You're not going to see much, if anything about this in the
dumbed-down U.S. media--not because they're trying to hide
it, but because they can't understand. But there is a reason
that the United States and the American Dollar are in the
trouble that they are in. It isn't only that demand from
Asia is putting pressure on supplies. Far from it, oil
supplies are adequate worldwide, which is what OPEC keeps
saying. So what's happening?
To understand, we need to go back a few years, to a
fundamental and catastrophic decision that was made in
1988 by the President's Working Group on Financial Markets.
While the record of its discussions
remains--understandably--secret, the effect of its decision
can be seen clearly all around us. No matter where you live
in this country, it is likely that there is an abandoned
manufacturing facility within a few miles from your home. It
is also likely that, if you are able to find any US
manufactured shoes, clothing, soft goods or small
appliances, they will be more expensive than similar items
imported from abroad, and far less numerous. This is true
not just of consumer goods, but of machine tools, equipment,
parts--you name it. Manufacturing has gone abroad.
Absent the minutes of the Working Group, what its policy has
been can only be inferred, but the inference must be
accurate, given that the economic consequences are so
obvious. What has happened is that a co-ordinated policy of
financial mercantilization has been enacted in this country,
and a conscious decision made to allow the abandonment of
America's manufacturing base.
This was done to increase the profitability of corporations
and enable them to compete by outsourcing rather than
increasing efficiency and productivity here at home.
Precisely the same process unfolded in Great Britain
throughout the latter half of the nineteenth century, with
the result that British power failed, just as American power
will.
Let's be very clear about what the change from a
manufacturing economy to an economy based on debt as
value
means. It means that the
value of American lives is no longer measured by work
output, but by debt potential. It isn't how many things you
can build that matters now, it's how much debt you can
repay.
What has been done, as you have ceased to have any
tangible
manufacturing output, is that your value, measured as the
value of your debt, both that collateralized by property,
such as your mortgage debt, and your uncollateralized debt,
such as credit card debt, has been mercantilized. This
process is called the 'securitization' of debt. Your debt,
restated as securities, is what the United States now sells,
instead of shoes, tractors and trousers.
Of course, we still have a large manufacturing component in
our economy. We make automobiles here, and airplanes, for
example. But these industries are no longer locally
vertical. Parts are outsourced from all over the world. In
fact, there are few manufactured goods that are entirely
American made, and American manufacturers, in general,
always outsource rather than investing in infrastructure
here at home. This denial of the value of American lives is
deeply, profoundly unpatriotic, and arises from the
incorrect focus of American industry on capturing near term
profit rather than building long-term value.
This has been true of government, too. Our term-limited
presidency means that the only meaningful time span to all
but
the best presidents is the near term. Unfortunately, a
defining characteristic of late twentieth century American
politics has been mediocrity in the White House. In fact, I
don't really see any exceptions to this rule, not in the
past fifty years.
The result is that the quick fix has always been the only
fix. So we have an economy that is, essentially, based on
pretending that something--debt--has a type of value that it
does not, in fact, have.
An economy based on the buying and selling of its own debt
suffers from many vulnerabilities, the most important of
which is that the quality of that debt depends on the
ability of individuals to service it.
This ability is dependent upon the price of essential goods
and services--things like food and gasoline--being low
enough to enable debt service to continue.
Since 2002, and accelerating in 2007 and, even more
dramatically in 2008, this has become less and less true.
Prior to mid-2006, the problem was concealed in two ways.
First, alterations to the statistical methods
used to compute the Consumer Price Index created a false
impression that prices were not rising. In reality, of
course, they were and they are. The first signs of a problem
appeared in 2007, when the so-called "sub-prime" crisis
began to affect financial markets.
In fact, it turned out that many people could not both eat
and pay their mortgages. They chose, oddly enough, to eat,
and many lower-rated mortgages began to go into default.
The
result of this was forced sales, and more housing began to
appear on the market than the market could absorb.
The rest is known to everybody, except for the outcome,
which will be as follows: first, if the price of oil doesn't
decline relatively dramatically and quite soon, the American
economic infrastructure is going to collapse. Energy costs
will mean that America has become, in effect, illiquid, and
thus unable to buy
goods from abroad. Subsequently, the Chinese, Indian and
Japanese economies will suffer profound dislocations as
well. So also will elements of the European economy that are
dependent upon exports to Asia and the United States for
their profitability.
Once we abandoned our manufacturing base, the United
States
ceased to be a viable economy, for the simple reason that it
is no longer adding enough value to increase prosperity. If
you feel poorer, it's because you are. Your money is worth
less, so your work is worth less. This is the core
definition of economic decline.
Precisely the same
thing happened to ancient Rome, when, after a long war with
the Parthians (Persians, now Iranians) the emperor Philip
the Arab paid the Parthian king Shapur fifty million
sesterces to buy peace.
This payment exported so much silver and gold out of the
western Roman world that it led to the debasement of the
Roman currency,
and
resulted in a financial crisis from which the western empire
never
recovered. Over the next hundred and fifty years,
manufacturing moved away from areas where the debased
currency was in circulation, and into regions where good
coinage was available.
As value left Rome, so did power, and by 350 AD,
Constantinople on the Bosporus was the center of the empire.
In another two
hundred years, the population of Rome had declined from
around a million to a few thousand, and shepherds tended
their flocks in what had once been the forum of the Caesars.
To understand why currency debasement is now also in the
process of befalling the United States, we must go to the
year 2002, and the beginning of the Iraq war. This war was
the death-knell. It has added vast public debt to our
country's vast private debt, in effect debasing the
currency. Prior to the appearance of the Bush
administration, American politicians, without being entirely
clear about the reasons, sensed that, as private debt
exploded before their eyes, additional public debt would
make the currency vulnerable--in effect, debase it. They
made efforts to reduce federal
indebtedness as much as possible. This is why the Clinton
Administration strove for a balanced
budget.
The United States economy, deprived by the Working Group's
decisions of the ability to add real value through
increasing productivity, was extremely vulnerable to debt.
And yet, Vice-President Cheney repeated a shibboleth often
stated during the Reagan years, that governmental debt
"didn't matter." This was a gamble during the Roosevelt
Administration, a mistake during the Reagan
Administration, and a catastrophic error during the Bush
Administration.
Roosevelt's gamble with debt paid off because of the way it
was used: to build infrastructure that supported the
economy. By the time Reagan came along, debt was being put
to use for a very different purpose: to increase the money
supply without regard to infrastructure or anything else. It
was, in other words, empty debt. Gasoline, in fact, on a
fire. The result of this is that the cycle of infrastructure
improvement that was needed in the 1980s never happened,
with the consequence that efforts to increase productivity
and efficiency face just one more hurdle.
Even more cynically, the Bush administration chose to curry
public
favor by using debt to cut taxes. Unfortunately, instead of
following
the tax cuts with promised reductions in the size of
government, it
increased government massively, and went into debt to
finance the tax reductions.
This increase in public debt, added to the increase
compelled by the war in Iraq, caused the dollar's decline to
intensify. In other words, the Bush administration, knowing
nothing of Philip the Arab and the consequences of his
debasement of the Roman currency to solve a middle eastern
problem, repeated history.
As the currency declined, the price of oil increased. As
people had to spend more money on fuel, they had less to
spend on housing, with the result that home sales declined,
and with them property values. Thus, the tax cuts were taken
right out of the value of homes. Most people have paid far
more in declining home values than they have received in
reduced taxes, largely because the cuts benefited the
wealthy, while the decline in home prices has affected the
median incomes only. So far.
The less original manufacturing in an economy, the more
problematic its debt becomes. The moment it becomes unable
to service its debt, there is nothing left but the abyss.
This is because, in an economy that is not firmly based in a
healthy manufacturing sector, all debt is, in effect,
uncollateralized and only as valuable as this month's service.
As US public debt began to rise uncontrollably in 2002 and
2003, OPEC, realizing that the dollar was therefore becoming
vulnerable, began to reduce the percentage of foreign
currency reserves kept in dollars. Until then, this had been
pegged at 75%, based on a 1974 agreement that had allowed
a
substantial price increase in return for a guarantee that
the dollar would remain the primary currency of exchange.
As of 2008, OPEC is keeping only 61.5% of its reserve in
dollars, and has ended all price controls. This has caused
vast economic destruction world wide and has, as will become
evident over the next few years, destroyed the American
economy as we have known it.
To some extent, this is due to a lack of growth in oil
supply at a time when demand is increasing, but it is much
more due to the decline of the dollar that is associated
with the abandonment of manufacturing in the U.S., and the
mercantilization of debt that is proving not to have any
dependable economic value at all.
The lesson is clear: if you're going to go to war, don't
close all of your factories first. The mercantilization of
debt isn't an alternative. Debt is not value, and it has no
business being used as the basis of securities. A factory is
a factory, and as long as it has the potential to produce
goods, it has measurable value, as do the goods
themselves. But what value does a promise have, in the real,
tangible and permanent terms that should be demanded of a
security? The answer is clear.
So, where are we now? For one thing, the price of oil has
been bid up unrealistically, as have other commodities as
large institutional entities, awash in cash, have
frantically shifted from securitized debt into something
more tangible.
All they have done, though, is to stave off the inevitable.
As commodity prices have escalated across the board,
demand
worldwide is plummeting, as will be seen in statistics due
to appear over the next few months. The result of this will
be that any commodity in normal supply, like oil, for
example, or meat and soybeans, is due for a terrific
temporary plunge in price, followed by a gradual regularization.
During this plunge, many financial institutions that have
been trying to escape into value will finally be bankrupted,
and there will follow a general contraction of debt in the U.S.
In other words, a profoundly damaged market enconomy will
strive, as markets always do, to correct itself. But, absent
a viable manufacturing base, the effort will, in the end,
fail, and continuing basic commodity supply problems will
further erode the value of U.S. debt, both public and private.
Until and unless manufacturing returns to American shores, the
U.S. economy will remain fundamentally unhealthy. Whether or
not sheep will eventually graze on the mall in Washington,
beneath the shadow of a teetering Washington Monument, I
cannot say. But I can say this: without the creation of real
value as its basis, an economy is an illusion.
