production to get by in what we now think of as a civilized style.

Almost everyone admits that the current crisis was caused by too much credit creation in the years 2004 to 2007. You have to remember that for every credit, there is a debt. So it is just as accurate to say that there was too much debt creation. There was not enough real productivity to support the level of credit and debt. Once debts could not be repaid, giving further credit was no longer in the interest of the banks.

Allegedly to prevent another Great Depression, the federal government stepped in. The rhetoric was save the American people, but the reality was to use taxpayer funds to save most of the capitalist class. A few capitalists were tossed to the sharks; not enough, in my opinion.

But the rescue created its own problems. Most Americans have tried to be thriftier since the recession began. That in itself caused reduced demand, which could also spiral into a more severe recession. So the government started spending money like mad.

Which means that since early 2008, while Americans have been saving (except for the unemployed, who have been exhausting their savings), the government has been spending money for us.

On crap I would never buy for myself. Like new highways. Like a war in Afghanistan, and the continued U.S. military occupation of most of the world. On special deals for all sorts of special interest groups that do not include me.

Yesterday the House of Representative just raised the federal debt limit $1.6 trillion dollars. Rounding to 300 million citizens, that is over $5000 of debt each. Thats on top of trillions already owed (See U.S. National Debt Clock, for instance)

The credit is being extended, in this case, by fools who are buying government-backed bonds and getting less than 4% interest for the risk they are taking. If the economy does revive, interest rates should go back up (unless kept artificially low by the Federal Reserve, as they were during the last bubble), making the current bonds worth far less. If the economy does not revive, these bonds could become worthless.

People are pretty used to the idea that the Federal government is never going to pay the principal on its debt, just the interest. Just like the mortgage loans of yesteryear, which are now illegal.

If the economy continues its gradual up cycle, the Fed and Congress should be able to gradually remove the stimilus measures. But don't expect them to. Once the Federal govenment starts giving away money, the special interest groups who receive it (typically corporations) decide they can't live without it, even during the good times. Look at agriculture subsidies, which have been with us since the days of Herbert Hoover. Look at the anti-poverty programs from Lyndon Johnson, that were supposed to lift everyone out of poverty, and instead trapped generations of families.

Republicans scream about socialism, but what we have is called state-capitalism (which, oddly, was what the Soviet Union had become by the 1970s, before it switched to just plain capitalism). Most of the benefits of both thought-out socialism and free-market capitalism are being eaten by the need for a global military occupation combined with politics based on keeping incumbents in power through special deals for donors and voting blocks.

I hope for a gradual recovery, because I am too lazy and not violent enough by nature to live comfortably if there is an economic collapse. My objective analysis, however, is that even if we have a recovery all the old debt will linger, and the next down cycle really will be more of a collapse than a recession.

1 comment:

  1. You have to keep in mind that for every credit, there is a liability. So it is just as right to say that there was too much debt creation.