Friday, March 09, 2007

Crisis on the Horizon 2: Hyper-indebtedness

Read past the appearent health of the economy (as shaky as it is in March of 2007) and you find debt everywhere:
  • Federal Debt: The general fund is over 8 3/4 TRILLION dollars in the red and rising recklessly. We've got two entitlement programs which are actually running surpluses, but the main fund is so deeply in debt that it swamps them over.

    What's interesting is that when you control for inflation the debt of the United States Government has actually held stable between World War 2 and Reaganomics. That was through the Eisenhower Expressway Building, Vietnam, Watergate, OPEC's quadrupling of prices in 1973, and Iran in 1978.

    Not only that, but since then the only time the debt stablized or fell (yes, fell) was during Clinton's administration. Remember that? And once you forget the blue dress, you'll understand just how good we had it then.

    So...for the past twenty-six years or so, we've been spending ourselves into a feel-good emotion with no relation to reality. Deficit Spending, thanks to Reagan and Bush (with the surrender of the Congress to be sure, but they took their cue from the Presidents) and the Fundamentalist in love with Reagan/Bush/Bush and the Military Brass and the Super-Rich (who have benefited handsomely) and the Corporations.

    And what did we get for this spending? The belief that Government can only f*ck things up, safety nets wrecked and torn almost beyond saving, Corporate Welfare for companies willing to export their production to China, the Wal-Martization of Rural America, "public-private" as an adjective, the utter destruction of the public sphere in American Life and worship of the rich as our new "state" religion.
  • Consumer (Credit Card) Debt: Would you believe that for the past twenty months we (as American Consumers) owe more than we have saved?

    The last time that happened was in the Great Depression, when we had OFFICIAL unemployment rates of up to 25%. I'd be curious as to whether the measurements we used back then would give us the same level of unemployment as before.

    I remember this wonderful thing known as layaway. You'd make payments on an item you wanted to buy, and when you paid it off it was yours. No immediate gratification, no usurous levels of interest, no threats from lawers when you fell back on your payments. But hey...why worry about waiting when you can worry about making payments?

  • Housing Bubble (and Housing-based Debt): So now people have come to believe that buying a house is the same as gaining money for retirement. Never mind that wages have stayed steady or fallen for the lower 4/5ths of the population; housing prices have risen radically over the past ten years.

    What's really overheated the housing portion of this mix is that much of the loading was based on "adjustible rate mortgages" and "interest only mortgages" loans. It really appears that people were expecting the economy to go into overdrive and take them literally over the top within a few years. When that didn't happen (or they lost their jobs -- a increasingly frequent happening in this post-911 economy), the arms ratcheted upwards...and people are losing their homes.

    It's actually getting so bad that many mortgaging companies are beginning to die off in one way or another. One wonders what will happen when the government decides to re-regulate this. I know there's been a bunch of ugly loans, but can you imagine the problem when the government starts putting requirements on reporting earnings in the form of "you must report only money recieved, NOT FULL PAYMENTS REPORTED.

    You know how this housing bubble started, do you? It started when they started tearing down those oversized buildings known as "the projects" in the inner cities. With nothing being added to replace the towers (outside of hyperexpensive rat-traps for the rich and decadent), the former residents of these ghettos (poor, usually black (yes, it's fact), used to violence as a way of life, death and getting things, and deeply into the drug culture) scattered into other poorer neighborhoods, where they immediately raised the violence ante in what were once poor but relatively peaceful inner suburbs. That, of course, put pressure on all suburbs, leading to the housing bubble in the Suburbs and the new Downtowns.

  • Student Loans: Since when did we come to believe that an educated populace was a luxury that had to be paid for by those seeking that education?

    For the past forty years, state and federal funding for colleges and universities has dropped, both in relation to inflation and often in relation to the year before. To fill in the blanks, tuition prices have risen at rates well above inflation. Add into that the spiraling inflation of textbooks (with the practice of a "new edition" ever three years despite nothing being added on) and the now ever-shaky job market, and you have a situation where the less-than-heavily-endowed student (whether through sports or a fat trust fund) must take out loans and gamble on making a success of him/herself.

    Consider what you get nowadays when you take out a "student loan:" a loan which you will have to repay, whether you're able to or not. While you can get some very good rates (I have one at 3.26%) and "liberal" payment postponement plans, there will be no way for you to cancel it. If you get sick, the principle increases. If you're unemployed for a long time, the principle increases. If you lose your house due to a disaster, you'll have to put your student loan ahead of your house and car. You owe and retire, your student loan gets to raid your retirement and Social Security.

    I understand why they did this in the first place -- student loans used to be done only to people trying to be doctors, lawyers or something else that would earn them millions; all the while attending Ivy League schools. But now, with many people taking out the loans because they feel they have to (especially the poor), lots of people are making school into a high-stakes gamble hoping they'll strike it rich enough to pay back what they owe in a job market which has pretty much turned on anything not sporting a CXO title.

  • Retirement Indebtedness: While much of this is a Governmental problem (thanks to Supreme Court judgements that tied Governments' hands while freeing Corporations to act as they please in this issue), this reaches to many companies and corporations who once gave their retirees promises of a good retirement and are coming to regret this decision.

    And this has nothing to do with underfunding, at least on the governmental level: many cities, townships, school districts, counties and states are now staring at retirement responsibilities which threaten to eat up the whole of their budgets in the future. Because the Supreme Court has ruled that governmental entities can't really do much to reduce their upcoming responsibilities, many of these places (especially cities which have historically had wealthy workers but have since lost the industries that made these workers wealthy) will find their residents ready to kill because they're stuck with roads that need fixing, pipes that need relaying, buildings that need fixing and staffs that need filling; but their budgets will be forced to go wholly towards former workers who retired years before.

    Corporations have done stuff to protect themselves from the above threat; but whether it will be enough is another question. Health outlays threaten to throw all calculations out the window, making even the healthiest corporation with a pension responsibility in threat of bankruptcy.
Not a pretty story, is it?

Now admittedly this debt would make sense if it were investments; say like the spending for the Interstate System. Indeed, if one were to look at an inflation-corrected graph of the National Debt, you'd find that the debt stayed steady during much of that time. That was because much of the debt was investment that was returned over the years, with the Inflation working as wealth redistribution (during low-inflation times the money went to the poor, with high-inflation times it went to the rich). So how does this debt measure up?
  • Too many governments have recently been gutted of all but the basic forms of taxation power. While a little fiscal responsibility never hurt anyone, there's something wrong with a government that creates lotteries so that they can steal money from the schools in order to fund tax write-off and boat docks for the rich.
  • Consumer Credit works best in limited areas. Housing (see below), Automobiles and certain items need credit, other areas can be done through layaway (you pick something, you pay it off, the store keeps it for you, when you're paid off you get it. Requires discipline to pay off for stuff you don't have yet). They can help during emergencies (injury, broken refridgerator, death of grampa) and credit cards can be used to reduce your need of on-hand cash. However, credit cards are almost always used for purchases, so rarely can they be called investments in the future (and if anyone tells you to charge like crazy for this reason, RUN!)

  • The housing bubble, while an investment in buildings, depends too much on people earning money. Not only that, but at some point people won't bite at the excessively expensive houses built or existing, no matter how many ghetto refugees you throw at them.

  • Student Loans would make sense if there were the possibility for steady employment that paid well and allowed the student loanees to pay it back (assuming reasonable decisions; one cannot expect a philosophy major to get a PhD on Student Loans as there would be an extremely low chance for payback). However the job market and job environments make this almost a crap-shoot.

  • Retirement Indebtedness has no relation to future investments, and whomever owes it has to fund it from their income.
Again, not a nice picture. Like we're paying for the past instead of investing for the future (even with student loans; when there are no jobs or you spend buckets of time looking, you're not reaping the benefits). And paying off the past is always harder than investing for the future, as catchup is harder than moving forward.

1 comment:

chairman ralph said...

I've told you this before, but we might as well put it down in cold type...people laughed at AMERICATHON, and its central premise: John Ritter as President Chet Roosevelt, shilling for a telethon to bail the U.S. out of its debt sinkhole.

"Ridiculous," people said at the time. "No way this could ever happen."

Well, then along came the likes of Reagan and Bush, and we know what happened -- although this present character's regime makes the red ink racked up at that time look piddling. The only thing missing is the film's opening scene, in which people walk, or bike, on the now-empty highways (since cars no longer have enough gas to run).

When I read this post, I thought, "Boy, there's so many ways we could make these things work better" -- as you note, the major problem is this corporate mentality that allows the country to be drained dry (with the costs passed on to us).

Additionally, things have slipped to where nothing in America can be created without something green attached to it. Student loans have always struck me as a classic example: essentially, they amount to a subsidy for the few companies that have been fortunate enough lock up those precious borrowing privileges.

From another standpoint, the biggest damage is to opportunities that people might pursue, without big debt burdens.

One example is all the so-called "helping professions," as they call them (nurses, social workers and care aides, to name a few). They pay pretty poorly to begin with, and if you're saddled with large debts, pursuing those careers is typically not on the radar screen.

Wny not do what Australia does -- tie student loans to a percentage of future earnings? Thus, if you have a lower-paying job, your burden is lower (and vice versa).

I've also read of states in the Plains pursuing a similar program, in which medical scool grads get lower interest rates; in return, they sign pledges to serve in an area for X number of years.

Rural areas get doctors, the loans get repaid, and the grads get more income to put back into the communities they agree to serve.

Makes sense, right? But two things will have to happen before these little scenarios get more common: either, a bubble burst that makes the '30s look like a kiddie picnic -- or retiring more of these "so-called people's representatives," my dad used to say, "who take all this money so they can 'vote their conscience.'" Enough said on that one.