This Economy of Ours – ’09

written by Glen Aaron on July 14, 2011

Ten, twenty years from now this crisis will have passed, and there will be a new one.  Historically, the American economy has been in the tank several times before.  The causes are always the same yet different.

For clarity, let’s look at the causal factors of this recession.  There are several, and each was a contributor.  First, this economy has been a consumer economy since the depression of the ‘30s.  That is to say that the health of the economy is based upon how much Americans consume each day.  Until about 1980 this worked pretty well.  The more money each American spent meant that there was increasing demand for the goods and services bought.  That demand created jobs for Americans in housing construction, manufacturing and the services like lawyers, doctors and banking to support those industries.

It was about this time that American companies discovered a new business model.  At first, its use was limited while the braver companies tested the water to see if it would work.  The new model, particularly for American companies, came to be known as outsourcing.  The first companies I recall doing this were Nike and Reebok tennis shoes.  One American, the other British.  The model was simple.  Go to a third world country, build a factory as cheaply as you could and pay pennies a day to the workers for making your product.  These first companies soon learned that their profit margin expanded exponentially.  You are an American company selling to Americans at market prices, but you are manufacturing your goods in another country for a very low cost per unit.  What business person wouldn’t like this business model?  Soon, every American company, no matter what they made followed this business model.  Of course, there were many adaptations depending on the creativity of management.  The entire western world fell into love with this profitable approach to manufacturing and third world countries longed for Western manufacturing companies to open a factory in their country because though the employee wages were minimal by Western standards they were life saving by poorer country standards.

In the ‘60s, the use of credit (debt) became more and more available.  The new credit card companies of Visa and MasterCard were fighting head-on for customer turf.  The old Diner’s Club Card had been limited, but these new versions promised to allow a consumer to buy anything anywhere.  Before this time, a consumer had to have the money in his or her bank account or a specific charge card like say a Sears card or one at a specific store to purchase something.  Now, there was a new game in town, and there was a thing called “minimum payment”.  As long as you could make the “minimum payment”, you could keep on buying, and Americans did.  Over the next twenty years, living on credit and credit cards became a way of life, and of course, it still is today.  The more people bought (consumed) the greater the GNP of the nation.  It made a very pretty picture of prosperity.

By the ‘90s, there was literally no savings rate by individual Americans.  There was only credit (debt).  However, the market had changed.  The business model referred to earlier had now become known as “globalization” or “the world economy”.  Individual consumption no longer stimulated the economy because it didn’t create jobs.  The manufacturing jobs had gone to other countries.  Nevertheless, Presidential administrations as well as Congress believed, even as they do now, that the more Americans spend the better it is for the economy.  If it takes more allowed credit (debt) to allow Americans to consume more then that is what must be developed.  The vortex of spending and increasing debt has to grow and increase or everything caves in upon itself.  The vortex collapses.

America’s wars have always increased the national debt by huge amounts, but up until the Iraq war they had always stimulated the economy.  To use an example, the more tanks, airplanes and equipment the government ordered for the war effort, the more manufacturing, foundry and mining jobs there were for American workers.  But by the time of the Iraq war, we had a globalized economy.  The trillion dollars we spent on the war, which we had to borrow from China, Japan and Europe actually went to create jobs in China, Japan and a few other countries.  It did very little for American domestic industry.  By the end of the first decade of the 21st century, America’s wars in Iraq and Afghanistan and paying for its worldwide military industrial complex was creating huge national debts.  The countries loaning America money were becoming more cautious and beginning to view America as a credit risk.

Another evolution had been occurring since the early ‘80s, now a twenty-five year history.  What was termed neo-cons (neo-conservatives) had been in charge of the nation’s economy.  Neocons had a pure view of capitalism.  That is that government should not be involved in regulating any aspect of industry or business.  Thus, a period of what was called “deregulation” began and moved through every aspect of the economy with great speed – finance, banking, transportation, mining, credit monitoring, just to name a few examples.  The other neocon strategies to increase our system of capitalism was to negate governmental commissions and agencies and to replace as many governmental duties as possible with what was called “outsourcing”.  At the same time, neo-con administrations instituted income tax cuts primarily for upper-bracketed tax payers.  The idea was that with the tax savings of the wealthier they would invest the money in domestic businesses and manufacturing.  There would be a “trickle down effect.”  These investments would create more jobs, people would have more money to spend, that would create more demand and so on.  Through the twenty-five year neo-con history that probably occurred to some extent, but what was actually happening was that the rich were getting richer, the poor were getting poorer, and the middle class was shrinking.

It is now clear what was evolving over this period.  Debt structure was increasing for the vast majority of Americans but with the ease of debt purchasing power, it appeared as if it were prosperity.  Government domestic spending was depleted, as there was a prejudice against government domestic spending unless it was for outsourcing to private enterprise.  As a result, the nation’s infrastructure, primarily built in the ‘50s deteriorated.  Government international spending and commensurate debt increased exponentially with little ability to repay it.

By 2008, the vortex began to unravel.  As overextended as the credit market was, it didn’t take much.  First, investment bankers and specialized investment mutual funds fell in love with developing new layers of debt, segmenting them into numerous different instruments and selling them over and over again.  It became so complicated and the financial instruments were so faceted, neither the creators nor the sellers of the instruments understood them.  They were created without government oversight or regulation, and to a large extent these instruments were simply based on bad debt that could never be repaid.  In a way, it was a repeat of the junk bond crash of the late ‘80s, only this time the financial instruments were so creatively complicated that they were unrecognizable.  Since the neocons had gutted the government oversight agency, the FDIC, the hyped sales of these hedged instruments became rampant and for a while millions, indeed billions, of dollars were made on them by Wall Street firms.  When the game finally spun itself out and came winding its way down, credit dried up for both the consumer and American businesses of all size.  There was a credit crash.

As for the world economy, it contracted as well.  If there was no one to buy goods in large quantities then, of course, there was no demand.  If there was no demand, factories shut down and workers were let off.  China, alone, in 2008 sent five million factory workers back to the farms.  Globalization was taking a hit.

Does this mean its over?  Prosperity is done?  Globalization is done?  No.  The world and this nation will continue to evolve.  Evolution is not dead.  It will be interesting to see how things change.  Historically, when America got into economic trouble, it just inflated its way out of it.  Most likely, the same will occur this time.  The dollar won’t buy what it used to, but there will be a whole lot more dollars.  What will be the result of the nations’ foreign lenders’ uneasiness?  Well, that remains to be seen.  It also remains to be seen how America resolves its depletion of a manufacturing base and still provides its population with enough jobs and income to remain a major consumptive power.

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