Free Fall

Great article in New York magazine, encapsulating some of the financial topics we hit from time to time -- the collapse of the derivative-bundling bookies, accelerating the subprime lending catastrophe; excessive debt consumerism; a plummeting dollar; and a world backing slowly away from our self-destructive tendencies, looking around nervously for a plan B.

Here's the (ahem) money quote:

Here’s why catastrophists see that as a major problem: About 25 percent of our government debt is held by foreign governments, with the major holders being Japan ($610.9 billion), China ($407.8 billion), the U.K. ($210.1 billion), and our friends in the Middle East, the oil-exporting countries ($123.8 billion). When the current Fed chairman, Ben Bernanke, cuts rates to soften the housing blow for Americans, he also weakens the dollar by making dollar-based investments less attractive. And when the dollar weakens, so, too, does the value of these gigantic positions held by the foreign governments. At some point, they’re no longer going to tolerate the losses we inflict on them by lowering rates, and if that happens and they start dumping dollars, watch out for the peso.

The bulls will tell you that foreign governments understand the American economy is the key to global economic health, and that they’ll suck it up and take it when we devalue their debt. To which Schiff offers another analogy. Imagine if five people were washed up on a desert island: four Asians and an American. In splitting up their duties, one Asian says he’ll fish; another will hunt, another will look for firewood, and another will cook. The American assigns himself the job of eating.

“The modern economist looks at this situation and says the American is key to the whole thing,” says Schiff. “Because without him to eat, the four Asians would be unemployed.” The alternative: Without the American, the Asians might eat a little more themselves and even spend some time building a boat. This is happening as we speak: With the rise of the Chinese consumer class, the local citizenry is now spending, and the country is no longer totally dependent on exports. Which means they’re no longer totally dependent on us.

Readers of the financial press are surely familiar with the buzzword of the moment, decoupling. It’s used to describe how U.S.-Europe and U.S.-Asian trade relationships are becoming less dependent at the same time as European-Asian ties are growing. Most Asian nations, including China, are seeing more rapid growth in exports to Europe than to the U.S. And the U.S. now accounts for a declining share of European exports. The bearish interpretation: that the longtime global embrace of the dollar is loosening.

I would add to all this that a prime symptom of the impending economic unease (if not malaise) is the sheer disparity of it all. The bulk of the benefits are accruing to the have-mores, while the rest of us scramble for the scraps. This is not to advocate for a redistributive overhaul, merely an observation of a historically fatal flaw in many societies. Much as they may try (and succeed to a certain extent), the 1% cannot entirely divorce themselves from the rest of society, without some consequences playing out somewhere along the line.

I don't necessarily buy that what's happening is unavoidable, nor as catastrophic as many are prophesying. It won't be pretty, and indeed is already getting ugly for many. We'll see how the Happy Birfday Jeebus shopping season goes. And as the article itself points out, it's a slow-motion train wreck, thus implying that there's still time to redirect some of the momentum and the consequences -- which naturally means to park it on the backs of the working class as much as possible, but it doesn't have to be that way, obviously.

And of course economic data is largely interpretive, so it behooves us to observe the contexts in which it's discussed. "Optimists", for example, talk up the Dow or the low unemployment rate, but fail to point out that the Dow is artificially inflated right now because of the devalued dollar and lowering interest rates. At some point (very soon) oil will hit $100 or so, which could price out average (comparatively) portfolio owners, leaving the boutique whales to whip out their dicks and get the price even higher. Or, everyone converts their oil holdings over to euros, and then we're royally screwed.

What's most galling is that everyone's lives and livelihoods are directly affected by what a bunch of bookies and percentage-point diddlers in Manhattan are doing. The "value" they are adding and cashing in on is phantom, ephemeral, supported only by an arcane system of international bond-holders. It's a Ponzi scheme, and they all know it, but the game is predicated on everyone clapping their hands and believing in fairies.



And when gravity finally kicks in, it won't be the numbskull bookies who bear the brunt of the impact. It never is.