Is deflation good or bad?
This is a very powerful article from SeekingAlpha financial website explains the benefits of deflation. It hits the nail on the head why we need deflation and makes a strong argument that without price deflation and debt deflation there is no way forward for the Economy, as the middle class is maxed out on debt while its wages have fallen so far behind the price increases that it is almost impossible for an average middle class individual to take on any more debt or to maintain any sensible standard of living.
WHY WE NEED DEFLATION
(The Winter is a Season of both Death and, later, Regeneration)
It didn’t have to be this way. The big mistake, in my view, came when the Fed condoned the equity bubble in the late 1990s. It has been playing post-bubble defense ever since, fostering an unusually low real interest rate climate that has led to one bubble after another. And that has given rise to the real monster — the asset-dependent American consumer and a co-dependent global economy that can’t live without excess US consumption. The real test was always the exit strategy.”
Stephen Roach, ‘The Test’
Deflation is a necessary season in the economic cycle. Deflation is the necessary contraction phase, and helps to balance the excesses fueled by the principles and energies of expansion. Deflation modifies prices that have escalated during the expansion phase of the cycle. These two forces – Inflation and Deflation – work together, as Day and Night work together, as Man and Woman work together. They only appear to be adversaries. Their adversarial relationship – like the relationship of Republican and Democrat – creates, in fact, a unity of motion. Centrifugal motion pushes energy outward from the center of a system; centripetal motion pulls energy from the periphery back to the center.
The U.S. government had been telling the American citizen for several decades now that there is no inflation in the American economy.
Of course, Americans know this isn’t true. Oil prices rose from $15/barrel to $150/barrel in twenty years. Housing prices jumped 150-500% is three years, after averaging an appreciation of 2.5% per year over a century. Health care costs explode year after year, averaging 9.5% growth, year-over-year for the last decade. The cost of college tuition has gone up by almost 1000% in thirty years. And we are told that there is no inflation.
It finally became clear to me, after years of musing on this phenomenon, that, there is no inflation, according to government statistics, as long as there is no wage inflation. And there has been little wage inflation – that is true. As long as wages stay low and do not chase the escalating costs of goods and services – and this is almost possible if the cost of credit stays low — then the inflation spiral is muted. Of course, the consumer, in this scenario, becomes more and more indebted through this method of paying for myriad inflationary goods and materials. Apparently there is no moral dilemma in this. Business profits grow, wages remain low, and workers take on more and more debt. It sounds to me like a volcano that is bound to blow. But what do I know? I’m not an economist. Sometimes logic is only logic for those not sophisticated enough to know the difference between appearance and reality.
Of course, consumers were able to offset stagnant wage growth in the last few decades because of the impressive stock market gains (the first bubble to pop). The stock market became a second source of income for American consumers, to help pay for ever-increasing costs, children’s education, first, second or even third homes. But then the stock market flattened out after 2001, moving sideways for a few years, eliminating wall street as a guaranteed source of secondary income.
Consumers were then forced to borrow against the equity of their homes, as the housing bubble took hold – via Mister Greenspan’s steady hand — once the stock market bubble played out. Of course, the housing bubble, again, increased American consumers’ indebtedness – forcing them to essentially withdraw savings from their own mortgage equity – in order to pay for the rising costs of health services, food, transportation, energy, education. As long as home prices continued to soar, the system seemed fine. Refinancing meant Americans could continue to draw on their increasing real estate wealth.
Of course, this paper wealth was being fueled by a dubious policy of serial bubble-creation that cheapened real money and turned millions of Americans (and world citizens as well) into credit-slaves and credit-junkies. The dogma of unlimited growth and unlimited wealth was being bruited about by the same bankers and financiers – and Fed Chairmen and Treasury Secretaries and U.S. Presidents — who were laying the groundwork for the destruction of America and Europe, and all the other ‘emerging’ nations of the world that could not wait to jump on this miraculous bandwagon of capitalism.
Charts of debt accumulation by American consumers shows pretty clearly that phantom inflation of prices was accumulating on American’s credit card accounts.
Another way in which Americans sought to keep up with the accelerating cost of living was to have both parents working. Of course, women’s liberation doctrine called upon women to pursue careers in the real world and diminished the role of women as home-makers and child-rearers. But most Americans were not influenced by this radical ideology of gender equality. Most Americans were influenced by the need for two incomes to try to keep up with escalating prices.
There was, of course, a dramatic and negative reaction in the society to this ‘careerizing’ of the American family. Divorce became the norm, drug-use accelerated, crime increased, delinquency became pandemic.
Many readers will argue that America is the greatest country in the world, the richest, the freest. But something is wrong in America. We are building prisons are a rapid (inflationary) rate. The number of incarcerated Americans has increased 960% since 1950. Two in three marriages fail. Our children are taking guns to schools and shooting fellow students. Everything is not right in America.
More cheerleading of America, more honoring of Donald Trump as a hero (and many other entrepreneurs), more ‘keep government out of business’ slogans will not address America’s social decline. Much of this decline of the family comes from the inflation of costs of materials and services in the American economy, bubbles created by Mister Greenspan for the sake of corporate profit and corporate expansion and the resultant extraction of women out of the homes to chase wages in order to salvage the families’ economic integrity.
Loans, second and third jobs, refinancing of mortgages, dependence upon an inflated stock market, credit card abuse….these led to a consumer that was overextended and susceptible to bankruptcy should any of these currents of equity dry up suddenly. Now, it seems, every current of emergency money has begun to dry up at the same time.
With the saving rate at historic lows, most Americans are one or two paychecks away from bankruptcy and a life on the streets as a homeless statistic.
Republicans make icons of the concepts of individualism and national patriotism. Democrats sing the praise of the so-called international community. To Republicans, the ideal of Globalism – and we should not forget this – was and is tied to the goal, in American if less-so in Europe, of controlling business costs by driving down wage demands through the destruction of the power of Western labor unions.
‘Globalism’ was a positive-spin-word for maximizing profits by exporting high-wage jobs to third-world countries, first Mexico and South America, and then to Asia, transforming these high-wage jobs to low-wage jobs, without benefits. The corollary piece of this puzzle was to maintain the First-World’s role and even duty (and I use this word with care) to consume manufactured goods as a means of helping to sustain international economies, despite decreasing wages, but through cheap credit. It was the duty of Western nation citizens to consume globally-produced goods in order to sustain the Western way of life, with its high standard of living, despite the fact that living thus drove the Western consumer toward a condition of credit serfdom in modern, plastic society. No one thought much about debt. As long as matter expanded, and the future was bright, everything would be fine. And wouldn’t matter always expand?
Of course this was ‘all good’ for business.
Sometimes, what’s good for business is not good for American citizens. The ‘free-market’ idea, which has controlled America since 1982, has run its course. We are beginning to see the underside of this doctrine. The ‘free-market’ system is very good for the owners of businesses – but it is not so good for the workers.
Sometimes what is good for American business is not good for citizens of the world. Walmart has a dismal record all over the world for abusing its workers through low wages and insubstantial or no benefits. In China, Honduras, Sri Lanka, and other countries, workers are required to work long hours (8AM to 10PM), 7 days a week, 365 days a year for less than $3 a day. A toy that Americans buy at a U.S. Walmart store costs $14.96 but only costs Walmart 18 cents to manufacture, because of its mistreatment of workers in China. This is immoral. This is un-Christian. Walmart shames every American citizen by exporting such shameless behavior in the name of American Capitalism. American business is supposed to be showing the world the right way to do business, not generating hatred and bad feeling in the name of American Exploitation.
Walmart is also notorious for its shark-like business plan designed to destroy local small businesses competitors in towns all over America, and all over the world, through an enforced low-price merchandise built on the backs of low wages and and poor or nonexistent benefits for Walmart workers. This lack of conscience and human exploitation is not a legal right; and it should be corrected through government legislation. This is an example of why and how the government must legislate business. Business will not do the right thing by its workers unless it is forced to do so by the weight of the law.
A government that refuses or is unable to protect its working class from plantation capitalism will fall to a revolution. It is in the best interest of all classes in a society to support fair and honorable treatment of all of its citizens.
Generally speaking, the rich get rich by cheating and stealing. We should not forget this.
Money is not the root of all evil; but the love of money is the root of all evil.
Bill Gates is one of the richest men in the world; and he has given more than 50% of his wealth to charitable organizations. The Walton family (Walmart owners) are perhaps the richest family in the world; and they have given less than 1% of their wealth to charitable organizations.
A famous American shoe company that makes a designer sneaker could export all production jobs to Asia, pay relatively unskilled workers about $2.25 a day to manufacture these sneakers, export the shoes back to American, European or Japanese markets for pretty impressive profits. The production cost per shoe might be $3 a pair in Vietnam (labor and material) and might sell for $250.00 in First World markets. That’s a pretty impressive mark-up.
Now, one argument companies might make as the logic of exporting jobs to low-cost markets is this: a company able to make shoes (or any product) much more cheaply through foreign production, could lower domestic costs of the manufactured goods. This does make sense logically. But that’s not how it has worked. Business has been able to win on both ends, with both decreased costs and with increased profits. Why? Because consumers have tended to view credit as money-in-their-pockets instead of a hand-cuff on their wrists. (In fact, it’s much closer to the latter than it is to the former.)
When I was a child in 1966, my father bought me a new pair of Chuck Taylor Converse All-Star sports shoes each year so I could play basketball. These athletic shoes were the best that money could buy at the time; I think these shoes cost about $3.50 a pair. If we compare a current cost of Nike Air Jordan shoes today ($250) with my old Chuck Taylor Converse All-Stars — the best sports shoes on the market in their day – we see that prices have inflated some 7000%. My father worked for the Sinclair Oil Refinery in Sinclair, Wyoming as an office manager (Payroll, Human Resources, Accounting, et.). I can’t imagine he was paid more than $15,000 in 1966 (and that may be high). The inflation rate implied in this example suggests that my father would need to be making $1,056,428.57 today, against $15,000 in 1966.
I admit that this example is somewhat self-serving. You can argue that quality of product is much higher today, that raw costs have gone up. Labor costs, in this example, have not gone up however. I will give other examples later in this book that will show clearly that we have just passed through a devastating inflationary cycle – one that has largely been ignored by governments and economists — from which we are only now beginning to unwind, with the deflationary spiral that has just begun in 2007.
When I was growing up, I idolized Willie Mays. He was the greatest all-around baseball player I ever saw (ahead of Robert Clemente by a fraction). I remember all the excitement about Willie Mays becoming the first major league baseball player ever to break the $200,000 salary barrier. He never did. His highest payday was in 1971, when he earned $180,000. Not bad for a kid from Mobile, Alabama, growing up in a racist country, playing a little boy’s game for much of his life.
Mays could hit for average, hit for power, run, field, throw – he was one of the best defensive centerfielders of all time. He is in the Hall of Fame and will probably be considered by History to be one of the greatest all-around baseball players of all time, if not the best.
Ok, now for the ‘inflation’ story.
Manny Ramirez is a very good hitter today, a clutch hitter, who does not field well, does not run well. In fact, Manny is a liability defensively. He doesn’t have range to get to balls, he doesn’t have grace when he does get to balls, and his throwing arm is mediocre. He’s slow. Willie Mays stole 338 bases in his career; Manny has stolen 37.
Manny has a higher career batting averge than Willie Mays (.314 versus .302). Willie stayed in the league a few too many years; this dragged his batting average down. Willie hit 660 homeruns in 22 years. Manny has hit 527 in 16 years. It is doubtful that Manny will pass Willie’s homerun total (Manny has averaged only 19 homeruns his last three seasons). Manny would need to play almost 7 more seasons and hit 20 homeruns each year to pass Willie’s 660.
Manny will not every be considered one of baseball’s greatest all around players and I doubt he will be elected to the Hall of Fame – although he is a great natural hitter and ha given his teams good play and offensive firepower, as well as reasons to complain with pretty regular bouts of laziness and leadership problems.
Willie Mays made $180,000 in 1971, when he was the best baseball player in history (or one of the best).
Manny Ramirez recently signed a $25 million contract to play for the Los Angeles Dodgers in 2009.
I have nothing against a man getting what he can in this life. But don’t tell me there is no inflation. Manny is making 125 times what Willie Mays made in 1971. Manny Ramirez isn’t worth what Willie Mays was making. (And now Manny has been suspended for 50 games in the 2009 season for testing positive for drug use.)
By example, an engineer making $35,000 in 1971 would need to be making $4,375,000 dollars today to keep up with the inflation rate suggested by the inflation of Mays/Ramirez acceleration of major league baseball players salaries.
As I have suggested, the reason there was ‘no statistical inflationary pressure’ in America for the last two decades is because the statistics are stacked to overweight the wage inflation component. There are several reasons for this, a primary one being American business has been scrambling to export jobs to low-wage countries and destroy American unions in the process. I am not necessarily pro-union. I understand the hostility to unions in the business world; and I also understand that mafia involvement with unions in the 1970’s helped to destroy the integrity and decency of unions. But I also understand that without a prosperous working class in developed countries there will be no prosperity in the world economy – there will be no one to buy all these ‘wonderful’ products the world economies are producing.
China and India are supposed to pick up the consumer demand, as demand falls in America, Europe and Japan. That is the ‘global market’ company line. So far, China and India are leading the world into depression. Do we really think China and India will have the consumer spending power to lift the world back up after it has fallen down? And will China and India have the political stability to make all this occur? I think not. Civil unrest in both countries seems highly likely as prosperity vanishes and governments (and the business elite) are blamed for this.
There is nothing immoral in profit. Without profit a business cannot survive, cannot employ citizens, cannot pay taxes that help the government provide public services. With significant profit, a company can expand, can hire more people, and can become even more successful and pay more taxes (although, businesses pay billions each year in lawyer’s fees to avoid paying a fair share in taxes), and can produce more goods, keeping the costs of their products more affordable for consumers. That is the theory.
However, there is a problem with this theory. Too much capacity, too many goods produced, tends to drive down the price of the product. Too much supply is a problem for business. Too much oil drives down the price of oil products. If the number of vacuum cleaners produced cannot be absorbed by the market at a given price, then prices almost always come down to encourage distribution of the product. So there is a built-in self-serving limit to expansion. There are ways around this problem, but production cut-backs (and worker lay-offs) are a popular response. Escalating profits that cannot be ploughed back in to the business (for fear of over-production) often are used produce conglomerate companies and are ploughed back into salaries and bonuses of CEO’s and company officials. It is obscene to watch banks and financial institutions being given billions of taxpayer money by their pal Hank Paulson from the U.S. Treasury (who is supposed to be serving the American public), while salaries rise and huge bonuses are paid to the very people who engineered their own companies’ bankruptcies.
In fact, this is worse than obscene; it is criminal. The 1920’s in America had their Robber Barons. The rescued bankers, mortgage brokers, financiers and insurance men in 2008 – the worst and the greediest on Wall Street, and their cronies in government – should be heading to prison instead of heading to the government welfare banquet.
Republicans, especially those wearing evangelistic colors, the Rush Limbaugh and the Sean Hannity variety, have accused Democrats and liberals of raising the ‘class warfare’ flag whenever an increased tax rate on rich Americans is suggested. In fact, the Republicans and their Business Culture have been waging class-warfare on the working poor in America for the last three decades, through the destruction of labor unions and the export of high-paying manufacturing and industrial jobs. It is shameful to hear Republican supporters of this top-down class-warfare policy now raise the specter of bottom-up class-warfare only after they have been waging and winning the class war for a quarter of a century. The Republicans (capitalists) have no problem with class warfare, as long as they are winning the class war.
The rich, in American, should be paying higher taxes. In fact, the rich have a moral obligation to help their fellow Americans now, especially after the rich had such a free hand for decades to profiteer locally and globally and, also, have played such a pivotal role in destroying the American financial structure which is driving many middle-class families into poverty and many poor in to deeper state of financial despair.
The Judeo-Christian God honors generosity, kindness, mercy, charity even more than He honors selfish acquisition, avarice, pride, status, and covetousness of neighbors’ wives and goods.
Something is going on here, Mister Jones – and you better find out what it is.
I repeat: I am not necessarily pro-union. I am not anti-business. Ecclesiastes understood the Wheel of Time, how each polarity is a season in the whole round. Each ‘virtue’ or necessity rules in and for its own time, and then recedes, like the tide.
Free the Ego – the Practical Man — during the Day (the Day is the vertical axis of the cross, the North-South orientation) to expand the economy, and to re-create the bubble of affluence. The Cowboy rules the Day, with its Individualism, its Business Culture, its ‘Greed’. The Indian rules the Night (the horizontal axis of the cross, East-West orientation) with its emphasis upon the internal and local, peace, sharing, and the life of the group, the life of the soul.
Death and Depression, the coming in of the economic and spiritual Darkness, the fall of Man from his throne of power and wealth, involves the cutting off of extremes: the high are lowered and the low are raised up, all being pulled into the ark, in a metaphorical sense, all being transformed into the Middle Principle in an attempt to ride out God’s destruction of the world. And that is the real sense in which the ‘meek’ (or the ‘modest’ – those who are ‘whole’) inherit the Earth.
We need the cycle of deflation (the Dark season) as much as we need the cycle of inflation (the Light season). The crime that the American Ruling Class committed (with their helmsman Mister Greenspan) was to curse the Night and to try to make believe it would not come if they merely pretended it wasn’t part of the reality.
It is very understandable why the Ego tries to build intellectual systems that reject death. The whole expansion of the economy is a response to the fear of death and to the conflict set up at Dawn which allows the Light to rise and forces the Darkness to fall. The desire for Life (the fear of Death) is the animating force of all creation.
All spiritual thought stems from a fear of Death and an attempt to understand why Death was added to the equation of Life. Death is darkness, the tragic overtaking the heroic. If the mind can create a mathematic trick which excludes Death from the picture – such as forced liquid-ization of the economy, in the sense of flooding the economy with cheap money, not in the sense of forced selling of property to cover debts, which comes later – then we could all live for ever. Alan Greenspan, and his colleagues, thought they had done exactly that. Inflate the universe for ever: inflate, re-inflate, re-inflate, re-inflate…. Some physicists even have argued that the universe expands and will continue expanding for ever.
But, apparently, one form of liquidation inevitably leads to the other form of liquidation.
Also, there is a karmic debt that attaches to each inflation, as there is an economic debt that attaches to each economic inflation. And the longer the inflation goes on, the more debt that is taken on, the longer will be the period of deflation during which that karmic and economic debt are unwound.
In words that might appeal to the Republicans (I have written that I am both a Republican and a Democrat – in fact, I am also an Independent), God is a banker and he gives us credit, packets of Light, if you will. But, in the contract we sign when we take on this loan from God we also are told that we will have to pay God back. Deflation is the nature of Humanity giving back energy to God.
The Darkness in Human Society – poverty, despair, hopelessness, tragedy – is the process by which Humanity is drawn back to God. ‘Falls off its high horse’ might be another way of expressing this metaphor.
The ‘winners’ we love so much in American society, the heroes, the conquerors, the successful and rich, the famous, the stars, the beautiful people, are those who are farthest from God. We look at the ‘winners’ in our society, and what do we see? We see – along with mansions, expensive cars, glamorous vacations and sophisticated friends and entertainment — divorce, addiction, crime, perversion, excess, loneliness, often early death, sometimes suicide. The ‘winners’ in human society, the rich, the powerful, the famous, are often ‘the losers’ before God calls them home again. The ‘winners’ are Icarus before he falls. The ‘losers’ are Icarus before he flies.
Psychological or Spiritual Deflation is the means by which God throws a human being to his knees.
Economic Deflation is the means by which God throws a society to its collective knees.
Deflation is not the end of life. Inflation, in fact, is the end of life,.
Most world cosmologies begin with God ‘breathing life’ into the world. But God also breathes life out of the world.
To ‘expire’ means to breathe out, to dig a hole in space and create a bubble that, ultimately, cuts one off from his source, the common fabric of life. This describes the inflation process. ‘Expire’ also means to die, of course. ‘Inspire’ means to draw breath in, to call souls back home from the burst bubble of isolated experience. ‘Inspire’ also means to fill oneself with excitement, knowledge, and revelation.
Deflation is closer in time to the beginning of life, the seed, the root, whereat and wherein the human soul becomes a child again, meek with lost pride, with fear and hope and vulnerability all mixed together. Deflation brings back community, and brings a human soul back to its roots, racial, national, and cosmic roots, back to the origin of its existence.
The Ego does not need God. The Ego believes he is God, standing alone above life, above God, above the mass, the king of the hill, a star centered in its own firmament. Ahab, in Melville’s masterpiece, Moby-Dick is the ultimate Ego confronting the world as a demi-god.
Misters Greenspan, Paulson and Bernanke and all their friends in Washington and on Wall Street were kings of the world (they apparently called themselves ‘The Masters of the Universe’ – Greenspan’s nickname was ‘the Maestro’ — graced by God, each a Sun in his own system. Who, given such a high state, such grand power, a god ruling over men, would accede quietly to the regular, cyclic loss of power that the Night was demanding? Who would willingly climb down from a omnipotent throne and fall to his knees and proclaim: ‘God, you are higher than I! Your will is my will!’
To the minds of America’s Ruling Class, Deflation was not God. In fact, deflation was the Devil – as to Ahab, Moby Dick was the Devil. Death was a Devil that needed to be fought, needed to be resisted, needed to be defeated! Perhaps technology could defeat the Devil! Perhaps semiconductors might do it! Perhaps Death was just a trick of accounting, something we could take off the books – with everyone looking in the other direction (in the direction of their own self-interest), perhaps no one would even notice that Greenspan had erased Death from the Cosmic ledger.
People (nearly everyone) would get richer and richer and we would sail off into the sunset on our collective Ted Hood Yacht. Perhaps, together, the Great Society of Individuals, could kill the Great White Whale of our finiteness. Perhaps we were the generation God had willed to finally destroy that form of spiritual Gravity which transformed Hope to Despair, which transformed Victory to Defeat, which annihilated Beauty and Bodily Power and terminated Youthful Dreams, and was the tragic denouement of every play and every existence ever writ!
And perhaps not.
We need deflation; and we need inflation. Deflation saves human souls from their isolation, from their self-love, from their manic disease of pride and inhuman will. Inflation saves human souls from their self-loathing, from their lost direction, and from their lonely descent into failure.
The Night is not only our primal enemy; the Night is, at the same time, our primal spiritual regenerator. The Night is death, but it is also peace, and the source of our Wisdom. The Night is terror, but it is also our comfort, our rest. The Night makes us small again, but it also gives us dreams, which resuscitate us, and carry us back in to the light, allowing us to become large again.
Material wealth is not the only treasure in life. Material wealth allows us to become gigantic individuals but it also forces us to become demonically isolated and dangerous. Material possessions separate us from life – giving us freedom to pursue our dreams but also becoming the burden that cuts us off from our humanity.
Wealth is good and bad; Poverty is good and bad. Nature is wealthy in Summer and Autumn; Nature is poor in Winter and Spring. We must experience the entire round of this cycle in order to gain depth as human beings in human cultures. Something is taken from us in Winter – but something is also given to us. We lose our bodily pleasures and our bodily strengths but we gain a spiritual treasury. We lose power but we gain perspective. We lose passion but we gain compassion. We lose wealth but we gain peace of mind, if we are fortunate. We lose youth but we gain a sense of completion.
And, rest assured, deflation is not the end of all things, is not the last movement in a dying opera. The universe is a seed that expands as a bubble with the hot, fiery Great Breath and builds great creations. But Time kills the universe too. The atomic alarm clock goes off. The universe contracts, crumpling matter as it recedes, pulling down great structures, as matter drawn back down toward the black hole center of anti-matter, contracting back in to a seed again. It is a never-ending process.
The universe is a great tree that rises up and falls back down again, rises up and falls back down again, an endless cycle of Day and Night, each time carrying a new dream into construction, the dream it is given in the Night. The seed is the dreaming time, and the resting time. So it is with humanity. So it is with the human atom, Man.
Do we really need an economic deflation? Yes.
I worked for thirty years in administration at the University of Oregon. Each year, as part of my tasks, I developed a statistical study for the department. One such study centered on the cost of tuition for students.
From 1976 to 2007, University of Oregon full-time tuition for undergraduate residents of Oregon climbed from $216 per term to $2107. This is an increase in thirty years of 875%.
In the same time, full-time tuition for non-resident graduate students increased from $320 per term to $5447 per term, an increase of 1602%.
To put this in perspective, a person earning $20,000 per year in 1976 (a reasonable salary at the time), would need to be making $320,400 in 2007 in order to keep up with this suggested inflationary rate.
A person earning $60,000 in 1976 (a higher administration type salary), would need to be making $961,200 in 2007 in order to be keeping up with this inflationary rate.
Not many job categories have increased at this rate. Some have: CEO’s of elite American businesses, successful founders of technology or biotechnology companies, or internet start-ups, Wall Street investment bankers, perhaps doctors and professional and college football coaches. But most Americans have not seen this kind of inflation of salary rates.
It is not just higher education which has inflated so dramatically.
When I was entering college in 1970, a new Volkswagon bug cost $1700. Today, a new bug costs $20,000. This is an increase of 1100%. A person making $20,000 in 1970 would need to be making more than $215,000 dollars today to keep up with that inflation rate.
Then, of course, there are housing prices.
My sister-in-law in Portland, Oregon bought her house in 1988 for $71,000. This was a modest three-bedroom house in a modest part of Portland. She and her husband had just emigrated from Vietnam; both she and her husband were working jobs starting at close to minimum wage. She had $3000 in savings and borrowed another $4000 from her mother to secure a 10% down-payment. In 2007, this house was valued at $700,000. In 2008, Portland housing declined about 10%. A house that has increased in value from $71,000 in 1988 to $630,000 in 2008 has increased 787% in twenty years. A couple making $30,000 in 1988 should be making $236,100 in 2008 in order to keep up with the suggested inflation rate designated by this gain in housing.
Talk about ‘global warming’!
In 1950, the year I was born, average house prices were $14,500. Average income was $3,216. In 2006, average house prices in the U.S. were $232,000. This is a gain of 1500% and suggests that average income in 2006 should be around $300,000 per year, using 1950 as a benchmark of normality.
The global economy has been in a condition of ‘massive, unsustainable animal heat’ for more than a decade, with Alan Greenspan leading the charge, cheering on the dogs: ‘Get your dreams now! Take on more debt! Being deeply in debt is a great thing for yourself, for your family, and for your country – even for the health and well-being of the Earth!’
Debt is good. Debt is sustainable.
But are high levels of debt really sustainable? A picture is worth a thousand words. In 1950, Americans’ debt to income was 20%. It is currently almost 120%. Personal savings as a percentage of income was 7% in 1950; today it is less than 1% (in the chart below it is 1% — it has grown to about 3% in early 2009), the lowest it has been since the 1930’s, when it went negative.
A second chart shows current American total debt is 350% of GDP, the highest in history. In 1930 American debt was 300% of GDP; and we all know what happened to the economy at that point in history. American debt amassed in the late 1920’s and 1930’s did not get unwound until almost 1960. In the late 1990’s American debt vs GDP attempted to peak at about 240%. Alan Greenspan to the rescue. To drive off the great leviathan of recession, Mister Greenspan opened up the waters of liquidity: Americans responded by taking on more debt, pushing total debt to 350% of GDP in 2008. More debt does not solve the problem of a society carrying too much debt. Stimulus packages and lower interest rates will not achieve a renewed American economic might – just more debt for the taxpayer and more debt for the consumer.
We are in a very deep hole. And it will take America almost a generation to get out of the hole we have all dug, with the help of Mister Greenspan and his ‘free market’ ideology.
Analysts might argue that it took Americans almost 30 years to dig out of debt from the Great Depression Era because this massive indebtedness caused a depression, which was then followed by a world war, depriving Americans of an optimum wealth-building business environment for fifteen years after the crash in 1930. Well, we are entering the depression at this moment; and the national responses to another great international depression will make another world war also very likely.
The Era of Fast Money-Making is over. We have entered a new reality, one that will not be an optimum business environment for at least a generation.
A look at one last chart shows the extent of housing inflation that occurred under Mister Greenspan’s watch. The broken line is the Case-Schiller projection of a housing bottom in 2016 or 2017.
Is it any wonder housing prices have fallen off a cliff? Fewer and fewer people can afford to buy a house at their current bloated levels, especially now that ‘creative accounting’ banking and exotic no-money-down, interest-only-payments-for-three-years mortgages (so called ‘liar loans’) are no longer in favor at America’s insolvent banks.
Also, people have already taken on maximum amounts of debt.
Also, with unemployment rising, businesses failing, with further foreclosures coming as variable-rate mortgages demand significantly higher monthly housing payments throughout 2009, 2010, and 2011, and with commercial real-estate heading down the drain, housing prices are set to fall at least another 50%.
My sister-in-law’s house, which she brought for $71,000, and which listed at $700,000 in 2006, should be worth $120,000 when the smoke finally clears, which will mean a gain of about 2.5% per year, which is the historical average.
Health-care costs, energy costs, the cost of food have all spiraled upward…has the cost of anything gone down in the last thirty years, except for computers and memory chips and some electronic equipment?
Salaries have moved sideways. Salaries have definitely gone down for a man or woman who once worked in heavy manufacturing and is now selling coffee at Starbucks after his or her job was exported to China.
One of the reasons salaries are stuck is because of the collusion that has driven health-care costs through the roof. Doctors, medical providers, pharmaceutical companies, and insurance companies all have been having the times of their lives in America. Everybody has been getting rich, at the expense of the American worker and at the expense of sick and dying Americans. Businesses that provide workers with health-insurance benefits have watched insurance premiums rise nearly 10% per year for more than a decade. Doctors, hospitals, drug companies raise prices; insurance companies raise premiums. The worker asks his employer for a raise and the employer says I’d love to give you a raise – but I already gave you a 9% raise in your health-care premium. A worker making $35,000 a year in 1998 would receive a comparable salary of $90,314.90 in 2009 if health-care premium increases were excluded from the cost of his salary. The worker is still being paid $30,000 a year in 2009. All the extra money is being paid to the insurance company. The insurance companies don’t care if doctors and drug companies raise prices, in fact they want them to raise prices; they just pass the costs on to the worker and the employer.
My wife takes asthma medication, which costs about $150 per spray-bottle in the US. When we visit friends and family in Vietnam, the same medication costs $10 per bottle. There is a conspiracy in America between doctors, medical providers, insurance companies, and politicians to gouge the American consumer. And this has been going on for decades. This is a natural side-effect of the Reagan/Greenspan/Bush doctrine that the business-class can do no wrong, that the business-class should be allowed to regulate itself, that business profits are sacred and trickle down through the entire society; and government should simply stay out of the way.
But does the American Dream require that individuals be allowed to become rich at the expense of middle class and poor Americans? I don’t think it does. Ingenuity, hard work, and intelligent risk-taking should be rewarded. But what we have now, in the health-provider fields, on wall street, and in the banking industry, and in many other branches of American business, is a form of state-capitalism, in which the government and businesses work hand-in-hand to enrich themselves, legally and illegally – and the rest of the crew of our ship of state can be damned.
The health-care bubble needs to be popped to make medical care affordable for all Americans.
What kind of civilized, wealthy society allows a poor person to die because he or she lacks money for medical care? We claim to be a God-fearing people, a spiritual people, but we still seek to deny charity in our society to all except those who don’t need it. This moral stinginess is a sign of corruption. This selfish, small nature must be corrected. We Americans are a tribal family of men and women and children. We must treat our family with justice and generosity. When we do this, we all benefit and live in a more decent and supporting environment. We will spend our public money to build more schools instead of building more prisons.
We can choose, as a nation, to change our values. We are not obligated to support a state that makes doctors, drug company executives, and insurance agents millionaires while the vast majority of Americans cannot afford the costs of their services, except as ‘benefits’ at work. And how secure is this ‘benefit’? Lose your job: lose your right to health-care treatment. A serious illness then results automatically in bankruptcy – perhaps in both death and bankruptcy. Is this the way we want to live? Are these the values we want to give our children? Is it reasonable for us to glorify only the rich in our society; and to discard those who are not rich, who are not the ‘winners’ we admire so ardently?
God wants humans to build a heavenly kingdom on the Earth. This means taking care of one another. This means not exploiting others for financial gain. This is a set of values religious Americans need to think about deeply, This is the message of Jesus Christ. Christians need to remember the meaning of the message of Christ.
Jesus was not a conservative. Jesus was a moral revolutionary who preached that humanity needed to change its behavior, needed to change the way it interacted with its brethren. He preached love, generosity, selflessness, and equality. He did not preach the virtues of materialism, selfishness, and suspicion.
The Higher Education bubble needs to be popped to make education affordable for all Americans with an aptitude for university study. This will require more education support from federal and state governments. It will also require the popping of the health-care bubble, which has become such a huge burden for universities and for university students, not to mention non-educational American businesses.
When someone pointed out to Alan Greenspan the ‘irrational exuberance’ of the housing bubble in 2005, Alan commented: ‘Even if there are declines in prices, the significant run-up to date has so increased equity in homes that only those who have purchased very recently, purchased just before prices actually literally go down, are going to have problems.’
The American banking system was also going to have problems, as banks careened toward default, insolvency, bankruptcy. The American Ruling Class was also going to have problems: Lehman Brothers would be gone; Morgan-Stanley would be going; Goldman-Sachs would essentially be castrated; and, without massive intervention from their former boss, Henry Paulson (who made over $400 million dollars from Goldman-Sachs stock options before joining George Bush’s government), who essentially robbed American taxpayers to try save his friends on Wall Street, Goldman-Sachs would have vanished.
Nothing was more bizarre than witnessing the bullying Paulson and his trembling shadow Bernanke appear like magistrates of social reconstitution before Congress, putting a gun to the heads of unsuspecting congressional leaders, demanding trillions of taxpayer dollars to ensure the salvation of Western Civilization, something of which only Paulson was now capable, insisting Congress approve a scheme whereby Paulson could give money to whomever he chose, and demanding a guarantee that no one connected in any way with the blatant act of highway robbery (the ‘bailout’ being reconstituted euphemistically as a ‘rescue’, first, and then as a ‘conservatorship’) could ever be held legally accountable after the crime.
Paulson later told a colleague: ‘It didn’t have to be a trillion dollars. It could have been anything! But it had to sound big.’
He wanted to scare legislators and the President into giving him what he wanted. He haunted Congress and George Bush with the picture of banks collapsing, riots, revolution, tanks in the streets, Washington D.C., and New York on fire. Washington swallowed its collective tongue (there were resistors) and gave Paulson $500 billion with few questions asked, few strings attached. Later, after giving away his stash, Paulson refused to divulge to the American public the names of the private institutions to which the cash grants had been made, concerned that stigma might attach to institutions so unsubtly graced (and so needing to be graced).
Now, after the first wave of $500 billion of personal Paulson loans and gifts to banks and financial firms (some at least with equity stakes) has not done the trick, we hear that more taxpayer money will be needed if the American banking system would survive its own mismanagement.
Alan: you were wrong. Your policy was doomed. AIG is gone; Fannie Mae and Freddie Mac are gone, all ghosts of their former selves, all shadows slipping in to nothingness of the sea.
Wall Street is gone, Alan. The investment banks you so admired, which helped to fuel the global free-market bubble, and fly proudly the great American flag of world financial leadership, have vanished or gone in to hiding, begging the government for money; once proud titans, now hat-in-hand, begging Congress for their own survival. How the mighty have fallen!
The ‘free-market’ is gone, too, Alan. We are heading, inevitably, into an environment of protectionism, of tariffs, of limited trade, of national responses to an international crisis, to international political realignment, probably to world war. And the ideology of the vainglorious ‘free-market system’, wherein noble and virtuous corporate leaders and financiers would be wise and capable of disciplining themselves, will not be mentioned again by serious policy-makers for at least another half-century or so. American capitalism has shamed itself on a huge public stage. American capitalism has given back all it won after a century of battle with Marxist dogma, given it all back and then some, because greedy bankers and politicians could not discipline themselves and limit their own obsessive needs to win.
Positive thinking, and cheerleading the business model, is not the same as the moral leadership of a nation. And it is not in the nature of wanna-be billionaires (i.e., criminals) to discipline themselves when no one is watching.
In early 2009, Alan, one in ten mortgages in America are either in foreclosure or under water (are worth less than what is still owed on the mortgage). Six million jobs for American workers have vanished. Even more millions of jobs for global workers have vanished. Suicides, mental illness, alcoholism, divorce, crime….these are all real side effects of the destruction of our economy.
Ervin and Ana Lupoe both worked as medical technicians at a Kaiser-Permanente hospital in West Los Angeles. They owed $850,000 on a mortgage; they both lost their jobs. They were in foreclosure; and they bounced a check for back-taxes with the IRS. So Ervin shot his five children, his wife and then himself. They were trapped; and becoming homeless with five children was not a future they were willing to confront. This was the seventh murder-suicide of a family in California since the depression, generated by the broken housing bubble, hit California.
More than just a few late-comers to the global housing Gold Rush are going down in flames, Mister Greenspan. Some of your friends are probably going down too.
What can the new Obama government do to solve the problems of economic collapse during this necessary period of deflation? Not much really. In a very real way, depression is ‘matter’ being drawn into a black hole, matter being destroyed through a growing proximity to anti-matter. Government can provide support systems for its citizens, extend unemployment benefits, generate government jobs to help reconstruct the infrastructure, protect savings in the self-destructing banking system. But all the trillions of dollars the government is now throwing or is planning to throw at the collapsing financial balloon of the global economy will not stop the ship from sinking. This depression will not bottom out until that atomic alarm clock goes off again, signaling the Dawn, when the necessary deflation will have finally been accomplished. We will look at this question more deeply later.
One thing government can and must do, however, is to raise taxes on the very rich Americans to provide social support systems for those who have been impoverished by errors, sins, and misdeeds committed mostly by America’s rich, those ‘masters of the universe’.
As I have suggested, I believe in Ecclesiaste’s wisdom: to everything there is a season. Let the rich generate personal wealth during the Day; and let the rich give back this wealth during the Night. It is a mechanism we can follow. Competition by Day; and Cooperation by Night. Lower taxes during the Day-Cycle; higher taxes during the Night-Cycle.
The danger the richest class faces, if they resist such collective sharing of the wealth during the Night-Cycle, is that they might lose everything in a social revolution, which is always a possibility during a deflationary Night-Cycle. History shows many examples of inflexible arrogant rich classes being stripped of their wealth and driven in to exile during Night-Cycles, when the moral imperative changes sides, joins forces with the weak.
One wonders why Alan Greenspan has not joined the monastery by now after his ‘free market’ doctrine and policy has helped to turn the American and global financial gargantua into a paper junkyard; and has turned the financial promises of America’s once-proud corporations into a kaleidoscope of shrinking visions, corporate corruption, and a rattled pyramid of junk-bonds.
The ‘I made a mistake’ statement – i.e., ‘I made an error in judgment’ – is not enough, Alan. Admit that you are a kind of Ahab! Admit that you unintentionally torpedoed the Pequod, the boat in which all Americans are riding! Admit that you sank the American Ship of State because you were trying to destroy Death, trying to defeat the Shadow; you were trying to exterminate the Great White Whale of philosophical and financial and physical mortality!
Tell us that your ambition was great, even as your judgment was flawed, as your management skill was … much less than advertised! A good education, and mediocre understanding, almost always lead to tragic results.
“I continue to believe the U.S. economy is healthy. We have had a significant housing correction in the U.S. You can’t have a correction like that without causing some dislocations. It’s too early to tell whether it’s bottomed. I believe it has…….shouldn’t be a surprise to anyone that there’s some fallout in the subprime mortgage market … but it’s largely contained.”
~Henry Paulson March 2007
What is the difference between a Banker and a Mafioso?
The Banker is the Mafioso at the end of his career. The
Mafioso is the Banker at the beginning of his career.