GREENSPAN’S FOLLY, AND OUR DUAL ADDICTION TO CONSUMPTION AND DEBT

It’s a house of cards, of course, a total fraud and extremely dangerous. It’s Enron accounting at its most deceptive, the kind of self-delusion that led to the absurd run-up of stocks in 1929 and the subsequent collapse that produced the Great Depression. Here’s the shaky foundation upon which the entire distorted economy now rests:

1. With interest rates at historically low rates, rich investors’ funds, millionaires’ tax refunds and pension fund infusions are all going into stocks instead of bonds, pushing up Price/Earnings ratios of stocks to astronomical and unprecedented levels. Even the most bullish brokers now admit that the stock market is wildly over-priced, but barring a spike in interest rates, money keeps flowing in and pushing prices up, because there’s nowhere else to invest it.
2. To delay a stock market collapse as long as possible, large corporations are creating unsustainable profit growth by (a) organizing into oligopolies and colluding to gouge consumers, charging them wildly inflated prices for low quality junk, and (b) lowering product and service cost (and quality) by downsizing, outsourcing and offshoring skilled labour, creating massive unemployment, underemployment, and a frightened, meek and compliant workforce willing to work incredible hours for a pittance.
3. Low interest rates also allow consumers to be hoodwinked into incurring collosal personal debts ‘virtually interest free’ just so they can buy more stuff. Their investment of choice with the proceeds of this ‘free’ borrowing is real estate, which, in parallel with the stock market, has therefore been driven up to ridiculous price levels completely unrelated to its underlying value. It’s a vicious cycle of buy more / borrow more, of excessive consumption and excessive borrowing, a cycle of addiction, and the corporatists are the pushers.
4. The borrowing capacity, risk of default, and borrowing cost of everyone — individuals, corporations and nations alike — is a function of the strength of their balance sheet. The balance sheet measures assets (the current ‘market value’ of investments, real estate, and ‘goodwill’ amounts paid by corporations to buy and remove their competitors from play) compared to liabilities (accumulated debts). Lending institutions will continue to extend credit as long as assets exceed liabilities, and as long as interest rates stay low enough to keep the cost of borrowing comfortably below income. Because they are now allowed to charge 15-30% interest rates to consumers on unsecured and risky debt like credit cards, second mortgages and mortgages with late or defaulted payments (rates that used to be banned under usury laws), the banks and credit card companies are actually encouraged to loan money to people even if they can’t afford to repay it. Result: personal bankruptcies and foreclosures are at record levels. Even two family incomes are not enough to keep many families solvent.
5. Because they borrow a lot, and have a lot of liquid investments, governments and big corporations can now borrow money at interest rates close to zero. And because they can, they do. This is called ‘leverage’, and is considered to be a shrewd business practice, because it doesn’t take much to generate a better return on the money borrowed (thanks to points 1 and 2 above), than the cost of borrowing, as long as the markets keep rising.
6. At the national level, the US government and multi-national corporations need to find someone to loan them money at these absurdly low interest rates. Who do they get to do this, and how? Why, they borrow if from other countries, of course. They get Arab and Asian countries to sell them trillions of dollars worth of cheap natural resources and crappy manufactured goods — but the deal isn’t for cash. These foreign countries lend the trillions of dollars the US needs to buy these goods, at low interest rates, with the debt denominated in US dollars. No cash changes hands. From an American perspective, they get trillions of dollars of goods (assets) and an offsetting trillions of dollars of debt (liabilities). The balance sheet therefore stays in balance, as long as interest rates stay low. From the Arab or Asian perspective, they get trillions of dollars of receivables (which they can take to the bank, as long as the US dollar and US economy is stable), and they create a bunch of sweat shop jobs for their grateful populace in the process. So as long as the US trade deficit is at record, astronomical levels, a US government deficit that’s also at record, astronomical levels is just hunky-dory. Mr. Greenspan says so, honest!

I’m sure, gentle reader, you can see the folly here, and all the things that can, and ultimately will, go wrong. Just as Enron’s profits and stock value were based on fraudulent overvaluation of assets, the ‘balance’ of everyone’s balance sheet — individuals’, corporations’, and governments’ — is fraudulently overvalued because the stock prices and real estate prices that constitute most of the assets are absurdly inflated.

If any of the following things occurs, the whole house of cards collapses — stock markets will plunge, housing values will plunge, the US dollar will collapse, and interest rates will soar — we’re talking the worst global economic collapse since the Great Depression:

• The IMF decides the leverage of the US debt is too high, and downgrades its rating of US government debt, producing a spike in US borrowing costs and/or a demand that future borrowings be denominated in Euros, which, in conjunction with the resultant collapse of the US dollar against the Euro, would drive up the value of the debt to staggering levels, making the US essentially bankrupt.
• Consumers and wise investors, realizing the stock and housing markets are dangerously overpriced, pull their money out of US investments and put their money overseas or into commodities.
• Currency speculators, who account for over 90% of all currency transactions, decide to ‘short-sell’ the US dollar, leading to its collapse against other currencies (some people think this is already occurring).
• Consumers decide they’ve had enough of their addiction to consumption and debt, rein in their spending, sell off investments and luxury goods, make personal sacrifices to pay off their debts, and start buying smarter, less, and better-quality, longer-lasting, goods and services.
• The Arabs and/or Asians decide their heavy investment in US dollar receivables is too risky, and, even though it will cost them a lot of American business, start to insist on being paid in local currency, Euros, or (gasp!) cash.
• Consumers revolt against usurous interest charges and demand a law capping interest rates a few points above prime, causing a fierce tightening of credit, and a huge spike in interest rates on all debt to recoup the lenders’ lost revenue.

So what do we do to prevent it? We’re so over-leveraged now that the best we can hope for is a ‘soft landing’.

Individual citizens can reduce their exposure to the collapse by paying down high-interest and variable-rate debts and short-term mortgages, selling US stocks and bonds (and getting your pension money out of these investments, too), and preparing for the likelihood that housing prices will plummet.

We also need to get rid of Bush and Greenspan, and ensure that Kerry has a program for dealing with the astronomical US debt and foreign payments deficit. And we need laws to reduce the power and influence of corporations, electoral campaign finance reform, cancellation of ‘free’ trade agreements and vastly strengthened anti-combines law and oligopoly regulation.

But I want to get back to my ‘pusher’ analogy. It’s really insidious. Just as rats in the laboratory have been ‘trained’ to push a button to get a ‘shot’ of addictive pain-killing drugs, and start pushing the button more and more often, we’re being trained — by our education system, by advertising, by the media, and by the entire oil-fueled corporatist economic machine — to want and ‘need’ to buy more and more stuff, to throw things out instead of fixing them, to get stuff done for us instead of doing it ourselves, to buy an endless stream of flimsy $5 doodads made in China instead of one $20 doodad made domestically that will last a lifetime, to undervalue our time and overvalue possessions, to buy overpriced ‘brand names’ for status, and to be terrified of not having enough. And to pay for our addiction to all this overpriced crap, we’re encouraged to borrow more and more money now (“no interest!”, “don’t pay a cent until 2005!”, “zero down!”) so we get as addicted to debt and as dependent on low interest rates as the big corporations and the Bush government.

By encouraging this reckless excess, Alan Greenspan really is the ultimate drug pusher, and he damn well knows that this, like all addiction, must ultimately end in tragedy. The corporatists, like all drug pushers, depend on reducing the people, the citizens, to mere consumers, mindless zombies. It’s irresponsible. It’s destroying our social fabric, wrecking families and causing irreparable damage to the environment. It’s shameful. It has to stop.