Category Archives: Economy

Deeper is not Better

Over the past couple years Automatic Earth has become one of my favorite economic blogs and Ilgari’s Christmas Eve post is a good example of why I venture there daily. Ilgari makes the point that the past year’s economic developments were, essentially, about the transfer of private debt to the public. This picture just gets worse and worse:

Many people today feel happy and positive when they look at the stock markets, because they think these reflect the real economy, and since the markets are up, things must have changed for the better in the past year.

But they haven’t, not below the surface. It’s all veneer and no substance. What actually has happened is that -virtually- no debt has been paid off in our economies, in fact we’ve added trillions of dollars more in debt. What is different from a year ago is that a huge part of the old debt and all of the new debt has been transferred to the public, and away from private business, in particular financial institutions (and, to an extent, carmakers).

So it comes down to the fact that people feel happy for being deeper in debt, and quite a bit deeper. Being the humans we are, we focus on the short term gratification which can be found in the Dow and a whole slew of increasingly fabricated numbers and government reports, while we conveniently ignore the enormous increases in debts, both public and private, that we will have to pay off down the line.

But, you say, it’s not as bad as it may look, because when the crisis is over, we will return to growth, and that will take care of the debt. That and shrewd dollar-inflation strategies by the wizards at the Fed and Treasury.

Really? What if the crisis lasts, let’s say, ten years? All that needs to happen for that is for home prices to keep falling, or even stagnate. And that seems a near certainty.

The US has no private mortgage market left, or even a viable housing market. Neither do Canada, Britain, Holland and many other countries for that matter. Homes are sold and mortgages approved only because the state takes them off the lenders’ hands and books the minute the deals are closed. The loans are then securitized and sold on to, in America’s instance, the central bank. In other words, all of the risk for all of the entire loans processed in this fashion lies squarely with the taxpayer.

And that is not a good thing if prices keep dropping. When unemployment won’t come down. When governments start raising taxes because sovereign debt goes through the various rooftops.

The main problem’s not even paying off the principal of the debt. That won’t start happening for years to come, if ever. It’s paying the interest on the debt that will become the most immediate headache.

Read it.

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Deepening Crisis

Oh yes, I know that the stock market had an orgie of a day yesterday on the news of the schemes being cooked up by the Obama administration to deal with the toxic assets currently in the financial system. More of the same and it won’t work because it is a refusal to deal with reality. The whole reaction to this massive mess of fraud is more fraud. The spectacle is truly disgusting.

Harvey Ussery of The Modern Homestead has written a fantastic article regarding the deepening crisis. I encourage you to read it. Here’s an excerpt:

The only thing surprising about the crisis—I should say the crises—now deepening around us, is that it has taken so many of us by surprise. For several years before the subprime mess started the current hemorrhage in global finance, I read detailed predictions for how the subprime mortgage bubble would burst, with the shattering and cascading effects in the wider system that we have now seen—analyses, mind you, not of Ivy League economic think-tankers, but of reflective folks of ordinary common sense like you and me. If such people were able to read the writing on the wall, where were the deciders in government and Wall Street, the head of the Federal Reserve? What were they thinking?

But this crisis has been long in the making, and the biggest mistake would be to assume that an anonymous “they” out there—Wall Street moguls, hypesters for junk-level, credit-for-everybody mortgages, OPEC gougers—are the ones who have brought us to grief, through no fault of our own. We are supposedly adults in a functioning democracy, not children, and as such we cannot escape responsibility for our willful complicity in an economy that defies compatibility with natural systems, meaning natural limits, and which opts consistently for short-term gain in preference to long-term soundness and sustainability.

I remember reading on the first page of the first economics textbook I ever encountered (Economics, by Paul Samuelson, when I was in graduate school) that the foundation of our economy is: perpetual growth. Not the natural resource base. Not equitable distribution of wealth. Not sustainability. The author was emphatic and unambiguous: Without constant, vigorous expansion, our economy would stagnate and fall apart. And on that first page, even a bonehead neophyte ignoramus like me was saying in confused surprise, “But that’s impossible—nothing can grow without limits!” (Except cancer, whose perpetual growth is precisely what in the end kills its host.)

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Abyss Indeed

Exactly. In his latest post, The Abyss Stares Back James Kunstler writes:

In the broad blogging margins of the web that orbit the mainstream media like the rings of Saturn, an awful lot of reasonable people have begun to ask whether President Obama is a stooge of whatever remains of Wall Street, with Citigroup and Goldman Sachs’s puppeteer, Robert Rubin, pulling strings behind an arras in the Oval Office. Personally, I doubt it, but it is still a little hard to understand what the President is up to. For one thing, the stimulus package, so-called, looks more and more like national sub-prime mortgage itself, a bad bargain made under less-than-realistic terms, with future obligations fobbed onto whoever inhabits this corner of the world for the next seven hundred years — and all to pay for a bunch of granite counter-tops and flat-screen TVs.

We’ve heard it over and over and over and over from those in power in reference to this coming depression: “We have to do something.” My thought? No, no actually you don’t HAVE to do something especially when doing something is the wrong thing to do. Action for the sake of action is stupidity. But they are not just doing something. They are doing the same thing that got us into this situation. Taking on more debt to fix debt for the sake of growth that is not even real growth. Well, the consumption was real and the growth for China was real, but the debt taken on in the U.S. was just that, debt. We got in the habit of telling ourselves, as a nation, that credit and debt were wealth but they are not even close to wealth. They may create the illusion of wealth but when it comes time to pay back what you don’t have the reality comes home.

There will be no getting out of this mess, no way to navigate around it. The hard truth is that we will have to slog through it day by day. This collapse was a very long time in coming and the going will be an equally long time. Unlike the first Great Depression though, when we begin to come out of this we will not find a ready, seemingly limitless supply of oil to tap into. We’ll discover that the production peaked sometime between 2005-2007. The good news though is that by that time we will have gotten used to a scaled back, lower income, lower energy way of life.

Again, to quote Kunstler:

Among the questions that disturb the sleep of many casual observers is how come Mr. O doesn’t get that the conventional process of economic growth — based, as it was, on industrial expansion via revolving credit in a cheap-energy-resource era — is over, and why does he keep invoking it at the podium? Dear Mr. President, you are presiding over an epochal contraction, not a pause in the growth epic. Your assignment is to manage that contraction in a way that does not lead to world war, civil disorder or both. Among other things, contraction means that all the activities of everyday life need to be downscaled including standards of living, ranges of commerce, and levels of governance. “Consumerism” is dead. Revolving credit is dead — at least at the scale that became normal the last thirty years. The wealth of several future generations has already been spent and there is no equity left there to re-finance.

It really is that bad and wishful thinking will not help.

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This small town

I spent many days every summer at the lake. When we weren’t fishing or in the woods we would sometimes take a ride into Fredericktown. Not my hometown but I feel connected to it more than any other Missouri town. Now that I’ve moved to the lake I’m making new memories that blur and blend with those of my childhood. This past spring I went back to the Dairy Bar and had a vanilla cone, the first I’d had from that place in more than 20 years and it was delicious. Each trip into town reminds me of my grandpa and our trips into town together. I can still hear his voice and picture him waving to the many people he seemed to know.

It’s strange, though I did not grow up here, did not go to school here or spend most of my time here, this town is the constant. Other towns or cities have come and gone at different times, but not this one. This is the town that I’ve known my whole life. I see no reason that I would leave my cabin on the lake. For the first time in my life I feel at home and so I hope that I’ll begin to develop a deeper connection to this town that lives so strongly in my memories. As I connect to the town and its people today I look forward to learning more about its history which I imagine to be very interesting.

This past summer I made quite a few treks into town and not just for the vanilla ice cream cones. Jimmy Thal’s hardware store is the best hardware store I’ve ever set foot in and the prices are great. The Madison County Farm Supply is my steady source of straw bales and staffed with very friendly folk. The locally owned “Town and Country” grocery store has everything I need outside of the other shops so I won’t need to set foot in Wal-Mart. The little garden park just east of the town square is a great place to sit and eat the above mentioned ice cream. There are two farmers markets in town, one on Saturday morning and another on Tuesday evenings.

This past fall I discovered Cowboy Coffee which quickly became one of my all time favorite coffee shops. The folks working there are very friendly as are the customers that visit. Thus far I’ve only bought coffee and brownies, both are very good. I don’t usually eat out so I’ve not tried any of the food though the pies sitting on the counter tempt me every time I visit. It’s a very comfortable place, decorated with bits of history, photographs and crafts along the walls. Sitting on the counter in the coffee shop I discovered a new community newspaper, The Madison County Crier.

After a few trips into the coffee shop and reading through this little newspaper I realized that I’d found something I had not expected. In the newspaper I was finding articles about the importance of supporting (and growing) the local food system, recycling, and the details of the goings on in the town council as well as a calendar of local events. In the coffee shop I was seeing the familiar signs of community life and connection that I was a part of when I lived in Memphis. Lots of folk on a first name basis, a meeting of the board of the farmers market, even a few folks sharing an impromptu dance lesson. I can’t help but think that locally owned coffee shops are, universally, community building blocks. They offer public space necessary for the development of the relationships that form the foundation of community and civic life.

I’m really just beginning to get a sense of this wonderful little town but I know that there is no place I’d rather be in times like these. A small town with locally supplied and supported farmers markets, thriving local businesses, an active citizenry, not to mention a pride and self-awareness of its history, is a great place to call home.

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Understanding the Greater Depression

Want to get a better foundational understanding of the Greater Depression that we have now entered? Here are a few blogs I’d suggest you read every day or at least a few times a week.

Sites which focus on the economic system specifically:
Chris Martenson
The Automatic Earth
The Market Ticker

Sites which discuss a broader range of issues (peak oil, self reliance, homesteading, climate change, suburbia…) related to the current collapse and what will follow:
Casaubon’s Book
The Archdruid Report
Club Orlov
James Kunstler

Here’s a little sample from November 7 post from
The Automatic Earth: Debt Rattle: Hocus Focus:

Obama’s chief of staff is a former Freddie Mac board member and fervent supporter of the invasion of Iraq. Many of the ‘experts’ are, or have been, Goldman and Citigroup execs. These people like the power and the money they have gathered while driving the economy into the ground. They’re not going to give that up just to build a financial system that would better serve the people. They’ll build one that best serves them.

Sure, some loose ends will be tweaked, but mostly they’ll spend the nation into a depression by attempting to salvage corporations that would have long since died if it were not for America’s 21st century version of Mussolini’s corporate fascism, and the unlimited access to the public trough it provides.

The broke man in the street will be broker, until he’s broken, until he lives in the street, his last hard earned penny squeezed from his hands and dumped into banks, insurers and carmakers that have zero chance of ever turning a profit again.

The taxpayer will be taxed, and will be forced to pay until (s)he can pay no more, if need be at the barrel of a gun, until (s)he no longer has a job, a home, dignity or a future. And then the growth machine will spit her out. Whoever can’t produce or consume is a write-off.

We’ve spent too much, and now we’re broke. Let’s spend more, and lots more, ‘cause then we will be whole again. Double or nothing, it’s all we know.

The dice will come up nothing.

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Climate change, global depression and consumption

Apparently there is talk that Al Gore might be head of the EPA in the Obama administration and just over a week ago Gore wrote up a dream list which was published in the New York Times.

One of my current favorite authors, Sharon Astyk, in her post A New Deal or a War Footing? Thinking Through Our Response to Climate Change wonders why there is no mention of lowering consumption. This is something I’ve written about before. Earlier this year I wrote that, in fact, a global economic recession was exactly what was needed as a way of forcing the lowering of consumption and thus a lowering of climate impact. From Sharon’s blog:

Quick – what’s not on this list?  I bet you noticed, too – there’s no mention of consumption, either as an economic issue or at the personal level. Rather like coming out of ‘An Inconvenient Truth’ we’re left with the message that there’s nothing for us to do other than lobby our fearless leaders.

What’s wrong with that?  Addressing climate change manifestly requires policy solutions – but again we see ourselves trapped in the false dichotomy I discuss in _Depletion and Abundance_ between public and private.  There is no question in the world that consumption is a policy issue – 70% of our economy depends on consumer spending and personal consumption.  Yet again we are being told that ‘personal action’ is something you do in the dark that makes no difference, while the really important stuff happens at the government tables.

In fact, in reality, we know differently. At US government tables we’ve seen exactly 0 major policy shifts so far – yes, we had the worst president imaginable, but that doesn’t change the fact that under Clinton, when Gore was vice-president, we saw the same zippo.  At the same time, as consumers have slowed their spending, we’ve seen projections of world oil use fall dramatically – for the first time in decades, we are expecting an actual contraction in the use of oil.  Earlier this year, actual driving miles fell dramatically – as much as 6% year over year.  Now these things were in reaction to high prices – but they were consumption decisions made by private households that in the aggregate made more real difference in the impact of our emissions than all the treaties we’ve violated or refused to sign.

The assumption, of course, is that we make changes for economic reasons, but that we’d never make them for ecological reasons.  My answer to that is simply this – no one has tried asking Americans to make major shifts in their lifestyle for the good of their country and their ecology in 30 years.  We assume we know that this would never succeed – in practice, we don’t have the slightest idea what would happen. 

Consumption is not simply accidentally left off the table by people who underestimate its power or prefer only to focus on legislation, it is left off because thinking about consumption undermines some of the presumptions of wholly technical and policy solutions. In fact, if we addressed consumption, we might have to change our basic assumptions about what we can accomplish.

 Think about Gore’s list above in relation to consumption.  The first thing, of course, that jumps out at you is the claim we have to bail out the car companies, even though, as Deutsche Bank announced, GM is worth nothing – its stock is worth absolutely nothing.  Think about that one for a second, and consider what has to underly our presumptions that we should bail out a car company – underlying it is the assumption that we will all be buying cars again fairly soon – shiny new electric ones. 

That is, underlying the assumptions of a Gore-style New Deal is the idea that we can do temporary bail outs because our consumption is going to go back up – only this time we’ll be consuming green products, including our electric cars.  There are several problems with this – the obvious one being that it isn’t clear what will fund our ability to buy these new cars in the coming years.  The assumption is that the new green jobs will do so – and perhaps that’s true, but there’s a ‘turtles all the way down’ quality to this analysis – the new deal will give us the ability to make these shifts, and the money will then only be spent for good (despite the fact that historically, the more we spend, the more we consume)….I’m not convinced anyone knows how that might happen.

Sharon offers many details in her thought provoking analysis of the energy input vs return in the massive renewable energy program that the Gore approach entails. I encourage you toread her post in it’s entirety.

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Peeling the Onion: What’s Behind the Financial Mess?

Sharon Astyk has peeled back the layers of the current economic collapse… an excellent essay worth checking out.:

What is reducing the amount of productive work accomplished, and moving the money increasingly only into a few pockets?  It is the high price of food.  And what is the root cause of the high price of food?  Well, the single biggest factor, according to a number of studies, including the UN studies, has been the move to food based biofuels.  So if we peel back the onion one more layer, what we find is that one of the major factors slowing the economy has been, well, oil.  The rush to biofuels is a response to tightening oil supplies and rising costs, and the aggregate effect has been to push up food prices all over the world, while doing pretty much nothing to increase energy security, reduce greenhouse gasses or do much of anything else useful.

I’m no economist, and I don’t pretend to be.  But I wonder, when we peel back the layers of the onion later, and look at the history of this Depression, I wonder if we’ll see that in fact, what happened was that we squeezed out the lifeblood of the very thing we’d built our economy upon – new workers/consumers who could be counted on to grow the economy outwards and upwards.  We could have forseen this – but we chose not to – we chose, as we struggled to keep our lifestyle intact on the backs of the world’s poor, not to see that we stand on their backs, and it is people…all the way down.  In killing them, we killed ourselves. It may be that besides the tragedy of starving millions of poor people, we may also have brought down our own system, simply because we did not see, did not realize that the poor matter more to us than we like to admit.

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The Greatest Looting Operation in History

As of now we all know that the bailout did not pass though it could still happen. Chris Martenson on the government bailout:The Greatest Looting Operation in History:

Here we must face the hard truth that merely transferring the failed loans from the insolvent banks to an insolvent nation will do nothing but forestall the problem until a slightly later date (when it will be larger and more severe, by the way). The fact that both candidates for president are openly supporting the bailout says that reality has not yet penetrated the inner beltway.

So the first challenge will be recognizing that it really is not possible for an insolvent nation to bail out an insolvent financial system by borrowing more money. This is an absurd notion, and in total it really is no more and no less complicated than that. One cannot solve a crisis rooted in debt by issuing more debt.

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The Injustice of an Absurd Bailout

Vermont’s Independent Senator Bernie Sanders:

While the middle class collapses, the richest people in this country have made out like bandits and have not had it so good since the 1920s. The top 0.1 percent now earn more money than the bottom 50 percent of Americans, and the top 1 percent own more wealth than the bottom 90 percent. The wealthiest 400 people in our country saw their wealth increase by $670 billion while Bush has been president. In the midst of all of this, Bush lowered taxes on the very rich so that they are paying lower income tax rates than teachers, police officers or nurses.

Now, having mismanaged the economy for eight years as well as having lied about our situation by continually insisting, ‘The fundamentals of our economy are strong,’ the Bush administration, six weeks before an election, wants the middle class of this country to spend many hundreds of billions on a bailout. The wealthiest people, who have benefited from Bush’s policies and are in the best position to pay, are being asked for no sacrifice at all. This is absurd. This is the most extreme example that I can recall of socialism for the rich and free enterprise for the poor.

Via Chris Martenson who had this to say:

This looks like the old populist message that has been so long dormant/suppressed in this country. Should that animal spirit re-awaken, social unrest will follow. Hell hath no fury…

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