Forgive Us Our Debts

Wednesday, September 13, 2006

In an earlier post I mentioned that I was reading American Theocracy by Kevin Phillips, and that the book has three secitons about what is leading to our demise: oil, increased secularism and debt. In the previous post, I mainly focused on the former two: oil and religion.

I want to take some time to focus on another problem that is quickly and evidently coming home to roost: an economic system reliant on debt.

In fact, consumer debt is being used to prop-up our national economy...which is comprised largely of debt and a heavy reliance on the Finance, Insurance and Real Estate (FIRE) sector (which is a sector built on debt and movement of dollars that are not real). Keep in mind: this consumer debt is taking the place of manufacturing, at least on the local and state level, in terms of what supports our dollar.

The FIRE sector relies, of course, on the transfer of money from entity to entity, using money that exists (in my own simplified explanation) only in concept; the "value" of something that actually cannot be immediately traded of real dollars, and is thus only conceptually valuable. Assets are traded rather than actual goods.

As I said above, what bolsters this economy is consumer debt - spending what I don't have and gaining possesion of something for which I cannot actually or possibly cover.

Our national economy, then, is not based on anything tangible. Imagine the chaos if the countries to whom we are indebted decide to foreclose on our loans because we aren't actually paying anything and in fact are continuing to spend. Worse: not only are we not paying and still spending, our collateral is less and less valuable.

Britain, Spain and the Netherlands have each seen this play out in different points in history. Britain could no longer sustain a massive empire because of its reliance on debt and credit (among other things). This reliance no longer allowed it to physically pay, in real dollars, for its own expense. The Spanish relied on indebtedness and "financialization" as it became the European bank of banks. All the the gold and silver bullion came to Spain, Spain made money, but it never produced anything. The end result: the total collapse of its unsupported economy of money transfers. Nothing actually held value but the money itself. The Dutch, similarly, overextended themselves through financialization as they lost the real value behind their dollar which was no longer supported by trade, but instead by transfer of liquid values.

The Detroit News ran an article today that I think clearly outlines the real danger of an economy of debt. Take a look at the link. The way I see it, the economic bubble bursts when one of the pieces of the circle, in this case the consumer, can no longer cover its part of the liquid assets. This burst becomes an outright collapse as more and more people in increasingly-higher income brackets also fail to support their end of the overwhelming debt.

To highlight this, according to the article Macomb County (Michigan's fastest-growing county in terms of population, housing and housing prices) in Southeact Michigan is experiencing a 234% increase in foreclosures. 234%. The byline of the article is that 35,000 southeast Michigan (Oakland, Wayne and Macomb counties) residents are losing their homes this year. The families are losing their house and their ability to borrow again at an affordable interest rate. The bank will lose money on the property. Interest rates for the family in question will rise above their price range. Money is lost in these cases and is simply not recovered.

The article continues to cite other reasons as to why this is a problem, but each of these reasons all have a common thread: it's all about investments that are tied to a market and not an actual value. When the basis for your economy fails - in our case, manufacturing - everything else slides with it, including your housing market.

Imagine that this is just the beginning. In fact, the same article shows a 141% increase in foreclosures statewide. This is more than the beginning. This is happening.

A solution? Banks don't need a federal bailout. Our manufacturing sector and tech sector need the bailout. We need to shift back towards exporting more than we import, but the problem is how absolutely lucrative it is to import goods using foreign labor (a big thanks to NAFTA and Clinton). Moreover, we need to stop spending beyond our means in D.C. Running a surplus is not a bad thing; it allows us to make payments on debts and regain our positive borrowing rating status worldwide. Tax cuts to the top 1% exacerbate the problem, and quite honestly, so will a cut in taxes to the middle! A recent NBC piece (can't make the damn link work) shows that there is a trend to actually accumulate debt, in that the question is: how big of a payment can I afford? If you free-up much more money, you contribute to accumulation of debt, which is used as a means to bolster our dollar. A dollar based no longer on goods but on money owed.

Further, as can be seen with a 141% increase in foreclosures, even the top 1% might be having trouble supporting an economy of debt. However, it is the middle class which an economy of debt deemphasizes and punishes. It pushes-out the jobs that bolster a middle class in favor of a narrower, smaller class of people who actually understand economics.

Cut-and-spend conservatives represent a huge driving force behind our increasing indebtedness and reliance on foreign investments in something that is losing value. We can increase the value so long as we value our dollar away from banks and back on our products. Remember "Buy American?" Debt isn't patriotic. Being a consumer isn't necessarily patriotic. But I fail to see how forcing a larger debt load on me is.

2 comments:

Thrillhous 9:01 AM  

Great post, Smitty. Debt is definitely a problem that's going to get a whole lot worse before it gets better. As usual, everyone (politicians as well as constituents) are trying to put the pain off as long as possible, thereby making the inevitable crash that much worse.

The wife and I have been lucky, in that the only real debt we have is our mortgage. Still, this is going to end up hitting everyone, no matter how careful you've been with your money.

We've got the same kind of thing going on around here that the article you linked to describes. Market's grown way, way too fast the last few years, and people have been taking out bigger and riskier loans that they just can't afford. Most banks turn around and sell their mortgages to Fanny Mae, so the banks will probably be okay. But with Fanny Mae underwriting such a large percentage of loans, things are getting very ugly for them already. And that's bad for all of us little people.

Smitty 3:47 PM  

So true. What happens to the financial institutions that handle our debt, especially if and when the dollar collapses?

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