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The cover of this week's The
Economist magazine reads "Unhappy America". To the authors'
credit the article goes beyond the typical Bush-bashing and identifies
several factors at play. They were treading down the right path when they
observe that "Lax monetary policy allowed Americans to build up debts
and fuelled a housing bubble that had to burst eventually." But rather
than going into further detail in addressing the subject of easy money, the
chief culprit of the financial mess we will be in for years, the authors turn
their sights on the need for education, healthcare, and other reforms. The
authors exercised relative restraint in assessing America's lurch away from
free-market capitalism in the wake of the housing market bailout, the Fannie
(NYSE: FNM) and Freddie (NYSE: FRE) backstop, the special protected status 17 financial companies are
receiving against naked short sales, etc.
They write, "One source of angst is the sorry state of American
capitalism. The ‘Washington Consensus' told the world that open markets
and deregulation would solve its problems." That is a nice way of saying
"America doesn't practice what it preaches". But this is tame compared
to hard-hitting editorials emanating from other international publications.
Peter Goodman, writing a piece titled "Is America Too Big to Fail"
for the International Herald Tribune *(IHT) painfully and
poignantly captures the essence of American economic hypocrisy:
Since World War II, the United States has been the center of global
finance, and it has used that position to virtually dictate the conditions
under which many other nations - particularly developing countries - can get
access to capital. Letting weak companies fail has been high on the list.
Paulson, who announced the bailout, made his name as chief executive
of Goldman Sachs, the Wall Street investment giant, where he pried open new
markets to foreign investment. As Treasury secretary, he has served as chief
proselytizer for American-style capitalism, counseling the tough love of
laissez-faire. In particular, he has leaned on China to let the value of its
currency float freely, and has criticized its banks for shoveling money to
companies favored by the Communist Party in order to limit joblessness and
social instability.
All through Japan's lost decade of the 1990s and afterward, American
officials chided Tokyo for its unwillingness to let the forces of creative
destruction take down the country's bloated banks and the zombie companies
they nurtured. The best way out of stagnation, Americans counseled, was to
let weak companies die, freeing up capital for a new crop of leaner entrants.
But I don't think Americans much care about the "sorry state of
capitalism". For Americans, it is more about the ends
"lifestyle" than it is about the means "economics" or how
to best achieve it. In a commentary I wrote a few months ago I referred to
"borrowed consumption" becoming the new "opium of the
masses." As incomes and savings peaked in the 1970s Americans
increasingly became dependant on rising asset prices and increased debt to
further fuel their ever-growing consumption habits. As a result, consumption
rose from being 60% of the economy to over 70% today. Incidentally, the
current recession is consumer-led and will therefore be much larger than the
business-led recession experienced earlier in the decade.
Savings has also dropped from 8% to zero (or negative, depending on
how you measure). Other countries have been complicit in this unsustainable
economic scheme by agreeing to buy US debt, thus underpinning the US
currency, keeping US interest rate low, and allowing their own economies to
grow through production and exports. But this relationship is reversing (or
at the very least has stalled) and Americans who have been living "la
vita leveraged" and just beginning to enter a painful period of a
decreasing asset prices, higher costs of credit, and higher costs for
essential goods.
Last Sunday Gretchen Morgenson wrote an article appropriately titled
"Given a Shovel, Americans Dig Deeper Into Debt" for The New
York Times in which she points out:
For decades, America's shift from thrift could be summed up in this
familiar phrase: When the going gets tough, the tough go shopping. Whether
for a car, home, vacation or college degree, the nation's lenders stood ready
to assist. Companies offered first and second mortgages and home equity
lines, marketed credit cards for teenagers and helped college students to
amass upward of $100,000 in debt by graduation.Every age group up to the
elderly was the target of sophisticated ad campaigns and direct mail
programs. "Live Richly" was a Citibank message. "Life Takes
Visa," proclaims the nation's largest credit card issuer. Eliminating
negative feelings about indebtedness was the idea behind MasterCard's
"Priceless" campaign, the work of McCann-Erickson Worldwide
Advertising, which came out in 1997."One of the tricks in the credit
card business is that people have an inherent guilt with spending,"
Jonathan B. Cranin, executive vice president and deputy creative director at
the agency, said when the commercials began. "What you want is to have
people feel good about their purchases."
The consumption binge is over. The great unwind of debt and leverage
for most has started. The Economist magazine reveals that shrinking
percentage of Americans are benefitting from income gains. They attribute it
to those who can benefit from the gains in technology and globalization, but
I attribute it to the money shufflers who are the one of the only remaining
contingents who are able to benefit from loose money and higher non-asset
inflation (i.e. inflation in commodities). The last pillar for most was the
removal of asset inflation and the development of rising inflation for goods
and services in the economy. Now tack on their level of indebtedness and you
have an economic disaster looming on the horizon.
Virtuous cycles have turned vicious. When you consider the years and
years this has been building, you should be scared out of your wits about the
unwind. A Gallup poll finds that 80% of Americans, when responding to the
question, "How do you feel about the way things are going in
America?" say they are dissatisfied, up from 30% in 2000. Ironically, baby-boomers
are the gloomiest. They should be the happiest. They are the ones who most
benefitted from this debt and asset-induced consumption gorge over the last
three decades. But perhaps it is because their generation has become the most
reliant on material goods for their satisfaction that they feel they have the
most to lose.
This is what a hangover feels like. We are getting what we deserve for
the most part. Most of us enjoyed immense material benefit from the illusory
wealth that was created during this period. Those of us who were fortunate
enough to pay off our debts should consider ourselves lucky. Those of us who
have not are going to struggle. Those of us who have lived austere,
responsible lifestyles based upon thrift and savings will be relied upon to
bailout those of us who have not.
John Waggoner of USA Today writes in an article titled
"Consumers Fall Further Behind, Financially" that "Consumers
are behind schedule in payments or have walked away from nearly $800 billion
in household debt of all kinds - mortgages, credit cards, car loans, says
Mark Zandi, chief economist for economy.com. ‘Household credit quality
has arguably never been worse,' he says." In normal cycles the cost of
credit would be going down to help cushion the blow, but as Pimco's Bill
Gross perceptively points out in his August "Investment Outlook",
"But the cost of credit is going up not down in contrast to prior
cycles, because astute investors recognize the myriad of global imbalances
that threaten future stability. The co-CIO/CEO of Pimco, Mohamed El-Erian
quoted in "Blowing in the Wind: America braces itself for the risk of a
second dip," an article appearing in the Financial Times, written
by Krishna Guha, says "there may be ‘multiple unstable equilibria'
for house prices, the financial sector and the economy." I think by
"astute investors" Gross is referring to those who do not listen to
the gurus on financial TV endlessly predicting bottoms which never seem to
occur and who tell you not to buy gold.
The "Blowing in the Wind..." article warns that the fading
effects of the stimulus checks and the fact that "The time lag between
the credit crisis in the financial sector and the peak of the credit squeeze
in the real economy may simply be longer than initially anticipated"
could result in the dreaded double dip recession. I agree with the author
when he finds, "At the core of the threat to growth is the resumption of
the basic dynamic of the credit crisis: a negative feedback loop from a
damaged financial sector to the real economy and back again. This is
aggravated by a decline in house and stock prices that reduces collateral
available to support loans." Many others are beginning to speak more
loudly about the negative feedback loops. Do you not see how this is turning
into a vicious cycle?"
The tipping point has been reached. The biggest consumption party in
the history of the world is now over and the hangover will be felt for years
to come.
Excerpted from the 7/2708 Global MegaTrends Portofolio's Newsletter:
To
view the full newsletter and gain access to Kurt's market-crushing Global
MegaTrends Portfolio, click here.
Kurt
Kasun
www.greenfaucet.com
A contributing writer to
GreenFaucet.com, Kurt Kasun writes a high-end investment timing
service, GlobalMacro, which is focused on identifying opportunities that
produce returns in excess of market with reasonable risk. He is strategically
located in Washington, D.C., a key to maintaining contacts and
relationships which help Kurt understand global policy and economic factors
as they emerge. His investment approach has always been macro in nature
largely due to his undergraduate studies at the U.S.
Military Academy
at West Point (B. S. National Security, Public Affairs, 1989) and his
graduate studies at George
Mason University
(M.A. International Commerce and Policy, 2006).
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