In case you are wondering, the title is optimistic. A pessimistic scenario, which I will share below, would have future years that are progressively worse. I expect the value of assets — stocks, bonds, real estate — to fall farther before bottoming out, because I do not believe their current value could have fully anticipated and “priced in” an economic disaster that (outside Michigan) is really just getting started. What has happened, and will happen, is enough to make one look behind the economic artifice that has built up over the decades and ask more fundamental questions, such as “what is real wealth.” In response to a query on the subject on another discussion board, a man from Virginia put it this way: real wealth “is an asset for you that isn’t a liability for someone else, whose value to you does not rely on other people’s opinions.” What a brilliant statement, perhaps even more so than he intended, because in the current environment it seems to eliminate just about every possible place one could put their savings.
Americans, it has been widely acknowledged for years by those paying attention (and has now become obvious to everyone else), have been living beyond their means, individually and (though government debts and deferred obligations) collectively. It part this tendency reflects the growing sense of entitlement of the Generations Greed, but in part it is a response to growing income inequality. As I previously described in more detail here, individual businesses may seek to maximize profits (or, in the current economic environment, claim fake profits while maximizing executive pay) by paying workers less, but in the end business a whole has to turn around and sell goods and services to those same workers. This is a “contradiction” first described by Karl Marx. In the past thirty years the contradiction has been solved, and social opposition to growing income inequality muted, by having most Americans save less for their future, and then go deeper and deeper into debt, first to wealthier Americans and then to people overseas. Growing debts have allowed average Americans to consume more and more while earning less and less.
The result has been the creation of a series of “assets” now held by mutual funds, pension funds, and sovereign wealth funds around the world — securitized mortgages, credit card debts, auto debts, government debts etc. These “assets” are liabilities, enormous life-crushing liabilities, for American consumers (that is all we are after all) and, in the case of government debts, taxpayers. For those “assets” to be worth anything in reality, these consumers must, in the future (and starting now) work while seeing their standard of living fall, and pay taxes while seeing their public services and benefits degrade. The holders of those assets, thinking they have accumulated “wealth,” have in fact accumulated promises that other people will agree to be much worse off in the future while surrendering the products of their future labor.
Realizing that the promises might not be kept, and there might be a passive revolt of the serfs through non-payment, savers — both in the U.S. and around the world — have suddenly become unwilling to place their money in anything but U.S. federal government obligations. That is the essence of the credit crunch that started in August 2007 and intensified last fall. The idea is that the federal government, using force and violence if necessary, has the power to compel those debts to be repaid with taxes, no matter what, so U.S. Treasury obligations, if nothing else, will be paid.
Most of the world’s debt instruments are not real wealth because of what they were used for — short term consumption. In the past, people only borrowed money for things that would either earn or save them money in the long run. Substitute the mortgage on a modest house that one could afford for the rent they could afford and eventually one ends up ahead rather than further behind. Borrow an affordable sum to further one’s education, if that education is sold for a reasonable price relative to one’s future earnings (rather than inflated to allow professors to teach just two classes per term and non-teaching staff to soar), and one also comes out ahead. If the government borrows money to invest in brand new useful physical infrastructure assets (while also maintaining existing assets without borrowing) then tomorrow’s taxpayers are better off despite the debt. At one time people had to come up with a good use for the money in order to get a second mortgage, and pay a reasonable percent of the balance on any credit card debts each month. At one time governments tried to balance their budgets, and had to pass referenda to incur debts payable by future taxpayers. But not in the past 20 to 25 years or so.
In the current era, at best, money has been borrowed for to purchase excessive McMansions and gas guzzling motor vehicles, fund the mere maintenance of existing public infrastructure, and buy overpriced higher education. At worst it has been borrowed for restaurant meals, cruises, overpriced health care of limited value, early retirement for public employees, and tax cuts. Or, in some cases, necessary groceries.
What some believe is a foreign trade problem is, in fact, a debt for consumption problem. Without debt for consumption, the only way Americans could afford to buy goods made in China (creating jobs for the Chinese) is if Chinese in turn bought goods or services made in the United States (creating jobs for Americans). Otherwise, where would the get the money to buy the Chinese goods? Actually, Americans could sell to some third country from whom the Chinese bought, but the point is that in the long run and perhaps even the short run, without greater and greater debts for consumption, trade would have to be balanced and beneficial to all parties.
Is the United States the richest country in the world? Wealth is not the same thing as income. Income is what you get to have right now. Wealth is assets what you are going to receive, over and above what you are obligated to pay, in the future, over and above the value created by your future work. By that measure, the United States isn’t the wealthiest country in the world, it is the poorest. Poor in the same way that Donald Trump was poor when, in an oft repeated story from the early 1990s, he stepped out of a limousine, was asked for a dollar by a homeless man, and remarked that the homeless man was richer than he was –because he neither hand nor owed anything, while Trump at the time owed much more than he had. We are the Donald Trump nation, impoverished by the Generations Greed. Those who didn’t follow the pattern individually are stuck with the results of government fiscal decisions collectively.
So virtually all the paper assets out there — stocks, bonds, investments with Madoff — are liabilities for someone else who has already blown the money, and thus not real wealth. So is the Social Security “trust fund.” There is a conceivable scenario, one the federal government is promising a huge share of our future work earnings (and that of our children and grandchildren) to prevent, in which these paper assets lose all or most of their value. Indeed, one could argue that all of the bailouts have been an attempt to preserve the future income of those who hold those assets, mostly older Americans (who hold most U.S. wealth after a lifetime of accumulating what turned out to be liabilities for other people) and savers in other countries. And that younger and poorer Americans would be better off with an economic collapse and reboot in which everyone could only expect to consume the value of their future work going forward, a situation clearly not to the benefit of the rich (in promises of the benefits of other people’s future work) or retired. Who has been bailed out thus far? The highest paid white collar industry in the country (Wall Street) and the highest paid blue collar industry in the country (automobile manufacturing), with the workers with the richest non-wage benefits in the country (retired government workers) next in line. And then the money runs out.
Given the mess we are in, it is said, “cash is king.” But the mess we are in is so bad that among those who agree with me among many other things there is a debate as to “what is cash?”
In one camp are those who believe that the green pieces of paper the federal government prints up, and the electrons used to represent them (provided those electrons convey a right to immediate or near immediate exchange for green pieces of paper), are the thing to have. With the credit collapse, partisans of cash assert, lots of money is dying and going to money heaven, thus making the remaining money more scarce and thus more valuable relative to what it can buy (ie. stuff). This is the deflation argument. In the other camp, is gold that is the only reliable store of value, relative to the stuff people need to buy in order to get by, because governments can and will print more money (or create more electrons), reducing the value of what everyone has.
Here is where the second half of Virginia Dan’s definition of real wealth comes in. Both cash and gold are excluded because their value depends on other people’s opinions. Neither is, nor will create in the future, goods and services that one can live on, unless one counts the fact that many people believe gold looks pretty and like to wear it. The past twelve months have seen wild swings in the theoretical value of various forms of cash and gold, both relative to each other and to many of the things they can buy. It is easy to imagine a situation in which, as opinions change, people are willing to exchange the results of their work for neither gold nor green pieces of paper nor their electronic equivalents, unless they get more and more of them.
Looks like those of us who lived below our means are saved are destined to be losers, no matter in what form the savings are held. I guess you can’t fight the social tsunami. So what does that leave as “real wealth?”
Unless the property rights system collapses, our home is real wealth, because it was purchased at a fair price relative to rent before the housing bubble and debts incurred to purchase it were reasonable. The wealth is the future right to live here for the just the cost of operating the home. On the other hand retired public employees have more rights to my home than I do, because they have an unlimited right to take an unlimited amount from it (in property taxes) to pay for them to receive goods and services (ie. pensions and retiree health care) from a relatively young age without offering anything in exchange. Their rights were supposed to be offset by other real assets accumulated in the past when they were working but, of course, they weren’t, so the retired and soon to retire public employees now have more rights to my home than I do instead.
My family and friends are assets. My ability to be happy while consuming less in goods and services than most of my peers is certainly an asset. Hell, the way things are going, I think I’d have to count my tendency to be overweight as an “ass”-et. It would take a very long time to starve me out.
What about the value of my future work? The good news is that I don’t suffer from the delusion that working for 20 or 25 years gives me the right to live in the manor to which I am accustomed for another 30 to 35 years. Although I am President Obama’s contemporary, therefore, I expect to have long years of work left, and to be approaching the mid-point of my career (or the start of whatever its second half will be) rather than the end. The nature of the work I do, however, is a cause for concern in an era when economic fundamentals come into question.
Past economic analysis divided the economy into the primary, secondary, and tertiary industries. The primary industries, such as agriculture, forestry, fishing, and mining, created goods direction from nature. The secondary industries, manufacturing, construction and utilities, converted those natural products into consumer products. The tertiary industries, such as wholesale and retail trade, distributed the products directly to consumers. The provision of direct services to consumers — cooking them meals, cutting their hair, curing their ills, teaching them something, entertaining them — might also be considered tertiary.
In recent years, however, more and more Americans — including me and many of the people I know — have come to work in a more ephemeral “quaternary” sector — providing services that indirectly, somehow lead to the production of other goods and services, and facilitating transactions of greater or less value. The very worth of work in the quaternary sector depends on the economic artifice that has built up over the years. It might better be known as social overhead. If trust in the system and various mediums of exchange collapses, those in the primary, secondary and tertiary sectors could theoretically still barter their work.
Will conduct land use, fiscal, regional economic or real estate analysis for food? Kind of puts a different spin on what a “real job” is, huh? Ideas have value, but only to those who can afford them, and even then only to the small minority able to tell the difference between actual ideas and a gift for (and drive for) self promotion. Thank God for all that early experience as a busboy, dishwasher and short order cook. Perhaps after age 50 I’ll follow the example of the 27-year-old Harvard grad and Wall Street executive who is now going to birthday parties and teaching children to make cupcakes. My wife and kids suggest putting my esoteric knowledge of the city to use as a pedicab driver for tourists.
When will our economy will come out of its tailspin? When the United States no longer has a current account deficit, and our governments no longer have budget deficits and are no longer deferring obligations (like pensions and deferred infrastructure maintenance) and advancing revenues (by borrowing against income streams such as one-third percent payroll taxes and spending all the money up front).
We got a brief taste of that in the early to mid-1990s, when during one year of the first Bush Administration our trade broke even, and that administration and the Clinton administration raised taxes and cut spending. Also, at the time interest rates were reasonable, not unreasonably low, and thus bonds had real value, and were not in a bubble. Other assets, stocks and houses (including the one I bought), were also reasonably priced, rather than in bubble. The result was a lower standard of living in the short run, but one that was on a sound foundation from which a future could have been built. Americans instead chose to borrow and party, collectively (leading to my increasing outrage at in particular state policies leading to my protest candidacy for state legislature) and individually (which since I was a non-participant I didn’t understand at the time).
If things go well, after a wrenching decline in our standard of living (relative to what people think they need because of their sense of entitlement) over the next year, the economy will once again find a solid foundation. And after a couple of years that are little or no better, move forward again. If President Obama is lucky, it might be “morning again in America” by 2012.
There are, however, darker scenarios, including a trade war worthy of Smoot-Hawley. And something else that a few America bashing foreign financial analysts and Mayor Bloomberg have pointed to — that at some point savers abroad will start to apply the same logic to U.S. Treasury obligations — they aren’t real assets because the U.S. can’t or won’t pay us back — that they have no applied to Americans in general, forcing the federal government to become the lender of last resort.
If that were to happen, suddenly, the federal government would be unable to borrow money or forced to accept at exorbitant and unaffordable rates, and would only be able to go on paying soldiers, hospitals and Social Security recipients if the Federal Reserve bought the debt and printed money (or electrons) to do so. The result would be (will be?) massive inflation, and the de facto default on all those assets that are liabilities for someone else rather than something that produces real income — by allowing them to be repaid with cash that is worth less and less and less. Long term bonds and debts would collapse in value. Short term Treasuries? Perhaps the federal government would enact legislation requiring mandatory rollovers at past rates rather than cashing in and refunding at a 100% interest rate.
So there you have what to look for — a return to balance, or a collapse in trade or the ability of the federal government to borrow. Government policies to perpetuate the imbalance, by having the federal government borrow money for people to blow, has been and well be popular with Generations Greed in the short run, but will only lead with more certainty to the disaster scenarios.