PART TWO: HOW AMERICA BECAME ENSNARED IN THE DEBT TRAP (Cont'd)
ENSNARED THROUGH DEFERRING TROUBLE
It is not hard to understand how political and financial pressures made these corner cutting actions attractive at the time. A main weakness of both our political system and the corporate financial system is the focus on short-term results. When long-term consequences can be kicked down the road for someone else to deal with, there is little incentive to voluntarily take on the pain of those consequences now. In the real world, consequences can be either immediate or deferred. We don’t always get a choice as to which way it will be, but when we can defer negative consequences, they often become weightier with time. This is especially true when we’re dealing with mounting debt and compounding interest. The likelihood of our leaders making wise long-term decisions diminishes even more in light of these additional factors: |
1. Political need for ‘growth’ -- Political success requires maintaining a positive economic environment, making it important to preserve at least the appearance of economic ‘growth’ (remember Bill Clinton’s famous quip, “it’s the economy, stupid”?). Irresponsible spending promises are a constant political temptation, and because government spending does produce a certain amount of ‘growth’ (the money expands), the political impulse always inclines toward increased spending.
Of course most of us would live in a dream world if we could. But if we try to, we quickly face the hard facts of life in the real world (rent, food, transportation, etc.). People often do not recognize their delusions or accept reality until they are hit by tangible consequences. Politics is especially vulnerable to the danger of avoiding reality because politicians can kick the tough choices down the road for other politicians to have to deal with later.
2. Manipulation of negative data – Because of this need to show the economy in an ever positive light, there is a great temptation for politicians to find ways to ‘fudge’ the numbers. Weak and negative economic statistics are veiled by manipulative reporting techniques, hiding certain classic economic warning signals such as the real rates of inflation and unemployment from the public. Inflation was originally tracked by calculating the CPI (Consumer Price Index), measuring change in an identical fixed basket of goods. Beginning with the Clinton administration, this weighting pattern was changed, later altered from arithmetic to geometric, then by a system of ‘hedonic’ adjustments and finally ‘intervention analysis’. This manipulation of data continues and is getting worse. John Williams’ website, ‘Shadowstats.com’, has become a popular place to find real numbers. Government issued numbers are increasingly distrusted and regarded as propaganda.
Of course most of us would live in a dream world if we could. But if we try to, we quickly face the hard facts of life in the real world (rent, food, transportation, etc.). People often do not recognize their delusions or accept reality until they are hit by tangible consequences. Politics is especially vulnerable to the danger of avoiding reality because politicians can kick the tough choices down the road for other politicians to have to deal with later.
2. Manipulation of negative data – Because of this need to show the economy in an ever positive light, there is a great temptation for politicians to find ways to ‘fudge’ the numbers. Weak and negative economic statistics are veiled by manipulative reporting techniques, hiding certain classic economic warning signals such as the real rates of inflation and unemployment from the public. Inflation was originally tracked by calculating the CPI (Consumer Price Index), measuring change in an identical fixed basket of goods. Beginning with the Clinton administration, this weighting pattern was changed, later altered from arithmetic to geometric, then by a system of ‘hedonic’ adjustments and finally ‘intervention analysis’. This manipulation of data continues and is getting worse. John Williams’ website, ‘Shadowstats.com’, has become a popular place to find real numbers. Government issued numbers are increasingly distrusted and regarded as propaganda.
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3. Looming economic bubbles --
Unrealistic economic practices cause the formation of ‘bubbles’, or
exceptional rises in prices or amounts. A bubble indicates that
expectations of value are out of line with real-market values. While we saw what a large bubble collapse looks like in the housing market crash of 2006-7 and its ensuing financial crisis, we are now facing extravagant bubbles in the amount of U.S. dollars in circulation, in the U.S. bond market (sovereign debt), in the U.S. stock market, in commodities and in consumer debt, especially student loans. These all have swelled to exponential levels, becoming massive ‘bubbles’ that will at some point inevitably collapse.
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ENSNARED THROUGH THE EFFECT OF GLOBALIZATION
On top of all of this is the sobering realization that the world is connected in a way that has never happened in history. It increasingly looks like a collapse in the dollar will take every other currency down with it.
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1. Increasing global interconnectedness – Interconnections in the financial systems accelerated rapidly beginning with the technological boom of the 1980’s. Both global institutions and nations have grown tightly intertwined. Communication and financial transactions happen in seconds, even milliseconds. All nations are now vulnerable to the problems and weaknesses of all the others to an extent unprecedented in history. |
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2. Toxic assets injected into the global system -- Modern bankers took advantage of deregulation to creatively package the toxic mortgage assets created through sub-prime mortgage lending. These were put together in three layers of riskiness; low-risk/medium-risk/high-risk. Thinking that they had discovered a way to minimize and even eliminate risk by packaging low-quality loans with healthy debt instruments and spreading the risk around, banks infected the global economic system with a flood of complicated toxic assets. In more cynical views, the originating banks knew the securities would go bad because there is evidence that they made money betting against them in the stock market. |
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3. Eurozone problems – The EuroZone was established in 1999 as an economic alignment made up of certain European Union nations. But because it has insufficient political foundations, the EuroZone has become an interdependent economic cooperative that looks increasingly untenable. It was given a shock upon discovering that Greece had been hiding massive debt in order to gain admittance to the EU and has been hobbled by several other nations whose socialist programs have racked up unsustainable debt. Its problems have removed pressure from the U.S. in the short run, keeping the dollar stronger than it would have been, but global interconnectedness will bring European failure back on to the U.S. |
4. Universal debt -- Fiat-inspired debt loads have put the economies of most all developed nations in a very negative state.
It should be obvious that we have entered a global economic mine-field with a vast array of trip-wires. What started as institutional problems became national problems through massive bailouts, and because of international connectedness the problem has become truly global in scope. What is important to see is that the level of financial explosiveness we are now living with has reached nuclear proportions.
