Monday, June 28, 2004

Debt Slavery: The New Economic Order?

In the past, various conditions have arisen when the lower social classes have been legally disenfranchised by various elites. The outright notion of slavery itself is the most obvious form, but indentured servitude is frankly not much better. The current economic system and its mismanagement has spawned a new version - something that Stirling Newberry of BOP-news has calling "debt slavery".
Well let's look at it closely. What exactly does debt slavery look like? Well it looks something like what is reported by the NYT in two separate but together incidendiary articles. The first article is on consumer spending.

Consumers -- whose behavior plays a key role in the economy -- boosted their spending in May by the largest amount in more than two years...

When adjusted for inflation, however, consumer spending rose by a more modest 0.4 percent in May after being flat in April. And disposable incomes were unchanged in May, following a 0.4 percent rise. The government does not provide a similar price-adjusted figure for Americans' overall incomes, which include wages, salaries and Social Security benefit payments...

Consumer spending accounts for roughly two-thirds of all economic activity in the United States. Thus, it plays a key role in shaping an economic recovery.

Consumer spending on ``durables'' -- costly manufactured goods such as cars and appliances -- rose by 1.7 percent in May, a turnaround from the 0.6 percent decline reported for April. Spending on ``nondurables,'' such as food and clothes, went up by 1.2 percent last month, up from a 0.1 percent dip in April. Spending on services increased by 0.7 percent in May, up from a 0.5 percent rise the month before. All those spending figures were not adjusted for inflation.

With spending outpacing income growth, the nation's personal savings rate -- savings as a percentage of after-tax income -- dipped to 2.2 percent in May, from 2.6 percent in April.[emphasis added]

Don't you think it's curious that the government isn't keeping figures on how much total incomes are affected by inflation? You'd think that would be something that people would be interested in. This ommission however serves a strategic purpose of avoiding discussion of how well off Americans have become over time. The other problem with the article is that it suggests that consumer spending is up because savings are down. But if we invest more than we save, and we do, then this isn't merely saving less and spending more - it means that someone is going into debt.
By several measures, Americans are more indebted than ever. Through the first quarter, they owed nearly $9 trillion in home mortgages, car loans, credit card debt, home equity loans and other forms of personal borrowing — accumulating nearly 40 percent of this total in just four years, according to published Federal Reserve data. But most of the debt is at fixed interest rates. Thus it will be unaffected initially as the central bank begins its much expected quarter-point increases in the so-called federal funds rate, now at a 46-year low of 1 percent. The federal funds rate, in turn, influences the interest rate cost of most household and commercial debt.

Only one-fifth of the $9 trillion in total household debt, or $1.8 trillion, is borrowed at variable rates. Variable rates, like those that the Diffenderfers pay on their four credit cards, often track what the Fed does, which means they are likely to rise one-quarter of a percentage point over the next few weeks. The immediate cost for the nation's households as a result of this process could be as much as $4.5 billion, including the initial $35 increase in the Diffenderfers' monthly credit card bill.

The $4.5 billion is roughly 10 percent of the cost of the rise in oil prices so far this year. That is not a big number yet, but each quarter-point increase would be another step closer to matching the oil shock, which brought gasoline prices above $2 a gallon in many parts of the country.

While the oil shock quickly raised the gasoline and heating oil bills of nearly every household, the burden of higher interest payments falls most heavily in the early stages on lower- and middle-income families. They are the biggest users of variable rate debt, particularly on credit cards, various studies show.

Upper income families, on the other hand - that is, families with more than $80,000 in annual income - are more likely to have fixed rate debt, particularly mortgages, and to owe relatively little on their credit cards. What variable rate debt they do have is usually at lower interest rates than lower income people. Lower income people, as a result, are 10 times more likely than upper income people to be devoting 40 percent or more of their income to debt repayment, the Economic Policy Institute reports. In addition, upper income people are the nation's biggest savers, and a rate increase raises the return on their interest-bearing securities.[emphasis added]

Don't you notice this interesting correlation? On one hand, the government says consumer spending is up and savings is down. What it neglects to emphasis is that debt has been increasing - some 40% in consumer debt - in the past four years alone. If you count backwards four years is Y2000 or when the recession hit and the Federal Reserve cut interest rates and GWB started instituting his tax cuts. So there's been a wealth transfer, from the income of the lower social classes to the asset properties ("rent") for the upper social classes ("rentiers").

Is this a joke? Is what is happening just an accident or is it that insidious? I don't mean to imply a conspiracy. There is no conspiracy. This is simply the result of a lack of imagination on the part of the elites - the leaders. A structural economic transformation has to take place. The leaders and elites of the society don't know how to accomplish this. Indeed as Iraq has shown they have no idea how to run or build a country. So they institute steps to try to maintain the status quo. But underlying economic changes are occurring. It costs ever more and more and the price becomes higher and higher to implement policies that maintain the status quo. Stirling describes it here in an admirable summary of how these factors are tied together.
Our politics is dominated by a reactionary party that must have absolute power, that must pour every cent of the economy into the pockets of the wealthy, so that we can continue to buy oil. That may sound like a contradiction, but it is not. The profits from oil pile up in dollars, those dollars are used to buy assets. If our rich don't stay ahead of the arab rich, the arab oilarchs will own the country. It is the distortion that drives tax breaks for the wealthy, ever spirally consolidiation, and ever more incentives for everyone to park money in the Dow.

The weight of the oil is crushing us.

And in the machinations to secure that oil, and to secure the monetary arrangements that prop up the dollar - for example Japan's well documented financial self-flagelation of buy nearly worthless US Bonds to keep our deficit floated - that lies the heart of dark secrecy. We elect scoundrels in chief, because there is a sense that only criminals can do the job. We then shrug when they manipulate elections and economics for their own benefit - it is part of the job...

The desire not to hear about the problems of this world has gone to bizarre lengths. We did not talk about the coming recession in the election of 2000, nor the S&L meltdown in 1988. Yet they were coming for all to see. The real events of 2005 are not being mentioned now.

Which means that somewhere is lost the ability to actually come to a consensus on these matters. Instead we have "leadership" which means selecting a course of action, and then having every branch of government become part of a vast echo chamber to push it, and exclude any other alternatives. As I write this the EPA is telling people that there is no point in getting a more fuel efficient car.

I still believe that "we get the leaders we deserve". Stirling's analysis points to the underlying causative factor in this. Our society does not want to be discomforted by change. Change is hard and difficult. We must throw aside the shibolleths of the past and demand competence and progress. This threatens the present economic and social order as we know it, because over time many of the people in every sphere and walk of life have become parasitical. They have lived off the glory of their ancestors and know not how to steal fire from heaven for themselves. So they fear change. They take steps to try to avoid it.

They elect leaders that will protect them from change instead of ones who will guide them through it. These elites themselves are eager to protect their own interests. Therefore they support the unsustainable, until the collapse happens and it can go on no longer. Then all is lost. As time goes by forms of debt - college education debt, property debt, credit line debt, etc. - are hollowing out the American economy. They are also transferring our asset ownership in capital flight overseas and in order to right this the elites are diverting as much of that asset ownership flight into their own names. Better that an American buy it than a foreigner own it right?

Only according to Newsweek there is scientific evidence that this sort of reasoning simply doesn't work.
Economists have many ways of demonstrating the irrationality of their favorite experimental animal, Homo sapiens. One is the "ultimatum game," which involves two subjects—researchers generally recruit undergraduates, but if you're doing this at home, feel free to use your own kids. Subject A gets 10 dollar bills. He can choose to give any number of them to subject B, who can accept or reject the offer. If she accepts, they split the money as A proposed; if she rejects A's offer, both get nothing. As predicted by the theories of mathematician John Nash (subject of the movie "A Beautiful Mind"), A makes the most money by offering one dollar to B, keeping nine for himself, and B should accept it, because one dollar is better than none.

But if you ignore the equations and focus on how people actually behave, you see something different, says Jonathan D. Cohen, director of the Center for the Study of Brain, Mind and Behavior at Princeton. People playing B who receive only one or two dollars overwhelmingly reject the offer. Economists have no better explanation than simple spite over feeling shortchanged. This becomes clear when people play the same game against a computer. They tend to accept whatever they're offered, because why feel insulted by a machine? By the same token, most normal people playing A offer something close to an even split, averaging about $4. The only category of people who consistently play as game theory dictates, offering the minimum possible amount, are those who don't take into account the feelings of the other player. They are autistics.

I think 'autistic' is a good description of persons who argue that increased income inequality will work as long as the "bottom line" improvement of people's living standards occurs. First of all people's living standards are on median decreasing in real terms once you've corrected income for real inflation and debt figures. Second of all limiting income disparity is a simple matter of political stability.

Let me clear, I consider myself generally most sympathetic to the social elites. This post is not about 'bashing' elites since I am elitist myself. I am not 'against' capitalism. I am not for labor generally. However I am a forward thinking elitist. If I wish to enjoy elite status and become prosperous with a six figure income and pass that on to my children, playing a zero sum game that disenfranchises and therefore enrages the middle-class and proletariat is not in my best interests. That's what's happening here, the elites of our country have lost their capacity for forward thinking. We have a deficit of imagination and will. This will prove almost surely a fatal loss.

25 Comments:

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