Eight Things You Need to Know About the Shaky U.S. Economy
by Larry Saltzman and Linda Buzzell-Saltzman
On the macro level, we may be concerned about the negative impacts of globalization and so-called “free trade.” We may also be uncomfortable with the kind of planet-destroying capitalism that has sprung up under the giant international corporations. But there is more – much more – we need to understand about how economics is impacting our personal and collective lives and the health of our planet.
The economic consequences of globalization and late stage hyper-capitalism are reaching a crisis point that will be felt by most of us in the next few years “up close and personal” – probably even before we feel the immediate results of peak oil or global warming. Even if we are doing everything we can to live a low-impact, sustainable lifestyle, we need to understand what’s happening in the U.S. and world economies.
The Big Picture
We have lived most of our lives in a growth economy, and our society has been getting rich off the consumption of cheap fossil fuel. That “free ride” up to Peak is just about over and a number of disturbing economic trends are appearing that spell big trouble for oil-dependent economies and for the average U.S. citizen. The era of endless “economic growth” is coming to an end. The Energy Descent economy has begun.
So let’s examine eight worrisome economic trends. They are interconnected and when stirred together create a nasty brew…
1. Private Debt
"Annual income twenty pounds, annual expenditure nineteen and six, result happiness. Annual income twenty pounds, annual expenditure twenty pounds ought and six, result misery." – Charles Dickens, “David Copperfield”
America has forgotten Charles Dickens’ famous words of wisdom. We are collectively trying to buy happiness by going on the greatest credit binge in the history of humanity.
Here are a few of the shocking facts:
The Federal Reserve reports that Americans collectively owe $2,164 trillion, of which $804 billion is credit-card or other revolving debt. By 2001, Americans were paying $50 billion a year in finance charges to service their debt and that number has since climbed higher. The average American owes $8,562 on their credit card(s) and will need ten years to pay that amount off at the minimum payment. At that point, they will have paid out over $16,000 or almost double the amount they originally borrowed.
These levels of personal debt are virtually enslaving Americans, forcing many of us to work harder and harder, for longer hours, at often meaningless corporate jobs in order to pay off our obligations. And bankruptcy laws have recently been hardened to make it even more difficult to escape the impact of serious personal debt, often caused by huge medical bills as well as our own intemperance.
2. The Real Estate Bubble
Thanks to low interest rates, Americans have been on a real estate binge, buying any property at any imaginable price in the belief that real estate will appreciate forever. Interest-only loans, variable interest loans, balloon payments and low- or no-down payments have become the norm in the usually conservative world of home loans. The result is that as interest rates continue their inevitable ride upwards, many recent home buyers are going to see their home payments rise beyond their ability to pay. And as home prices begin to fall, and perhaps collapse, some home owners are going to experience negative amortization. That means that every month, instead of the equity on your home increasing, it will decrease and the total amount you owe will increase.
As real estate prices soften, which is already happening on the South Coast and elsewhere, foreclosures may rise as people go “upside down” on their loans, owing more on their mortgage than their properties are currently worth. Banks, stuck with unwanted properties, may begin to sell them at fire-sale prices, further depressing the price of real estate.
Any fall in real estate values is especially worrisome as some Americans have been using their home equity as a kind of last-resort personal bank, taking out second mortgages to pay off credit card balances, do home remodels, buy cars or take expensive vacations. Others have used their equity to pay monthly or extraordinary bills, masking the fact that it’s getting harder and harder for many Americans to retain a middle class lifestyle in the era of outsourced jobs and flattened incomes.
3. Our Savings Rate
The citizens of the United States can now boast having a negative savings rate. We remove more money every month from our collective piggy banks than we put in. The average baby boomer will retire with a net worth of $23,000. The parents of baby boomers left their children far better off than the baby boomers are going to leave their children. Perhaps we can partly blame boomers’ extravagance, consumerism and sense of entitlement. But we also have to look at changes in the U.S. economy that have allowed those at the top to earn more and more while paying less and less taxes, while the middle and working classes are being squeezed with job losses and the export of much of our manufacturing.
4. The Bond Bubble
This is a little more obscure problem, but worth understanding. As interest rates have been increasing on short term debt, the interest rates on long term debt have remained stubbornly low -- probably because of foreign investment in U.S. Treasuries and the fact that U.S. currency has been until recently the preferred currency to accept payment in. Recently a 90-day Treasury bill paid approximately the same interest rate as a ten-year bond. As interest rates keep rising, the value of bonds may plummet, causing many people to lose a lot of money in supposedly safe and secure U.S. Treasury Bonds.
Bonds are confusing to most people. High interest rates mean that the price of existing lower-yielding bonds falls. Why buy an existing bond paying 5% when you can get a new bond paying 6%? Much of this U.S. debt is of course held by foreign countries, most notably China. If foreign countries ever panic and begin dumping U.S. Treasuries, we will see interest rates rise dramatically and we will be very lucky to escape a full blown depression.
5. Government Debt
Whatever happened to old fashioned conservative fiscal responsibility? Thanks to George Bush and his imbecilic economic policies, we have now become the nation with both the largest personal debt and the largest government debt. Our military policies are hugely expensive as well as immoral and stupid. And as the effects of Peak Oil and Energy Descent begin to be felt, we will have little wealth available to invest in new solutions.
If we are lucky enough to elect one of the hapless Democratic candidates for President and this person turns out to be a Franklin Roosevelt disguised as a centrist Democrat, he or she will have none of the maneuvering room, that Roosevelt had, to get us out of the economic depression that we may face in the not too distant future. Roosevelt was able to keep the much smaller federal budget of that era in balance while spending on programs to jump start the economy. Today’s Bush economics will leave a great deal of our federal budget servicing the debt the fiscally irresponsible Republicans have run up.
6. Inflation and Higher Prices
By lowering interest rates to practically zero to encourage false and unsustainable economic growth, the Federal Reserve under recently-retired Chairman Alan Greenspan set the stage for inflationary pressure in the economy. Virtually non-existent interest rates not only fueled the current real estate bubble but made borrowing in general too cheap and easy. This conned millions of Americans into a borrowing binge that has left us deep in debt to the banking industry. If we cannot pay those debts, the banks themselves may also falter.
7. Loss of True Productivity
What does America actually produce these days? Our financial services sector is now far larger than our manufacturing base. In other words, the business of America is moving money around. And what happens to this truly unproductive economy when the shaky American dollar falters or exorbitant fossil fuel prices make it impossible to import what we need?
8. The Shaky U.S. Dollar
A currency has to be based on something of true value. But the U.S. dollar is increasingly dependent on its status as the world’s default currency rather than the underlying worth of America’s productivity. So what would happen if oil producers, for example, decide they’d rather be paid in euros than dollars?
Add it all up…
So what do these eight interconnected trends add up to? An unsustainable situation, a house of cards waiting for a tiny breeze – another spike in oil prices caused by a natural or terrorist supply glitch, a sneeze from our major creditor: China, a major oil producer requesting payment in euros, another bad hurricane season – to start the downward cascade.
How You Can Survive and Thrive in Spite of these Trends
The solutions at the individual level are clear.
1. Stay out of debt, and if you are in debt get out ASAP. If you don’t pay your credit cards off in full every month, get rid of them and use a debit card.
Even if you aren’t in credit-card debt, consider getting rid of your cards anyway as a political act. Credit cards have tricked and deluded Americans into feeling richer than we actually are. They start arriving in the mail while we are in college so we get hooked young. Then these plastic handcuffs enslave many of us, creating an illusion of wealth and disguising the fact that our salaries have stagnated and fallen. This has benefited politicians and banks, not ordinary people. Credit cards lock us into the world of materialism, consumerism and greed and keep us like hamsters in a treadmill, running to keep up, going nowhere. If you think of debt as an addiction, the credit card companies are the pushers.
2. Find work that has a future in an energy descent economy in which “economic growth” is a relic of the pre-Peak past.
3. Learn to take your pleasures from simple and sustainable living. Live at or below your means and save for the future, even if you can sock away only a few bucks a month. Let friends, family and spiritual pursuits replace consumerism and greed. The Voluntary Simplicity movement has done a great job of showing us how to enjoy a rich and satisfying lifestyle without excessive materialism. And Permaculture offers the practical tools for sustainable living that increase our real prosperity and the true wealth of the earth rather than squandering it on the impossible nightmare of endless economic growth at the cost of environmental and social destruction. m
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