Saturday, January 06, 2007

Popping America's Bubble Economy

Most laypeople are not aware of the precarious state of the American economy. While I won't pretend that my prescience derives from some supernatural ability to foretell economic fate, I am nearly certain that my economic prescriptions will materialize at some point in the near future, rendering much of our standard of living gains worthless. There are six major economic bubbles that are set to pop, essentially simultaneously: the national debt bubble, the trade deficit bubble, the dollar bubble, the consumer debt bubble, the stock market bubble, and the real estate bubble. Each of these bubbles is intimately related to the others, through a complex web of currency, credit, and international financial flows.

Bubble #1

The national debt bubble will reach 10 trillion dollars in a few short years. This absolutely phenomenal level of indebtedness is a deep abyss from which our federal government might not be able to emerge. While in fact, there are many other countries that have a higher ratio of national debt to annual GDP, no country has an absolute debt burden of our size. If a corporation or household managed to run up this kind of debt with blatant disregard for fiscal fundamentals, its credit rating would plummet and lenders would never continually throw good money after bad. Beginning in the 80's, Reaganomics unleashed a sort of deficit spending that relied on a set of economic assumptions that ultimately seem similar to Keynesian principles but were indeed initiated by supply-side beliefs about the importance of cutting income taxes on the wealthy, increasing military spending, and running up huge deficits to stimulate investment and consumer spending. The national debt is indeed astronomical. It served to pave the way for incredibly unprecedented economic growth and stock market expansion through the 80's and 90's, but this created a huge bubble. Real incomes did not rise, but a tremendous influx in foreign capital created a credit environment where spending was facilitated and an illusion of prosperity was fostered.

Bubble #2

The trade deficit bubble is of similarly exorbitant proportions. Like the national debt owed by the federal government, the trade deficit is indicative of the reckless policies of our economic stewards that has encouraged borrowing from eager foreign lenders who believe that extending cheap credit to us will continue to feed our consumerist vices. We contine to receive extremely cheap foreign goods, oil, and credit in exchange for what? The U.S. offers foreign investors a reliable, longterm investment haven. Well, at least it has for several decades, but it is dubious whether the current rate of debt increase will cause investors to tremble and shake in their shoes. They are starting to realize that our creditworthiness is in jeopardy and that America is not producing enough to deserve its affluent standard of living. Ultimately the annual disparity between how much we produce and how much we purchase will not be tenable. The rest of the world, lead by China and Japan, will demand that we repay our debts in the form of our cheapened assets, which will have become so cheap due to the decline in the dollar's value. That repayment will have been necessary due to our illusory belief that we can receive something for nothing. It is true that we have provided a bedrock of stability for international markets and military protection for the system of dollar hegemony. However, we are spoiled by the export-driven economies of East Asia, who have selfishly convinced themselves that lending us mad money to buy their goods is prudent. It was prudent for a while, but now the bubble has become insurmountable.

Bubble #3

The dollar bubble is such that our currency has become overvalued, especially with regard to how much oil, consumer goods, and other currencies we can buy. Although the dollar has clearly been sliding since the invasion of Iraq in 2003, there is still much of correction that has yet to be made. Foreign governments have been propping up the dollar with massive purchases of dollar reserves for their central banks. Japan and China have accumulated trillions of dollars in their vaults in order to protect their dependence on the dollar, all the while becoming even more addicted to dollar hegemony. However, they will only be willing to suffer so long under the yoke of a sinking dollar and a faltering American economy that is unabashedly lacking in economic fundamentals, instead addicted to unadulterated consumption at rates never before witnessed in the history of mankind. As the dollar slides, the day becomes nearer that the American government will default on its debt, forcing hordes of foreign investors to sell off their American assets. Real estate, stocks, and bonds denominated in a declining dollar will appear less and less attractive. American interest rates will need to climb sky high in order to offset the outflow of foreign investment. There will be a massive realignment of global economic power, as Chinese and European purchasing power are readjusted. Our cheap credit will have been erased, and we will be forced to pay down our debts, albeit with devalued dollars and at extremely high interest rates. As the Chinese currency appreciates, Chinese consumers will begin to attain the level of consumption to which they are duly entitled. As stated above, oil, consumer goods, and credit are artificially cheap for Americans at the present time. As a result of a huge imbalance, this state of affairs has lingered for quite some time, allowing for an expansionary American economy that has only been able to keep interest rates down with a consistently massive influx of foreign capital. Domestic lenders would never have been willing to risk this much. However, foreign investors have plunged into dollar hegemony not due to their love of America but as a result of the perceived safety and prosperity of American economic conditions. However, due to gross fiscal mismanagement of the federal government and due to reckless monetary policies that encouraged the extension of absurd amounts of credit, the dollar bubble will pop without remorse. This will drain Americans of huge quantities of wealth, even if it will encourage huge growth in our export and tourism sector. We will be relatively much poorer with regards to our ability to consume foreign goods, travel, and most importantly, oil. Once the dollar falls, energy prices will rise to levels never previously encountered. The artificially happy-go-lucky American economy will be terrestrial once more. And American consumers and investors will be bound by the same constraints that limit all other economic actors across the world. No longer will printing limitless currency be an option for increasing the money supply and extending credit in reaction to the influx of foreign capital. We will be straitjacketed by a new era of exorbitant interest rates, inflationary macroeconomic conditions, and a dreadfully depressed populace whose beloved dollar is relatively powerless.

Bubble #4

The consumer credit bubble has resulted in consumption of otherwordly proportions. Never before has such a mass of human beings been able to "afford" such an incredible level of personal consumption of flat screens, SUVs, Gucci bags, and trips to Cancun. Household savings have never been so doomed, and household debt has never been this astronomical. Americans themselves are not so much at fault, for their economic shepherds have led them astray. The demons of advertising and the barons of industry have successfully attained leadership over a mass of powerless individuals who will consume at the behest of the rulers. The very small increases in actual income are overshadowed by magnificent growth in ability to possess material wealth. Due to the American ability to print dollars and foreign willingness to continue the cycle of trade deficits, the system has propagated itself for quite a while. However, as personal credit card debt and bankruptcy levels reach for the fiscal skies, the system will implode. Foreigners will not sit idly by as America cannot pay back its debts to the rest of the world.

Bubble #5

The stock market has not grown appreciably since 2000, when the internet bubble finished bursting. However, over the course of the 80s and 90s, the market far outstripped the traditional ratio of stock price to earnings. The PE disparities are doomed to implode as well, for this sort of valuation cannot hold in the long term. Although I'm skeptical of attempts to break down all economic activity and transactions into a set of rational choices and scientific fundamentals, I see that the stock market does not reflect the true health and wealth of most companies. Once the dollar slide accelerates and consumption takes a dive, the market will bear the brunt of the slide. The reality of zero growth since the 2000 tech bubble collapse and the PE ratio curse doom the stock market to dip downwards sometime in the near future.

Bubble #6

Real estate prices have climbed 80% in less than a decade, while real income growth has been negligible. The housing market has been booming for these years, with explosive growth in new home sales until this past year. Most cities in the country have experienced a tremendous upswing in housing costs, rendering housing unaffordable for people with average incomes. Due to the reality that incomes have not risen appreciably, it is evident that, without a rise in household savings, it is utterly impossible for Americans to afford such a rise in housing costs without incurring gargantuan debt. Unless it is merely the top third of Americans who are buying new homes and making significantly more per annum (which is a distinct possibility given increasing income disparities and the Bush tax cut program), it would seem that housing prices are far beyond their true economic value. This inflated housing environment is a temporary arrangement. It cannot be sustained. Income growth is mere pennies, mortgage foreclosures are occurring like never before, and borrowers are losing their financial hats as their adjustable rate mortgages become less affordable with inevitably increasing interest rates.

True Inflation, GDP, Unemployment

Although I don't have the hard data to support these assertions, it is empirically obvious that true inflation is much higher than officially reported in the financial media. Due to the through-the-roof increase in housing costs, health insurance premiums, and tuition rates, it would seem that inflation really is far higher than the 2-3% that is attributed to our economy these days. Assuming that true inflation is is around 7%, then real interest rates have been even lower than conventionally understood. Interest rates were kept far too low for such a long time that the economy overheated, rendering Americans in debt up to their boob jobs and collagen lips. Moreover, assuming a much higher rate of inflation, true GDP growth is actually much lower than reported. This is in keeping with the assumption that recent economic conditions have not resulted in betterment of economic fundamentals. Rather, the artificial economic growth created by voodoo economics, unfettered military spending, and abandonment of the welfare state have produced a thoroughly neoliberal and deregulated society where economic indicators do not reflect true economic wellbeing. Even more damning than the misleading inflation figures are the unemployment figures, which declare American unemployment rates to be about half the average European rate. The reason for this is that we only count those who are in the labor force. Persons who have given up looking for a job are thusly considered discouraged workers and are not tallied in the official unemployment rate. True unemployment is probably around 12% or so. True urban unemployment in many places is somewhere between one third and one half of the adult working-age popualation. The official numbers thus don't give us a clear view of what is actually happening in the economy.

Implications for Our Standard of Living

As these 6 bubbles eventually pop, we must be accustomed to increasing foreign ownership of American real estate and corporations. As the value of assets denominated in dollars falls, foreigners (especially Europeans, East Asians, and Middle Easterners) will buy up huge sections of the American economy. I realize that many of these assumptions about the future depend on a relatively simplistic understanding of economic variable but the question of empirical proof cannot be challenged. The true economic fundamentals indicate that our currency will fall and we will be forced to pay off our debts at very high interest rates with dollars that are worth less and less. We will be able to afford much less of what the rest of the world produces, yet it is to be hoped that this realignment produces economic conidtions that correlate with actual economic value. Yet, it is difficult not to confound what ought to happen with what I believe will happen. Do I or other economic agents have a vested interest in hedging for a particular macroeconomic outcome? Are these predictions merely realizable if more people start to believe them and start acting as if they are already true? These questions relate to epistemological debates within economics that are rather complex. Either way, I harbor a significant amount of certainty vis-a-vis the decline of the dollar and the onslaught of euro omnipotence. American consumers will be put in their place due to their consistent endorsement of political and economic leaders who led them astray. They have not listened to the true economic prophets who warned them against such limitless consumption and orgiastic materialism. The human and social costs of the bubbles bursting will be vast. Yet, it is hoped that the realignment will result in increased power of the citizenry over the American government and the financial institutions to which it is inextricably linked: the Fed, IMF, and World Bank. These unaccountable entities need to be brough to justice for their reckless endangerment of American standard of living. Hallelujah!

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