Getting Out Alive

Overreach

As a grandmother used to say about eating too much, "The eyes are bigger than the stomach." That is the ultimate cause of the current problems which started in the United States.

Please recall what has been happening in the United States during the last century. Americans have been True Believers in their Exceptionalism, the doctrine that the United States is ordained to bring Truth, Justice and the American Way to the world. Americans see themselves as "good people," well intentioned, fair, just and charitable. They also see themselves as entitled to the best of what the world offers in return for having brought salvation to the world. Although most Americans are opposed to Imperialism (exemplified by the 19^th century British Empire and European colonialism), the United States is the world's greatest surviving Empire. The American Empire arose in World War II as an inheritance from Great Britain. It was solidified and extended by the challenges of the Cold War at the expense of the Soviet Union, the other great Empire which survived World War II. In analogy to the ancient Mediterranean world, Great Britain plus Europe was America's Greece and the Soviet Union was America's Carthage. As with the Romans, the United States prevailed by dint of persistent sheer force; i.e., the American Empire is founded on superior military technology, organization and determination (John Wayne's "true grit"). Although the military nature of the American Empire is invisible to most Americans, the United States is responsible for about half of all military expenditures, and supplies about 60% of the weapons bought in  international arms markets. Americans are the major beneficiaries of global hegemony because they have organized the world in their image, just as the Romans, British and Chinese did before them within their spheres of interest. As Amy Chua argued in Day of Empire, the dominance of the United States is maintained by its monopoly on skills which, in  turn, is founded on a doctrine of limited tolerance. That is essentially how the Romans organized their world. Once an Empire demonstrates its ability to project power, its influence and direction extend far beyond its occupied territories. This lack of direct military control cloaks the Imperium, making it more insidious and fearful, thus all the more effective.

Since the 1980 election of Ronald Reagan to the Presidency, the United States has been controlled by Conservatives who evolved into neo-Conservatives. Even recently elected Liberal (mostly Democratic) officials are far more conservative than their right-center Republican predecessors such as Richard Nixon and Gerald Ford. The result of Conservative rule has been the elevation of the upper classes, especially the elite 10%, and the reduction of the lower classes. In 2008, working class household real incomes (incomes adjusted for buying power) are about 20% lower than they were in 1980, while managerial incomes have grown far more than 100% in the same period. The top 10% of income earners experienced a more than 20% increase in their wealth from 2000 to 2006.

This massive shift of income and wealth has been engineered by several financial mechanisms. First and foremost, the working classes (what American politicians call "the middle class") have been encouraged to meet their needs and desires by borrowing. Today, most Americans buy their houses, cars, furnishing, clothes and even food on credit; i.e., on the average, their monthly purchases exceed their monthly income. To accommodate the vastly expanded use of credit, the financial system has treated credit as an asset, thus increasing the wealth of lenders "on paper." The major beneficiaries of that increased virtual wealth are the management and shareholders in banks and other financial institutions; i.e., the Rentier class. Thus, American working people are the boys in Pinocchio who turn into donkeys. Americans are enslaved by their natural lusts which always demand more.

Second, the increase of credit increases the amount and flow of the currency by which it is represented. Since in the human way of thinking, something comes from something else, there has to be an increase in  the money supply corresponding to the increase in credit. Put differently, when credit is represented as a monetary asset on the lenders' books, there has to be a corresponding supply of money recorded as a liability. Money is actually made physical by supplying it to debtors and their intermediaries; i.e., the act of paying off liabilities creates money, unless lenders actually strip themselves of currency on hand. This creation is disguised by borrowing from other banks and, eventually, cumulative borrowing from the Sovereign's central bank (such as the U.S. Federal Reserve, the Bank of England, the Bank of Japan, the Bank of China, etc). The Sovereign bank pays its qualified borrowers (which have accumulated the lending of others) in notes (IOUs) it prints, which acknowledges the increase in  money supply. Since the printed money circulates throughout the economy which recognizes it, credit increases the size of the economy.

 In the old days of hard currencies, payment would be made in silver or gold or other barter. Payment in hard currency exchanges a "real" asset for a debtor's note (IOU) which is a virtual asset. Since lenders and most people still prefer to hold real assets, creditors prefer to assume debt by paying loans in scrip (bank notes). Thus, when mall stores receive payment for charge card sales as money, their virtual income and wealth change as noted on the books of the transfer agent. This virtual change corresponds to a private IOU, currency created without government authorization. Credit issued in this way creates a private economy which otherwise operates the same as the economy operated on behalf of the Sovereign. Of course, ultimately the Sovereign, acting through the central bank, validates the operation of credit by printing money (the Sovereign's scrip).

Third, financial people are nervous about the debts owed them, so they usually demand collateral in the form of liens on hard assets. Somehow, lenders feel better when the debtor assigns to the lender an interest in the properties the debtor owns; e.g., land, houses, cars. Such an assignment is security for the loan, since the lender is allowed to repossess the security under terms defined in the loan agreement. Those arrangements reflect the persistent belief of most people, including trained financial professionals, that hard assets have some intrinsic value, not just an instrumental value. Thus, lenders are motivated to "upgrade" debt by issuing it on collateral instead of mere signature. Consequently, during the last decade or more there has been a constant refinancing of signature debt (credit cards, personal loans) into equity loans. In effect, lenders have pumped more and more money into the economy by reducing unsecured debt in favor of collateralized debt. Since this sort of debt is a security in the most fundamental sense, it is not surprising that financial whizzes took it to the next step: bundling the securities and selling them.

Of course, there are two problems in securitizing debt. First, it is ultimately important for those buying the debt to know whether the debtors can repay it. Second, it is just as important to know whether the collateral offered is actually worth its assessed value. In the last few years, neither of these potential difficulties have been addressed by lending institutions: it was just assumed the securitized debt was worth whatever value "the market" granted it. Since the focal point of market-oriented financiers is market value, little attention was paid to debtors' ability to pay; i.e., it was assumed the collateral was worth the loan.

Fourth, the securitized debts were sold internationally. In order for that to happen, financial institutions had to be globalized and freed from regulatory restrictions. European institutions were happy to oblige, in return for taking up positions in the United States previously closed to them. Japanese banks have bought some American banks. On the other hand, the Chinese were not enthusiastic about taking on American debts, and the Indians avoided it altogether. Thus, the present global financial crisis is most acute in those places which were friendliest with American financiers.

Fifth, Americans used much of the loaned money to buy products, particularly products manufactured in China, Japan and other parts of Asia. In the process outlined above, credit card balances, auto loans and other personal debt was usually and recurrently paid off by "refinancing" debtors' homes. Debtors could continue to spend as long as the value of their homes increased faster than their expenses. This spending was associated with an expansion of the monetary economy; i.e., the printing of money. This money was and is used to pay off the international debts resulting from an imbalance of trade. The Japanese, and later the Chinese, governments were willing to accept U.S. dollars in exchange for trade balances owed, because it put Asians to work. The result is that the Chinese and Japanese have received an immense amount of U.S. currency based on pumped-up American property values. Both Japan and China have used their dollars to buy U.S. Treasury bonds - presumably a more secure equity because it is backed by the full faith and credit of the U.S. government - so that the United States government now depends on those countries to finance its operations. (That is, everything depends on the credibility of the United States government.)

To the extent that private debts are backed by the government, those debts become Sovereign debt. Thus, the end result of financial processes which have gone on for decades in America is that the full faith and credit of the United States government is on the line. The entire system relies on everyone's belief in the competence and responsibility of the United States government. It is a very rare occasion when a government goes bankrupt, but it does happen. The United States is teeter-tottering on the brink. Great Britain was in this position after both World Wars. The Soviet Union's economic system fell apart during the War in Afghanistan, and then, overnight, the USSR disintegrated. It is an ironic coincidence that the United States is deeply involved in wars in Iraq and Afghanistan, just when its international financial position is deteriorating and faith in the Administration which sponsored those wars is at an all-time low.

Rewind

Americans have gotten themselves into a terrible mess which is going to take time and self-discipline to clean up.

Much of the rest of the world can go about its business and do well without major participation by the United States. For example, the growth rate of the Chinese economy is expected to slow from over 12% to around 9% due to the American recession. (Coincidentally, the Chinese government has been trying to slow the breakneck growth rate to less than 10%.) India is impacted by events in the United States only indirectly, as that country is far more involved with Europe, Russia and China than the United States. Australia and Brazil are increasingly more involved with China than the United States. On the other hand, the Japanese are in trouble on account of America, because it has been Japanese policy to rely on the United States as its "retirement account" since World War II. But even the Japanese hedged their bets in the last decade: they now have greater investments in China than the United States.

The Great Depression of the 1930s hit the United States harder and longer than other industrialized countries. For most Europeans, the depression was over by 1935. In some places such as France, the economic disaster ended by 1933. Meanwhile, Americans did not experience a complete recovery until the advent of World War II in 1939. The American economy stuttered during the 1930s, improving for short periods only to fall back into depression. The difference in performance between the United States and, particularly, Germany after 1935 convinced many Americans that Hitler had imposed the right policies. Admiration of Hitler's resurgent Germany made it very difficult for the United States to enter the war on the British side. It was only the Japanese attack on Pearl Harbor (Dec. 7, 1941) and Hitler's gratuitous declaration of war on the United States that allowed Pres. Roosevelt to ask for a declaration of war against the Axis powers.

I think two lessons to be learned from the foregoing extracts from 20^th century History are:

1. European and Asian governments act rapidly and forcibly to end economic depression,

and

2. the world will go its way without Americans, despite Americans believing they are indispensable.

In the present global economic crisis, Americans will probably drag their feet, thus worsening the crisis and slowing recovery. This is illustrated in recent news headlines, that Europeans are proposing a global conference to amend or replace the 1945 Bretton Woods Agreement which was originally written (dictated?) by the United States as the groundwork of the present international financial system. Among other things, European governments want to eliminate U.S. style executive compensation and tone down the Wild West rules that prevail in America. Generally, it appears Europeans are more interested in stable, predictable systems than obtaining the highest possible rewards (as in  million dollar jackpot slots). The Bandit Administration headed by George W. Bush - as usual - opposed such a conference, especially since it is proposed by non-Americans. (Are the colonials rebelling?) However, after things got worse, George W. Bush relented and called for an international conference, but his call has been poorly received. While there will be an international conference on the financial system in November 2008, it is clear that George W. Bush has little influence or credibility abroad. Probably for that reason, in an unprecedented appointment, the U.S. President-elect (presumably Barack Obama) will be represented in the conference. (December 2008 Postscript: The conference was held, but Obama did not attend. Little was accomplished, except to set another meeting for Spring, 2009, after the new Obama Administration is seated.)

What the United States Must Do

As seen from abroad, the United States has lorded it over others since Word War II. While I am sure most Europeans and Asians were thankful when the war ended in the defeat of the cruel Axis powers, they came to resent the victorious Soviet Union and United States. Hatred of the Soviet Union was particularly widespread, not so much for its Marxist-Leninist ideology as for its brutal Imperialism. The Russians were determined to punish their enemies and take revenge for their horrific wartime losses. The United States came to be disliked, if not hated, because it introduced or imposed American culture and business practices in a way that was hard to resist. Young people, especially, were seduced by rock-n-roll and Hollywood tinsel, forsaking tradition for fads as young people everywhere have always been wont to do. Anti-Americanism is stronger in Europe and the Middle East than in Asia just because American values seem close to the values of other Western cultures, so are more threatening because they are more acceptable. The Japanese are pro-American in a peculiar way: Japanese people have for the most part ignored American culture and values except so far as required to sell Japanese products to American consumers. While young Japanese people try out American ways for a time, most of them relapse into traditional roles by the time they are 30. (Japanese people are by training, inclination and history very conservative.) Generally, Americans are best liked when they are kept at arm's distance even while money changes hands.

So, the first thing the United States must do is find ways of becoming more acceptable to foreigners. The United States was once seen as a model of democracy and an example for others in its international relations. The Cold War destroyed that positive attitude, which was based in part on the widespread illusion of American altruism. Since it is very unlikely the story-book character of the United States - the fiction of the good white Knight - is recoverable, other things must be done to improve America's foreign relations. Since it is American intrusiveness that is most hated, changes in this area would most benefit the United States. Apart from ending the Conquest of Iraq, the most important thing the U.S. government can do is reaffirm its commitment to the United Nations and build a position as a collaborator with, not dictator to, other nations. This requires major attitudinal and policy changes: the United States must see itself as one nation among many, not as the exception to the rules.

In order to meet present and forthcoming challenges, the United States must change its culture. There is little chance the desired results can be achieved without in-depth, long term planning and dedicated enforcement of socially desirable standards and goals. Such programs will not work in the context of a society dominated by selfish, unruly people, such as the romanticized Wild West. Americans will have to accept the social good as good enough. In a community-oriented society, competition, self-interest and inequality must be regulated to prevent fracturing and then other disharmonies which undermine survival. The oldest, long running civilizations of Europe and Asia have already made this transition.

In the romanticized Wild West, every man was a hero creating a new civilization from nothing. Somehow, the lawless cattle rustlers and gunslingers were always defeated by a Sheriff or Marshall with occasional help from the townspeople. The townspeople somehow remained the quirky, independent characters they always were. In the real Western Frontier - of which there are many surviving examples within a day's driving distance of my home - either the townspeople united to drive out the crooks or the place became a ghost town. Small towns are often insufferably narrow-minded and conformist. It is important not to ruffle feathers too much. People like me have to keep their radical thoughts to themselves, or express them in non-threatening ways. There are a lot of inconveniences to living in a provincial town, but the hopeless alternative is living in wastelands ("badlands" in  the movies).

One of the important things happening at this time is the changing of the Americas from the "New World" to a settled, old world. North and South America are becoming just like the places the settlers had left behind. There is nothing alarming or unusual about this, first of all because the New World's settlers are essentially the same human beings as those in the Old World. In most cases, the migrants brought the Old World with them as demonstrated in enclaves of most cities: Little Italy, Chinatown, Germantown, Japan town,  the Latin Quarter, etc. Quebec is dedicated to maintaining French influence in North America. Many Hispanic Americans desire restoration of their Aztec and Mayan heritages, even though they are living examples (by descent) of the Spanish Conquest of Central and South America. Despite the persistence of old ways, new cultures have arisen out of juxtapositions of the old in a few places, especially in places like California which are founded on entirely novel industries. The media businesses of Los Angeles ("Hollywood") have combined with the technical expertise of San Francisco ("Silicon Valley") to create a new culture oriented toward present pleasures and future aggrandizement. This culture, as yet definitively named, is in the process of shedding traditions while creating new ones. It will probably take several more generations for this new culture to become institutionalized.

Secondly, the United States will probably have to accede to becoming a lesser force in  financial markets. The U.S. dollar has been the world's reserve currency since Bretton Woods. Most likely, within the next decade, international financial institutions will shift to a market basket "currency;" i.e., the reserve currency will become an index of the dollar, euro, yen, yuan, rupee and other currencies. Such indexes already exist. They are practical on account of the global information networks implemented during the last decade. (In this sense, the massive "wasted" investments in IT during the1990s have allowed major changes in economic arrangements.)

Shifting to an international currency basket will have two major short term effects on the United States. First, it will make imported oil far more expensive since the present dollar-denominated oil market subsidizes U.S. imports. The demands of other countries will become relatively more important, and the power of oil exporters (OPEC) will be increased. This will force a choice on the United States: either become more energy efficient or suffer a long, possibly fatal, economic depression. The way to avoid this undesirable outcome is simple enough: the United States must undertake a crash program of decoupling from oil.

Third, for environmental reasons, the United States will be forced to rely on renewable energy resources instead of mined oil, coal and natural gas within the next 25-50 years. This means the United States will have to build and rebuild entire industries to use solar, wind, hydro and nuclear power. This also means the way American cities are built and organized will have to change in favor of smaller, centralized cities. The day of urban sprawl is over. Because global warming will change sea levels and local climates, millions of people and entire cities will have to be moved to sustainable locations. Basically, what the United States will have to do is remake its portion of North America, an enormous task that will keep everyone employed for generations. (It took a century to settle and begin to civilize the West.) The alternative is devastation and ruin.

One of the most critical, but seldom mentioned, problems facing the United States and portions of Mexico and Canada is a shortage of potable water. A related problem is the accumulation of salts in agricultural areas due to the extensive use of fertilizers and insufficient water to cleanse the soil. In order to supply sufficient water for urban and agricultural uses, major efforts need to be launched to conserve and recycle water. Desalination needs to be implemented on an industrial scale, but that process will require huge amounts of electric power which can only be obtained from solar or nuclear generators. The biological need for clean water together with climate change will drive relocation of cities and agriculture, as well as forcibly change methods of obtaining energy.

If the United States vigorously pursues solutions to the climate change and water shortage problems, it could retain its status in the world's leadership for several generations. If it does not, the United States must inevitably become poorer and weaker. Even a superficial study of History will show that Nature does not approve and encourage any nation for long. Every human society that arises faces the certain prospect of extinction sooner or later, so survival is always an uphill struggle. The nations which last longest use their good fortune to advantage and do not exceed their resources. Unfortunately, all of the world's advanced economies depend on importing non-renewable resources, especially oil, to sustain them. Either the United States and everyone else will live within their means, or soon enough they will not live at all.

Finally, together with all of the above, the United States government must regulate its population and economy so as to make a peaceful transition from the "American century" to whatever the 21^st century happens to be.

What Americans Must Do

While most of the needed changes must apply in the whole society to do any good, there are things individuals can do. Changing a society is a cyclical, interactive process: what individuals do influences others, and what others do influences individuals. While it is very unlikely that one person can change society, the person who organizes and motivates others can create a fad or movement which does effect change. Of course, there is an interesting pitfall in bringing about social change: while a small number of promoters can start it when conditions are right, the direction and eventual outcome of social change is almost never predictable. How each individual receives and interprets social instruction is extremely variable, as reflected in the fact that individuals have to be taught to conform in most things. (That is why it is economical for manufacturers to install robots on  production lines.) So, while human productions (artifacts) are similar at given places and times, they also have distinguishing individual features, some of which give rise to a new generation of artifacts. Most of the time, the details of how a fad starts, stops or evolves into another are simply lost in the welter of events, so no one knows the outcome.

Each person must make a concerted effort to change one's lifestyle. People are loath to do this, as one's habits are already the result of a long selection process. Making changes is just as hard as quitting smoking or other addictions, which is why social directions and interactions are important. Nonetheless, at bottom, it is individual behavior that counts because what a society does is just the integrated total (including feedback) of individual acts.

Probably the most difficult change is getting off credit (borrowing) which, at its core, is shucking the idea that people can have whatever they want right now. American consumerism is based on this last idea. Madison Avenue encourages it in millions of messages broadcast everyday. Producers pay to advertise their products in the most tempting and seductive ways possible. Madison Avenue hires herds of people to figure out which lure the producers' targets cannot resist, consequently advertising is especially aimed at those least able to resist it: the young and the old. There are endless products which supposedly grant or restore health, beauty and vitality. Sales of those products depend on continued advertising to sustain belief in their efficacy. (If they do not work for me, it must be something about me because they work for all those other people.) Knowing this, individuals should not listen to the ads; instead, it is important to find another, truthful source of information. (Information has no intrinsic truth value, so advertising must be evaluated to determine its truthfulness.)

For most people, houses are places to live, not investments. As homeowners surely know, home maintenance is a constant struggle. Things are always wearing out, breaking or not working properly. Those facts are just a local instance of the Law of Entropy: things tend to a state of disorder. That being so, it is truly unreasonable to expect houses to increase in value; instead, they are just a cost of living. People fly in the face of the facts when they treat their homes as investments: what value would a house have other than as a home? In order to retain its value, the house has to be maintained anyway.

When a house is considered as an investment - the underlying assumption of home equity and refinancing scams - its value is determined by money alone; i.e., the house becomes a monetary phenomenon. For those who need to live somewhere (most of us, as it happens), that kind of valuation is very risky because it assumes houses are dispensable. For rental property owners and speculators (the Rentier class), the monetary value of property is everything because it represents wealth and brings income to the owners who do not have to live there. That is, there are at least two quite different ways of looking at residential property, one of which treats property as a commercial enterprise and the other as a personal necessity and benefit (like food, drink and clothes). In the last decade, people may have adopted the commercial attitude because they desperately want to be rich or because they see themselves, their lives, as commodities. In either case, the social determination of value replaces a personal sense of value; i.e., people who live in, or as, an investment have become creatures of society, not self-determined individuals.

So, chasing after wealth and "shopping until you drop" are dangerous frivolities because they turn people into zombies, creatures who do not direct their own lives. The credit card and investment home are the new chains and shackles of indentured servants.

The cure for that condition is simple enough. Work at jobs that  you enjoy doing, that fit you. Live in places that are comfortable and "homey." Find out what pleases you, what you want, and ignore what society tells you to want. All of us have to compromise: because we are social animals, we must adjust to the needs and wants of others. But adjusting to others does not require us to turn into ciphers. In fact, society is stronger when it is a mix of people who make their own, peculiar choices.

I think the most important thing Americans can do, as individuals, is think things through independently while making an honest, personal accommodation with their neighbors and associates. What we should want is not the Great Society, but a Good Society. In the end, a life worth living is one's most precious asset.

Posted 10/23/2008               Last update: 12/02/2008

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