The Unraveling?

Our masters are having problems these days, particularly in the United States. Engaged in disastrous, unwinnable wars in Iraq and Afghanistan, with an economy that verges on collapse, a leadership with no legitimacy and an opposition that won't oppose, the country just sinks deeper into the muck. The US model of political economy has outlived its usefulness. Caught in the dilemma of a paradigm that is moribund but unwilling to change to a sustainable model they, our Dear Leaders, are following Dylan Thomas' advice to "not go gentle into that good night." Change will never come from the top; they will fight to the last drops of our blood to maintain their power. History shows that our masters care not much for us. Consider the following statistics.

Year	CPI1	GDP/cap.2	Consumer Debt3	Debt/cap.
1960	88.7	13,847	60 B	330
1970	116.3	18395	131.5 B	645
1980	246.8	22716	351.9 B	1550
1990	391.4	28493	808.2 B	3249
2000	515.8	34788	1,722.4 B	5939
2004	565.7	36627	2,204.1 B	7600

1- CPI base year 1967=100 2- Per capita GDP in constant year 2000 dollars 3- Consumer debt does not include mortgages, merely cars, tv's, vacations, latte grandes etc. and are in "current, nominal" not yearly-adjusted "real" dollars.

The above figures could have been expanded through 2nd quarter of this year and recalculated for common base years but the trend is so huge that the meaning wouldn't change. From 1960 to 2000 the CPI increased by a factor of 5.8, GDP/cap. increased by a factor of 2.5, while debt increased by a factor of 28.7, and per capita debt increased by a factor of 18. Today,(non-mortgage) consumer debt is about $8000 for each and every one of us, even the tiniest newborn, and the National debt is an additional $30,000+ for each of us. So, if you are an intact family of four then:

Year	"Nominal" share GDP	Family consumer debt	Debt % of income
1970	202601	25801	12.7
2000	139152	23756	17.2
2004	146508	30400	20.7

1- These are 1970 dollars.

If we tack on the National Debt (using 2004 as a baseline) then that works out to 84.7% of "nominal" family income and added to current consumer debt that totals more than 105% of your family's share of GDP. This not only doesn't include housing costs, it also doesn't fill your gas tank in the morning or your belly at lunch. And while debt must be paid out of income not all GDP is dispersed as income and most of us (nearly all, in fact) never get "our" share of this national income. Since these days debt is commonly paid through new debt this digs our hole deeper each year. Financial counselors and book authors are famous, and rather trite, in preaching us to live within our means but living on borrowed money is the norm for all, including governments, banks and corporations. Debt's a "funny" thing. Consider this from Financial History of the United States by P. Studenski and H. Krouss ©1952:

Who owns the debt is much more important than its size, for if the debt were divided among the citizens in proportion to their tax liability, each individual would be paying to himself the interest on his bonds and the whole debt would lose all meaning and could be canceled. On the other hand, once debt is distributed in different proportions from taxes, it involves a burden on taxpayers for the benefit of bondholders.

The above quotation describes national debt but in a large sense the same people who own Treasury bonds also own corporate bonds and municipal bonds and consumer and mortgage debts as well. We are beholden to a class of rentiers and these parasites have bought the best government they can afford. Not to get too far ahead but we basically live in a deflationary era where productivity is so high that production growth outstrips market growth, commodity prices fall, and with many decades of the assault on labor, ordinary workers can't afford to buy so our masters advance us credit to keep the production line moving and sales growing and, hey!, they make money on the back end too through interest. Thus rises debt and our further impoverishment with each passing year.

The Financial Times wrote recently that corporate profits are at their highest level in more than half a century and that last year those profits totalled $1.35 trillion pre-tax and that companies retained $460 billion rather than disburse them through dividends. Some of these retained earnings have gone to buy back stock to prop up exchange prices and a lot of it has been invested in financial instruments, some being in those types currently in the news as they crash and burn around us. Back during the dot.com boom there was the book Dow at 36,000 or some such name. Most who heard of it (this writer included) were astounded and wondered if stock prices could go so high and the forecast was dismissed as unrealistic if not silly. Upon further thought, however, what would it mean if the index did balloon that high? Recently, an analyst named Henry Liu wrote in the Asia Times that at the end of 1994 the total dollar value of all US stocks was $5.3 trillion and at the end of 2006 that same value had ballooned to $35 trillion. Anyone old and literate enough to read a newspaper knows that the real economy didn't grow more than 600% over those 12 years. We don't have 6 times the wealth or jobs or cars or even computers. What happened was asset inflation; stock prices lost their tether to reality and today have little relationship to underlying real value. And just as millions are losing their homes through foreclosure so too the reckoning for the economy and the country is coming due. Not only the degenerate gambler doubling down to get back the bookie's stake has to pay the piper; at some point reality crunches us all.

The other day Fed chairman Bernanke cut the discount rate to increase liquidity to forestall the collapse of mortgage lenders and other financial companies. Ensuing days produced paeans to Bernanke's acumen as he cut his academic teeth on the Great Depression and the lack of liquidity that brought the economy to a (virtual) halt. Problem is, today's world is different. First, in the 20's money was tied to gold; thus, the dollar more or less moved in lockstep with commodities. Today we have fiat money, constantly inflated since WWII days and particularly since 1973 all through continual injections of liquidity. Think of continuous borrowing to pay off old borrowing: if your long-shot doesn't come through you're screwed. Today money is debt and that debt was created through constant injections of liquidity into the system, with worse money chasing bad money. This Fed move can only delay, not avoid, the day of judgment. Today it is almost a truism that everything is connected to everything else. So, let's unravel these threads and see if they all lead to the same source, if all roads lead to Rome.