If nothing else, the housing market crash and the ensuing credit meltdown and debt deflation signifies the extent to which Americans had come to believe that you can get something for nothing. Believing money really is some sort of cosmic force all on it's own, obeying the metaphysical laws specific to it that had been harnessed by a bunch of people in suits living in Manhattan might have been the foundational delusion. This was widely believed. Rather, it was narrowly believed and widely believed in as so much depended on the veracity of this new dimension of money. Long ago, back in the 1980's under the Reagan Administration, it was decided that the nation's power and prestige, it's ability to fight and win the Cold War, and the expansion of the American economy would be entrusted to Wall Street. Guided by the beacon of enlightened self-interest, Wall Street would take the nation and the world to new heights of unimaginable wealth for the people of the world as economic growth would over time solve any problem that came along. Morning in America. Everything is going to be outstanding. Who has time to be miserable when you are so busily getting rich, after all? And if you just so happen to be miserable you have only yourself to blame.
Optimism turns delusional when it tries to maintain a consensus reality in the face of new conditions deleterious to that reality. Americans have been feasting on a buffet of optimism since the end of the Cold War. Certain of the superiority of our system, moral or otherwise, the nation set about aggressively exporting the American model to the rest of the world, much of which had just been freed from the dreary, dull authoritarian socialists. The lesson taken from the collapse of the Soviet Union was essentially that free societies will prevail over the non-free. More specifically, and more importantly, the free market will prevail over the centrally controlled markets. Translated into politics, it meant the free market knows best and the government knows nothing. Until recently, it was well nigh impossible to pitch an argument against this victorious ideology that could get a hearing anywhere. Now, it would seem, the fate of the American economy would largely depend on whether the American economy is the best (only?) development model.
It behooves us to wonder whether the American model is even possible anymore. For a variety of reasons, the American model faces a lot of questions about it's legitimacy as we notice the freest of the free markets require enormous and unprecedented amounts of government money just to appear solvent. This money has to be borrowed, of course, so that investment banks can cover bets they borrowed money to make. Not only that, these investment banks have sold this debt to unsuspecting investors and then bet against this debt from ever performing. This debt market, called the derivatives market, is also called a dark, or opaque, market for a simple reason; nobody really knows what anybody else is doing in this market. It seems self-evident that if a bank accumulates debt, counts it as an asset, and then issues credit based on the value of that debt that eventually there would be problems. The question Americans, whose future depends on the answer should ask, is: Why has the American system required so much debt?
Lots of people complain about the debt. Everybody knows that at some point debt is going to be a problem. What most people don't understand is the magnitude of the debt that has been taken on. What we do know is the $10-odd trillion the government owes. We know the financial obligations of the U.S. government in entitlement payments over the next fifty years is $65 trillion. We know corporate debt is about the same within a shorter time span. We know household debt is somewhere around thirty trillion. Lots and lots of debt. But what about the derivatives market? The market that underlies the credit market, what made the heyday of cheap, easy credit possible over the years is the derivatives market. The latest estimate for the total "value" of this market is $1 quadrillion dollars. That is $1,000 trillion dollars worldwide in debt derivatives that are contituted by a smorgasbord of innovative investment vehicles that believe with all it's heart and soul that one day the American and global economies will grow sufficiently to make those debts good investments. To borrow Chris Martenson phraseology: It assumes the world will be $1 quadrillion dollars bigger than it is today. The global economy is roughly $55 trillion and shrinking as of this writing. What if the assumption that the world will be 200x bigger than it is now isn't right?
Back to our question, then, of why the system needs so much debt. The debt load was not built over night and so finding the reasons behind it seems, well, reasonable. First, though, we will name the economic process that lead to the debt accumulation; financialization, which is the technical term for big economic fun. Also known as the last stage of empire. The financial sector of the U.S. economy grew from around 13% of Gross Domestic Product in 1980 to around 26% in 2008. How that breaks down on a yearly basis I don't know, but the question I have, and I don't know if anyone can truly answer it, is what would our economy look like had we not gone through the financialization process. Would our vaunted growth rates, the very growth rates we beat our European friends over the head with, have been nearly what they were had we not built up this financial sector to such a degree? It seems the answer is probably no. What does the sum of the American economy look like when you subtract the debt? That still leaves the maddening question of why all the debt was necessary?
The answer will have to wait until the next post.
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