Today Henry Paulson, acting in desperation, radically revised the U.S. bailout package. Instead of buying toxic assets from banks, now it will try to inject money directly into the economy by supporting the consumer debt markets directly. Meanwhile, stock exchanges around the world slumped as economy after economy literally fell off a cliff when consumption, quite simply, stopped.
Meanwhile, US credit card companies were canceling millions of credit cards, especially those not often used, and credit card companies were making efforts to justify increasing interest wrates on credit cards by artificially damaging consumer credit.
If you have received a notice recently from a credit reporting service that your credit has declined three or four points because your expenditures on a little used card have "increased 2500%" because you have spent a few dollars on the card, you are a victim of this massive scam. It is now possible, for example, to spent $25.00 on a gasoline credit card you don't often use, and see your credit rating seriously impacted.
However, abuse is the way that banks and credit card companies have functioned for years. They are the ones who paid off the notorious ex-congressman Tom DeLay to ram through a revision of the U.S. bankruptcy laws that make it essentially impossible for consumers to clear out their debts and start again. This abuse was sold on the basis that it would curb "bankruptcy fraud" when, in fact, most consumer bankruptcies happen because of medical bills, not because of irresponsible spending.
Then, when the banks were offered a bailout to save them from their own greedy embrace of toxic debt, they reacted by going after our tax dollars in order to buy other banks, not make loans, as was intended.
Now, not only has the commercial paper market stopped functioning, so has consumer lending at every level, from mortgages to credit card loans. In fact, the entire credit system is frozen, and it is frozen because banks refused to use their bailout money responsibly, and instead chose the path of greed.
As a result, the purchase of anything that requires credit has come to a grinding halt, most importantly, the purchase of cars. It is quite possible that GM, Ford and Chrysler will no longer be with us in a few months, and, if that happens, we will be in the worst depression in history, worse than the 1929-1933 disaster.
Even if the federal government attempts to step in, it's not clear how much that will help. Short of establishing a corporation that replaces the entire auto loan industry, there really isn't much point in throwing federal dollars after the running expenses of the big motor companies. All they can hope to do with that money is to produce more cars that they can't sell.
Today, President-elect Obama attempted to get President Bush to support a bailout of General Motors. Bush's reaction was to negotiate for a free trade agreement with Colombia, which would cost yet more American workers their jobs. So Bush will probably let GM go under. If it cannot devise a restructuring plan, it will have to cease operations. Directly and indirectly, this could cost this country half a million jobs. But a free trade agreement with Colombia is, apparently, more important.
The cries that these bailouts mean socialism and the end of the capitalist system are stupid. In case you haven't noticed, the capitalist system has already ended. This has happened because value everywhere has sunk to new lows. The oil countries and oil companies are taking a phenomenal hit due to the collapse in oil prices. Farmers and agricultural economies around the world are imploding due to the collapse in food prices. Mining and metals production are disintegrating as demand evaporates. The list goes on and on and represents, in fact, what will probably turn out to be the greatest unwinding of economic activity in human history.
And so, the question is 'why?' The answer is so simple that it's actually kind of scary that no economic scholars have seen it so far. It is that work has less value than has been placed on it. We value work two ways, by compensation and by debt. When a lawyer makes $10,000 a month, we allow him not only to buy $10,000 worth of goods with that money, but also to go into debt to buy more goods. In other words, we say that his work is worth not just its present value, but its future value also.
As long as his debt is believable, this is all perfectly fine. However, if you will recall, just last summer oil prices, commodity prices and home prices were literally going through the roof. Oil was at $140.00 per barrel and gasoline was costing upwards of four dollars a gallon.
This cut into consumer spending. Then it cut into mortgage payments. Then the slide started, as millions of mortgages turned out to have been gathered into what are, essentially, fake securities. They are fake because nobody can tell who actually owns the mortgages they contain, and therefore, if the mortgages default, there is no final owner to claim the property.
But this is a side-effect of the real problem which is that, due to the fragility of planetary supplies of virtually everything, work is not as valuable as it used to be. This is why oil prices skyrocketed, and why, if there is even a slight increase in demand, they will go up again just as fast.
Because the scarcity of raw materials has caused the value of work to decline, there has been an astronomical increase in market volatilities, as they strive to regress to a mean that is no longer clearly defined. One moment, work has more value because demand is so low. The next, work's value has gone through the floor because increased demand caused a sudden, violent decline in supply.
This is what happens when a planet runs out of resources, and it can only be solved in one way: by a massive technological effort to re-establish the value of work by reducing the need for raw materials through greater efficiency.
There is no other way to do it, and all the financial manipulation in the world cannot change that. Economies are not about finance, they are, purely and simply about one thing and one thing only: the value of work.
To repair the world economy, we must increase the value of work by increasing the efficiency with which we consume raw materials. If this is not done, or cannot be done, the next few years are going to be hard indeed. In fact, just the challenges to social order that will break out in developing societies all over the planet will eventually become impossible to control.
These are hard and desperate times. Thus far, nobody has quite realized just how serious the situation is. Politicians who know nothing about economics are fond of saying that the economy is "fundamentally sound." It is anything but. In fact, it is fundamentally unsound, and will remain so until and if the value of work comes into balance with the value of goods and services it can by. All else is illusion.
NOTE: This Journal entry, previously published on our old site, will have any links removed.