Here at Dymaxion Web HQ we recently had to take time out to handle a problem
with the floor in one of the bathrooms in our more than century old townhouse.
We could have waited, even as floor tiles began to pop loose revealing a water
damaged sub-floor layer. Happily, we could determine there was not yet apparent
serious damage to the structural joists. In other words, nothing was about to
fall in. Still, we decided it was past high-time to go after the problem despite
the inconvenience.
We don't pass this bit of domestic trivia along for local color but rather, to
make a point: It takes a long time to rip down a structure that has been
constructed on solid building principles. We say this, because it came to mind
as we listened to the Mago, Allan Greenspan, as he led Congress to the
well of wishful thinking. "Frothy" was the word he used to describe the housing
market, evoking images of a soothing summer milkshake at the local Dairy Queen.
Since the 1980's, when supply side policy first got traction, real wages for the
bottom half of society have remained level while those in the uppermost cohorts
have increased to plateaus last seen in the days of Louis the XVI. To compensate
for this gap in buying power, earners below the pinnacle, with Greenspan's
guiding hand, have greatly increased the amount of debt they've taken on. We
have, it seems, progressed from a supply side economy theoretically based on
increased production to a debt-side economy based on greater borrowing.
Contrary to the original theory, private investors who received the greatest
subsidies through a series of personal and corporate tax breaks and government,
treasury and fed policy have not reinvested in more production capacity,
certainly not in the US. Since 2001, when the present debt bubble began to form,
the US has lost 16% more of its manufacturing jobs. Investors during this period
have looked increasingly for profits in financial markets and the ever growing
pool of hedge funds.
On the make side of the equation, General Motors, once our leading employer,
has not turned a profit in its core business of manufacturing automobiles for
the past few years while its mortgage lending arm has prospered. In concert, in
a few short years, US big-three's market share has fallen, probably
irrecoverably, from 43% to 35%.
Every bubble, and economic history has plenty of them, like every good scam, is
based on some plausible argument: In the 90's we were experiencing a shift away
from the military spending that had drained the Treasury during the Cold War
while entering into a new age of worldwide communication and globalization ,
which would, as its proponents argued, radically change the economic equation.
No doubt, the Internet has caused a great deal of change but in hindsight, we
can also see that of all the thousands of companies with millions of employees
that were once valued in the trillions of dollars by naive investors looking at
a market with no upper limits, one can count on one's fingers the number
prospering less than ten years after. Over $5 trillion dollars in assets went up
in smoke when the stock bubble finally collapsed in 2001.
All that remains of those trillions, are great piles of tee-shirts yellowing in
many a dot-comer's closet. Pawing through them, it's impossible to make out what
these companies offered as their "value proposition" other than the magic
".com". The only thing we remember is that they did IPO's and within a number of
days their stock sold for over a hundred dollars a share. Here, for instance, in
our drawer, is a white blue and yellow one that says: "add content and shake".
With all eyes on Silicon Valley, the real story during those years and after was
the dramatic changes going on in Southeast Asia, particularly China and India.
Communication and computing power was being turned into jobs and capacity not in
the US but in Southeast Asia. But American attention had turned elsewhere. First
there was the predictable near total collapse of the market, then the attack on
the World Trade Towers, then the ill-fated invasion.
Even without counting the costs of the Wars in Iraq and Afghanistan --kept "off
the books"-- the government, to stimulate activity and reward wealthy backers,
went into debt mode borrowing heavily from countries only too eager to take
great chunks of US consumer market share in return.
With the government spending well beyond the amounts it collects in taxes and
fees another method had to be found to cover the gap between spending and
revenues. Enter countries like China, Japan, South Korea and Saudi Arabia that
are happy to run hundreds of billion dollar trade surpluses with the US. China,
alone, this year is expected to rack up a two hundred billion dollar trade
surplus. In figures out today, China's month over month surplus widened a
further 14% in April alone. Overall for April, the US bought $57 billion more
than it sold to foreigners, or about $2 billion dollars a day that has to be
borrowed from those same foreigners. Foreign debt has reached unprecedented
heights. The trade deficit this year will represent over 6% of GDP.
The result of all this official and consumer borrowing is a situation contorted
enough to inspire a carny side show operator. This dollar recycling has resulted
in keeping long-term interest rates at historically low rates even as the Fed
now raises short-term rates. At some point, if this continues, we may see a day
when short term rates actually exceed long term rates. That has happened before
and, BTW, has always preceded a recession.
But low long term rates and an excess of capital, has set off another bubble in
the US, this time in housing. The concurrence of historically low interest rates
with the migration overseas of industrial production and better paying
manufacturing and service jobs, investors and the financial services providers
have turned their attention to the housing market. With all stops removed
--check out no money down, interest only loans-- the housing bubble has probably
now reached the same point as the NASDAQ when it peaked in early 2001. Like any
Ponzi Scheme, the last guys in get left holding the bag. The rates are variable
and also timed to increase at a certain point, which means that when long term
rates finally start to move up with all the bottled up inflationary forces
pushing up consumer prices, many home buyers will be left stranded with houses
that they can't sell at the price they paid and much higher monthly requirements
than they can meet.
Curiously, the Bush Administration is pushing hard for a revaluation of the
Chinese Yuan --China has up to now kept its currency pegged to the dollar and
thus has ridden down with the dollar. Since the US is entirely reliant on the
good will of the Chinese to continue financing US deficits, the Administration
lacks any great levers but if it succeeds it may not like what happens. A higher
priced Yuan will mean higher prices in Wal-marts and Target and that will fuel
inflation in this country. This jump of prices across the board on consumer
goods may just be the trigger that kicks long term rates up thereby pricking the
housing bubble while causing a further erosion in US jobs --home building, being
one of the few bright spots.
The Chinese have said they are quite happy with the Yuan as it is but in the
background, again according to the WSJ, they have begun moves to create the
mechanisms that would allow controlled trading in their currency. It's expected
by many that some time this year they will begin experimenting with the currency
market. If the US economy continues its pattern of hobbling along without
picking up steam --and with an ever decreasing manufacturing base, it's hard to
imagine otherwise-- then the Yuan move just might be the straw that bust the
housing bubble.
This is a great time for American consumers, who have dropped their savings rate
to less than 1% of income while at the same time increasing plastic and mortgage
debt to unprecedented heights. Every once in a while, all you have to do is go
back to the well and borrow even more from willing lenders offering ever more
creative financing tools. After all, we're a rich country with a massive
economic base, why would it collapse now?