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Decade at Bernie's
Unfortunately, that's a pretty good metaphor for what happened to America as a whole in the first decade of the 21st century.
Last week the Federal Reserve released the results of the latest Survey of Consumer Finances, a triennial report on the assets and liabilities of American households. The bottom line is that there has been basically no wealth creation at all since the turn of the millennium: the net worth of the average American household, adjusted for inflation, is lower now than it was in 2001.
At one level this should come as no surprise. For most of the last decade America was a nation of borrowers and spenders, not savers. The personal savings rate dropped from 9 percent in the 1980s to 5 percent in the 1990s, to just 0.6 percent from 2005 to 2007, and household debt grew much faster than personal income. Why should we have expected our net worth to go up?
Yet until very recently Americans believed they were getting richer, because they received statements saying that their houses and stock portfolios were appreciating in value faster than their debts were increasing. And if the belief of many Americans that they could count on capital gains forever sounds naïve, it's worth remembering just how many influential voices - notably in right-leaning publications like The Wall Street Journal, Forbes and National Review - promoted that belief, and ridiculed those who worried about low savings and high levels of debt.
Then reality struck, and it turned out that the worriers had been right all along. The surge in asset values had been an illusion - but the surge in debt had been all too real.
So now we're in trouble - deeper trouble, I think, than most people realize even now. And I'm not just talking about the dwindling band of forecasters who still insist that the economy will snap back any day now.
For this is a broad-based mess. Everyone talks about the problems of the banks, which are indeed in even worse shape than the rest of the system. But the banks aren't the only players with too much debt and too few assets; the same description applies to the private sector as a whole.
And as the great American economist Irving Fisher pointed out in the 1930s, the things people and companies do when they realize they have too much debt tend to be self-defeating when everyone tries to do them at the same time. Attempts to sell assets and pay off debt deepen the plunge in asset prices, further reducing net worth. Attempts to save more translate into a collapse of consumer demand, deepening the economic slump.
Are policy makers ready to do what it takes to break this vicious circle? In principle, yes. Government officials understand the issue: we need to "contain what is a very damaging and potentially deflationary spiral," says Lawrence Summers, a top Obama economic adviser.
In practice, however, the policies currently on offer don't look adequate to the challenge. The fiscal stimulus plan, while it will certainly help, probably won't do more than mitigate the economic side effects of debt deflation. And the much-awaited announcement of the bank rescue plan left everyone confused rather than reassured.
There's hope that the bank rescue will eventually turn into something stronger. It has been interesting to watch the idea of temporary bank nationalization move from the fringe to mainstream acceptance, with even Republicans like Senator Lindsey Graham conceding that it may be necessary. But even if we eventually do what's needed on the bank front, that will solve only part of the problem.
If you want to see what it really takes to boot the economy out of a debt trap, look at the large public works program, otherwise known as World War II, that ended the Great Depression. The war didn't just lead to full employment. It also led to rapidly rising incomes and substantial inflation, all with virtually no borrowing by the private sector. By 1945 the government's debt had soared, but the ratio of private-sector debt to G.D.P. was only half what it had been in 1940. And this low level of private debt helped set the stage for the great postwar boom.
Since nothing like that is on the table, or seems likely to get on the table any time soon, it will take years for families and firms to work off the debt they ran up so blithely. The odds are that the legacy of our time of illusion - our decade at Bernie's - will be a long, painful slump.
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23 Comments so far
Show AllIs Krugman arguing for WWIII? Given the urgency he suggests, it is time for the nations of the world now to choose teams?
More seriously, the stimulus plan should have fully funded infrastructure deficiencies, including a usable public transportation system for the 21st century. I forget what some project the cost of such would be, a couple of trillion or so; but why not go for the home run? There may not be a next inning, in that I suspect it will be hard to keep the BlueDog Democrats in line regarding a large deficit in the new budget or to get them back for another round of stimulus.
My wife employs an adult daughter of one of the BlueDogs, thus we have a bit of his attention. I sense in discussing things with him and his chief of staff that he will be soon reverting to his BlueDoggedness now, feeling he's gone far enough. And he is one of the BlueDogs more willing to consider the positives of a deficit (albeit not willing to reconsider his debtophobia). But then again, he not only represents a largely rural district, but one with a large university town which gave an enormous edge to Obama this past election, plus he has a personal friendship with Obama, so he may be more flexible than BlueDogs without these characteristics.
I don't think he's advocating a war, but he is advocating spending like we're in a war. Unfortunately, you're not really in a position to do that. The debt load that's already been accrued is staggering. To introduce that sort of works program will break the dollar, not a totally bad thing, I'd say it's the only way you're going to get the rich to pay for their error in backing economic voodoo artists like Reagan/the bushes and Clinton.
"The odds are that the legacy of our time of illusion - our decade at Bernie's - will be a long, painful slump."
Yeah, our next decade will be at the depression grocery line with government food stamps in our hand.
No illusions here!
One would think that in such a severe economic downturn one result would be less consumption and this would be environmentally beneficial, but this will probably turn out not to be the case. Poverty tends to breed environmental rape and pillage.
One small example: in the rural area where I live, in the American Midwest, many more people are heating with firewood due to high propane and other fuel prices. Where do they get the firewood? Unemployed young men steal it and create a black market. Much has been written about similar trends in third world countries but I have yet to see a single article about this trend in the U.S.
We're screwed.
-30-
In the southwest, it's copper wiring that's being stolen from construction sites, and oh yes, kidnapping as the "war on drugs" has expanded the profitability of the business, just as the new war on immigrants has.
"Poverty tends to breed environmental rape and pillage." Yup.
Capitalism tends to breed environmental rape and pillage.
"Controlled economies" tend to breed environmental rape and pillage.
Homo sapiens will breed to the point of environmental collapse.
We are screwed.
in 1972 i read this book:
http://en.wikipedia.org/wiki/The_Sheep_Look_Up
about dystopian america - hello
written by john brunner - who may be the best sf writer of them all
http://en.wikipedia.org/wiki/John_Brunner_(novelist)
and now here we are in 2009
i look at my daughter who is texting the entire western world on a daily basis between episodes of so you think you can dance, the oc and american idol and i truly don't know what to tell her
but i do feel that i let her down somehow
especially now that armageddon approaches - she is not prepared at all
and i hope nobody kills her, especially the government
cheers, b
What you do is stand up and be a parent instead of a wimp. Tell her to put the damned e-toy down, turn off the idiot box, and go find something worthwhile to do. If she throws a fit, too bad. She's young, she'll get over it.
Yup - that's what you need to do!
It's just another unexpected curve-ball we all have deal with on the life path.
Your daughter is a lot smarter than you are, but she needs you to survive. You have nothing to explain, it is what it is.
I have shed my tears long, long ago.
So Now Mr. B, while waiting for mass revolution, buy a gun and learn some survival skills. Start stocking up. Go To BIG LOTS and look for SALE on GERRY CANS.
In The Meantime, we go to work, pay mortgage and bills. Some day when it all comes to a crash, will Click Heels With Joy! Hey it is only a house! Here Mr. Bankster, come an get it! It's all yours!
I like log cabins better, and I'm GOOD WITH AN AX. Don't you like that smoky smell in the morning, with frost on your boots?
My wife and my dogs, we will live in our van and see the country. No worries! It might be a Mad Max kind of life out there, but that's OK. Man does best when life is an adventure, when Survival is a Challenge. I will be strong and I will provide. I will be happy to unload a clip into anyone that gets in my way. We will struggle together and die together, our love is the most powerful thing that holds us together, forever.
So Don't Be Worried MR. B, you have your loving family. It will be all right. Material things will not matter anymore. Did THEY EVER?
Stimpy
WW3? You mean nuclear winter right? Welcome to BV$Hworld chapter 2. This is the part where BV$H and his GOP friends close the gated compounds they live and enjoy the chaos their greed these last 30 yrs. has brought down on all of us.
To understand how we survived the enormous spending during WWII, one needs much more information not furnished by Krugman. First, FDR imposed 70 to 90 percent income tax on the wealthiest. The tax was not entirely removed until more than a decade after the end of the war. Further, the government spent relative large amounts of money in the post war era on rebuilding Europe and Japan, and assisting the GIs to get an education and a first home. Everybody benefited, the economy sprang into life and the whole world recouperated. We should keep all of this in mind during this crisis, including the high taxes on the rich. The rich have raped the world with their greed and irresponsiblity and without higher taxes, they will make even more wealth off of this crisis. They always do.
Ah, I can hear the Republicans singing, "Class Warfare." "Tax and spend." "The tax money belongs to you not the government."
What came first? A deep aversion among the rich to being taxed or the theory which explains why taxing the rich is an economic evil? And that cutting taxes is the best stimulus?
Anyone the least familiar with American history should know the answer to that. But let me offer a hint. Supply side economics took off, along with 'trickle down," about the time Ronald Reagan was elected president. And it offered the cover they needed to do what they had wanted to do all along.
In the last several weeks, I've begun to conclude underlying economics is a fundamental flaw. Under the influence of Newton, economics apes classical physics. Doing so, assumed are elastic tangible objects causing behavior in a transitive sequence. Thus Krugman asserts,
"until very recently Americans believed they were getting richer, because they received statements saying that their houses and stock portfolios were appreciating in value faster than their debts were increasing. And if the belief of many Americans that they could count on capital gains forever sounds naïve, it's worth remembering just how many influential voices - notably in right-leaning publications like The Wall Street Journal, Forbes and National Review - promoted that belief, and ridiculed those who worried about low savings and high levels of debt."
Problem is the content of economics is intangible. Money, bonds, stocks, sales, etc., are abstract, not substantial. Being abstract, they are emergent, engendering little external costs. As a result, economic value constituting exchange, unentropically increases towards "growth," when physical energy constituting "work," entropically decreases towards "death." Inconsiderate of the distinction, Krugman repeats the economic dogma Roosevelt did not end the Great Depression until spending enough money during World War II. Thus,
"If you want to see what it really takes to boot the economy out of a debt trap, look at the large public works program, otherwise known as World War II, that ended the Great Depression. The war didn't just lead to full employment. It also led to rapidly rising incomes and substantial inflation, all with virtually no borrowing by the private sector. By 1945 the government's debt had soared, but the ratio of private-sector debt to G.D.P. was only half what it had been in 1940. And this low level of private debt helped set the stage for the great postwar boom."
Overlooked are two things. First the U.S. did not suffer economic competitors beginning with WW II until the late 1970s. Second, it wasn't the money spent during the war which ended the Depression. Money is mythical, and the mythical affects behavior only insofar as it is accepted. Ending the Depression was the mythical sense of commitment to the war effort, engendering a shared sense of duty and sacrifice previously absent, just as now absent. More accurate than Krugman and standard economic analysis, is the place of myth in Georges Sorel's Reflections on Violence.
An economy having no objective reality, it is mythical. When acceptance of the myth fails, the economy "crashes." Abstractions are recognized for what they are, and dismissed. Resolution is to create a new myth, to "fool" the public into accepting as real the unreal. They must be provided something in which to believe. Accepting the mythical economic conception of actuality as real, economists and contemporary politicians are unable to understand the social psychological. They having banished all other myths to affirm their own, we are left in an intellectual wasteland. Without an alternative in which the public can believe, I am apprehensive of the future.
"Ending the Depression was the mythical sense of commitment to the war effort, engendering a shared sense of duty and sacrifice previously absent, just as now absent"
Very true. If half the U.S. population (Republicans) thinks that the simulus package will only prolong the downturn, then they are right. Half if not more of its effect to begin with was psychological. I don't see any shared sense of commitment toward ending this downturn. I DO sense that half the population is being groomed by Rush Limbaugh to hang any further bad economic performance on the other half. If they are looking for disaster, they will find it. They wouldn't see economic recovery even if it happened, because they weren't looking for it. And so, they would not invest, not spend, and so prolong the downturn.
l always thought Hitler was more responsible for ending the Great Depression than FDR.
Well, yah, kinda. Hitler ended the GD, but FDR's policies allowed the usa to survive the depression, and perhaps even win the war. Had the works programs not been used the usa wouldn't have all the infrastructure needed to transport the goods or power the plants needed to build the weapons...
philandrel,
I don't know what gibberish you are talking about, but my pacifist friend wants me to teach her to shoot a shotgun.
Maybe that is an indication of how serious it is looking out here.
To me it is another day of shock and disbelief.
Considering, "To me it is another day of shock and disbelief," that is the point. You don't believe anymore, but have nothing with which to replace that in which you believed. Provided are bandaids: technology, a "green economy," nationalized banks. All must still be "capitalist" because "business does it better." Business having failed miserably, how can you believe anymore? You are understandably in a state of "shock and disbelief," because you have nothing else to believe in, and you've lost your faith in what is, when the policy makers continue to offer nothing more. We are paying for years of intellectual stagnation.
"a long, painful slump"
Bring it on... The people don't care. The elites do care. So the elites will suffer, not the people. So who cares? Who says the people will suffer? The elites say that so they can continue enslaving the people. But only if the people let them. The people don't have to work in slavery to the elites. Let the people enjoy the slump. Let the people enjoy fresh garden heirloom foods during the slump. Let the elites go crazy during the slump, because their destructive economy is slumping. The people's economy never slumps. We have a highly stable supply/demand for food, shelter, clothing, via land/water rights. Let the people enjoy the bounty of nature. Let the elites suffer the collapse of their slave-driven empire. Try mesquite flour - its very sweet but the stuff from Peru is milled too fine - it creates a dust when so fine, doesn't pour as easy, plus it oxidizes faster. And it seems roasted - try raw instead. Get it from our own Sonoran desert, raw, less finely milled. Mix it with stuff.
Follow the link: http://informationclearinghouse.info/article22000.htm
Much is being said about saving the “financial system”, the alternative being an economic cataclysm. However, the only sure consequence of letting the “financial system” go bankrupt is that the trillionaires of the country (and of the world) would lose humongous amounts of money (but they wouldn’t be reduced to misery, far from it).
It would be a revolution driven by the market’s invisible hand (if you can talk about “the market” when referring to the process by which greedy trillionaires self-destroyed by bribing economists, journalists, and politicians in order to force-feed a “new american consensus” of deregulatory nonsense to the western world and so make tons of short-term money that later evaporated as the hot fluff it always was.
“Saving the financial system” is the catchy phrase invented by bribed economists, journalists, and politicians to save this self-serving neo-feudal class of trillionaires masters of the universe that is sooo “essential“ to what “America stands for” and to what “we would like to be” as the “radical” Paul Krugman has repeatedly put it, i.e., essential for the bribes paid to economists, journalists, and politicians and for the protection of the trillionaires’ right to socialize their losses and to shelter their profits from taxation by invoking in shrewd alternation i) the “sanctity of private property” (unless this property belongs to easily taxable suckers who are too uncouth to bribe economists, journalists, and politicians effectively) and ii) the “universally accepted axiom” that one should not interfere with the “workings of the market” (unless the workings “work” against those who can pay effective bribes and have paid them for many decades to great acclaim; note that many bribed economists, journalists, and politicians do develop a sense of loyalty towards their masters, in the way that many house negroes did it towards their masters in Ol’ Glorious Dixie).
So it’s time to let the neo-feudal class of trillionaires masters of the universe fail and to save through nationalization the non-speculative parts of the banking system so the expertise to finance entrepreneurs whose projects are deemed worthy is kept intact and given new prominence.
That way the trillions about to be taxed away from ordinary citizens and be given to trillionaires masters of the universe can be used instead to finance public works that will raise the standard of life of everybody and to foster private entrepreneurship that focusses on real production rather than on “innovative” financial vaporware.
Is the title a spoof off of that crappy movie "Weekend at Bernies"?
If so... Capitalism has been the dead guy on the couch for years, and hedge fund managers are the two party animals trying to fool everyone that he's not dead yet, the party is just beginning! Invest now and forever...! Meanwhile, the body is starting to smell...