The Dry Hole of American Finance

Got a call from an old friend, we used to be real close

Said he couldn't go on the American way

Closed the shop, sold the house, bought a ticket to the West Coast

Now he gives them a stand-up routine in L.A.

– Billy Joel, My Life

I fully intended this week to continue what has become a mini-series on the aspects of a safety net of alternative systems for ordinary people to build in preparing for the effects of Peak Oil and climate change. But my plans were “overcome by events,” as they say in the military. The big events over the last two weeks have been the failure of at least two more large investment houses and the Federal “bailout plan” being proposed by President Bush and his economic advisors as a means to stabilize the markets. One major aspect of the impacts of Peak Oil and resource scarcity is the financial aspect, and the present responses of our society to the financial instabilities occurring now will in turn generate their own financial effects, which may hinder the ability of common people to prepare for a post-Peak world.

I will begin with a caveat. First, while there are many things about engineering that I understand, there are many things about finance as it is played at present in the U.S. that I don't understand, since American finance is a shady Las Vegas-style game in which the major players keep changing the rules to keep the rest of us off balance. Secondly, I am a bit late in addressing the financial situation, and other voices have already provided words of great insight and wisdom in explaining what is going on now. (See http://cluborlov.blogspot.com/2008/09/adieu-stage-1-collapse.html; http://thearchdruidreport.blogspot.com/2008/09/rx-depression.html; and http://sharonastyk.com/2008/09/25/peeling-the-onion-whats-behind-the-financial-mess/ for examples. Warning: some of these posts contain some strong language.)

For the last few decades it seems that the American way has been to pump crony capitalism as much as possible by keeping wages stagnant, deregulating financial markets, outsourcing the manufacture of essential goods to low-wage countries, stimulating economic activity by easy credit, and lowering taxes while borrowing to finance national boondoggles such as the wars in Iraq and Afghanistan. Now many Americans have no savings or are upside down on the loans they have taken out to purchase their “stuff” - houses and cars now worth less than what is owed. And the National debt – the amount of money which the Federal Government has borrowed and which it owes to its creditors – is approximately nine trillion, eight hundred sixty billion dollars (Source: U.S. National Debt Clock, http://www.brillig.com/debt_clock/).

To put this into perspective, the total U.S. population is 303,824,640 as of July 2008. (Source: CIA World Factbook, https://www.cia.gov/library/publications/the-world-factbook/print/us.html) 67 percent of this population is between the ages of 15 and 64 years old. Assuming that this is the age of employable people, that means that there are 203,562,509 potential members of the workforce. If we further assume that ten percent of these are too poor to be taxed heavily and that another ten percent are so rich that they can escape taxes through legal maneuvering, the total taxable workforce is now 162,850,007. Assume further that 6.5 percent of them are out of work at present due to the present economic crisis and we have a taxable workforce of 152,365,757 people. If we divide the national debt by this number of working people, each wage-earner owes $64,700 on the National debt.

That debt grows every day, thanks to President Bush's war boondoggles and refusal to bring Government spending in line with tax receipts. But over the last eight or nine months a new source of debt has emerged, namely the Government's repeated moves to bail out large, high-flying investment banks who are unable to pay their debts and whose assets are now becoming worthless because of the subprime mortgage crisis. Every bailout has been accompanied by pronouncements from the Republicans that “this bailout is necessary in order to prevent the economy from crashing,” yet after every bailout, the crash has progressed a little more.

What is being protected by these bailouts is the notional “assets” of a number of rich investment bankers. These assets were based on the notional value of I.O.U.'s such as mortgages, which were used as collateral by investment houses to borrow money equal to many times the value of the original I.O.U.'s. Thus the investment banks, whose assets consisted of I.O.U.'s, used these “assets” to write much bigger I.O.U.'s. Now it is being seen that the original assets are rapidly becoming worthless, because the little people whose mortgage I.O.U.'s were counted as certificates of worth are unable to pay their debts. The whole debt structure is therefore in danger of falling apart.

A crash of financial markets is therefore a real possibility, and would be a painful thing to experience, since our society is largely credit-driven, and since most Americans don't produce tangible goods of real value anymore. Such a crash would force us to face the fact that the American economy is worth much less than its worth on paper, and would drive down our standard of living, as well as knocking a few rich people off their pedestals. But things get much worse if the Government becomes the guarantor of this structure of private I.O.U.'s. The Federal government already owes $9.86 trillion.

The significance of that fact becomes apparent when one realizes that that money is owed to someone. Who holds American debt? Right now, at least 25 percent of that debt is held by foreign governments. At the end of 2006, foreigners held 44 percent of federal debt held by the public. China in particular holds over $1 trillion in dollar-denominated assets. (Source: “United States Public Debt,” Wikipedia, http://en.wikipedia.org/wiki/United_States_public_debt#Foreign_ownership)

That debt exerts pressure on all of us, even though this nation has delayed facing the prospect of paying off the debt. And because this nation is past its peak in the production of many natural resources, and has largely outsourced its manufacturing base to other countries, we have increasingly less collateral with which to obtain new credit for the Federal government. To choose at this time to add to the National debt by nationalizing the results of the bad choices of the rich is an incredibly stupid move.

And such a move might soon lead to a time when all Americans - including those who are not in debt and who own their own property - may be required to forfeit all their possessions to service the national debt. This could be via a number of foreign governments demanding repayment of debt certificates issued by the U.S. government, to which the Feds might respond by raising the tax rate on anyone with assessable hard assets (including real estate) to such an extent that no one would be able to afford the tax. Then the Government could foreclose on the personal properties of people who could not afford the tax, and turn those properties over to foreign creditors in an attempt to repay some of the national debt. Is this a farfetched scenario? I'd like to think so, because the present governmental shenanigans are rather spooky.

But there are people who have seen the societal trends now building in the United States and who have tried to act wisely in disconnecting themselves from the present breaking system. Now the preparations of these people may be imperiled – especially if those preparations involved saving money or buying land or reducing debt – due to the real threat of having a crushing tax burden imposed on them, just so that irresponsible rich bankers might continue their high-flying financial games. What then happens to the safety net of the wise?

I will close by mentioning a post by Stormchild on the blog, Gale Warnings, titled “Responsibility and Authority.” According to that post, one characteristic of an abusive leader or abusive organization is the desire for absolute authority coupled with the total evasion of responsibility. This seems to be a characteristic of President Bush, his “bailout plan” and the rich investment houses he is trying to help with his plan. He and the Congress are determined to enact this plan even though a solid majority of Americans opposes it, seeing it for the shock doctrine tactic that it actually is.