For those of you wondering how I can see stuff coming, all that is required is that you pay attention. One might have noticed, for example, Secretary of State Clinton imploring the Chinese government to keep buy U.S. Treasury bills, notes and bonds — in effect a poorer than average country lending money so one of the world’s richest countries can spend. I had predicted earlier that as a result of 25 years of deficits that don’t matter, the next U.S. President would end up begging for money around the world. This was followed, yesterday, by Chinese Premier Wen Jiabao admitting that he was worried about whether the $1 trillion China was already lent the United States will be paid back, and asking for “guarantees.” That is the lead story in the Financial Times today. Larry Summers, President Obama’s economic advisor, and several other administration officials released statements that the administration is committed to “long-term” fiscal stability in reply. Looks like the Republican “starve the beast” plan to destroy the government might succeed just in time.
Meaning younger generations can expect drastically higher tax rates, and perhaps will not receive benefits like Social Security and Medicare, so China can be paid back, but please keep sending money now so Generation Greed can continue to receive everything believes it is entitled to without paying for all of it. The kids will pay it back in the long run, guaranteed. Or is it?
The U.S. and China are locked into a relationship of destructive co-dependency because of the factor that has turned free trade from an asset into a liability: debt. Absent debt, if someone in country A wants to gain the benefit of a good or service produced by someone in country B, then the person in country A must in turn produce a good or service that someone in country B wants. Or, the person in country A can produce something for someone in country C, who produces something for someone in country B. Either way, as long as it all balances out, everyone comes out ahead, and free trade makes everyone better off.
Introduce debt, however, and everything changes. The average person in the United States received lots of things made by people in China (and oil out of the ground in Saudi Arabia) without contributing nearly as much in return by making promises to pay later, though debt. Americans kept borrowing and borrowing and borrowing, with credit cards, home equity lines of credit, student loans, auto leasing rather than buying, through tax cuts and spending increases and government debts at the federal, state and local level. So much private debt they could not and would not pay it back, leading to the credit collapse we now see. People in places like China, who sacrificed in the short run expecting to be well off in the long run, now realize they worked and saved for nothing.
The only U.S. institution they are now willing to lend to, therefore, is the federal government — because it can send IRS agents out backed by FBI agents with guns to force people to pay. And therefore the only U.S. institution with the money to keep the economy going, at least to an extent, is the federal government. So instead of individual Americans promising to be poor in the future while paying off debts so they can live it up today, you have older generations of Americans promising other people will be poorer in the future in exchange for them living it up today. The other people are younger generations of Americans. But will they be willing to pay vastly higher taxes, and have their Medicare and Social Security slashed, to pay back those debts? That’s what the Chinese are worried about. And they should be.
To understand why, let’s broaden the issue from paying back the federal debt to contributing to social institutions in general — families, businesses, cities, states, and the federal government. And to limit the number of typos, I’ll quote my platform from 2004 when I was running for state assembly, which benefited from an editor.
“Some people are grateful for what they have and try, over the course of their lives, to contribute more to others than they have received themselves. I am very grateful to my neighbors who have worked to build up our community, running soccer leagues, organizing the rehabilitation of the parks, working to improve the schools, providing services as volunteers in churches and other organizations, and taking care of their family members. I am also grateful for the many assets and institutions provided to us by prior generations, assets and institutions that contribute to our lives today. New York State politics, however, is dominated by those seeking to leave life with a ‘profit’ by imposing a loss on others. Quickly acclimated with and bored by whatever they have, made to feel envious and inadequate by television commercials selling what they don't, far too many people feel needy today. Our state capital is a place where people are focused on themselves.”
“If you are a net contributor to those with greater needs, you are a good person. If you are a net contributor to those with a greater sense of entitlement, and a greater willingness and ability to work the system, then you are a sucker. Our state politicians have become perpetual incumbents by pandering to the organized selfish, and telling them what they want to hear. As the un-politician, I would tell it like it is, and try to let the losers know who they are. In doing so, I would represent the responsible and considerate people of this community and this state, and would allow their voices, for once, to be heard. And I would work to ensure that their net contributions go to the needy, and to future generations, not to the greedy.”
I wrote that five years ago, and yes I can be taught! Note only has the state government been captured by those “with a greater sense of entitlement, and a greater willingness to work the system,” but virtually all social institutions have been. The more that considerate people are willing to contribute to keep social institutions going, therefore, the more others are going to suck out, until those institutions collapse anyway.
As important as those institutions are, therefore, considerate people have to stop being blackmailed into a worse and worse deal and prepare to live without them. In ethics ought implies can, and if there’s no way out, there is no obligation. Just look at the MTA, and the ugly, nasty, selfish little trolls up there in Albany joyfully playing their little ego games with the future of the region’s transportation system, and our future. Are they really so different from many people of their generation?
We are faced with the values of the richest generations in American history who, sadly, are likely to retain that designation for decades, perhaps indefinitely. Even in their most intimate social institution, the family, so many chose to get laid without the bother of a committed relationship, or get divorced when they believed that there was a better deal out there for themselves, to the detriment of their children. Given their personal lives, no wonder an even larger share saw broader institutions as cows to be milked to death, whether Wall Street executives making “heads I cash out tails the firm goes bankrupt” bets, or members of public employee unions seeking to retire ever earlier and never have to do anything for anyone else ever again.
It is for that reason that five years ago I identified the Democrats as the party that panders to selfishness by telling people they don’t have to meet personal responsibilities, and the Republicans as those who pander to selfishness by telling people they don’t have to meet social responsibilities. But here in New York they are happy to poach on each other’s turf.
And this is the country that Chinese peasants have worked 80 hours a week producing goods for, receiving $1 trillion in IOUs in return.
And now you hear calls for shared sacrifice and responsibility. But it is always younger generations and the future that are sacrificed, while those who cashed in refuse to take responsibility. See, for example, how all those deals that enriched pensions for those cashing in and moving out are always proposed to be followed by lower pay and benefits for future employees. The entitled not only expect a better deal, moreover, they also expect to avoid the indignity of being told they had a better deal, so they don’t feel bad about it. Do you hear any elected official saying that because group A has a deal that is too rich for us to be able to offer it to everyone, group B will have to contribute more or accept less? No. They say group B needs to sacrifice its fair share, and pretend group A already is.
Lots of people see the writing on the wall. An institutional collapse is inevitable, because those in power are psychologically incapable of reform and, given the manipulation and degradation of what used to be democracy, impossible to dislodge. And because those on the outside are too lazy and apathetic to do anything about it until the catastrophe has already occurred. So let’s get on with it.
I’d rather have the MTA bailout fail, have the MTA’s cash reserves drawn down, have the transportation system shut down for weeks and months with the permanent loss of a few hundred thousand jobs, than have yet another stopgap that will make things even worse in the future, but postpone the pain until the Kruegars of the world can take their pension and go to Florida. And I’d rather have the Chinese stop buying U.S. Treasuries right now, setting off Great Depression II, and forcing cuts in benefits for existing beneficiaries, and huge tax increases on those who gladly voted for those who believed that deficits do not matter, rather than face an even greater disaster in the future.
Let’s do a little thought experiment. The federal government has been flailing furiously and borrowing $trillions to prevent the economy from collapsing. By imagining what might have happened if it had stood by and allowed such a collapse to occur, one can figure out whose interests are being served.
If the government had allowed one financial institution after another to go bankrupt like a series of dominos, because all have huge obligations to each other every day, then the value of not only financial stocks but also financial bonds would have been wiped out. So would have deposits over $100,000, meaning virtually all businesses would be unable to make payroll and would go bankrupt, wiping out the value of most corporate stocks and bonds as well. The resulting loss of paper value would make insurance companies insolvent, and unable to pay claims and annuities. Pension funds would also lose all their value and go bankrupt, and would be unable to pay public employee pensions. With tax revenues collapsing, and the federal government unable to borrow, state and local governments would face a choice of paying their bonds and providing some kind of services, and would probably do the latter, wiping out the value of municipal bonds. With massive job losses and pay cuts, anyone with a significant mortgage or debt of any kind would be unable to pay, and lose ownership of their homes. Desperate to pay benefits of some kind, the federal government would have to print money, leading to massive inflation. Even federal debt, therefore, would be paid back in dollars that were worth half of less the original value of the bonds.
What would have occurred (and still might), in other words, is a financial neutron bomb that would wipe out almost all the value of paper assets and existing public and private institutions, but leave the people, land, buildings, machines, and infrastructure of the United States still standing. No longer would anyone have a piece of paper that gave them the right to take a share of someone else’s future work for their own benefit. And there we would stand, facing the need to create new institutions and mutual obligations or starve, in a situation which anyone’s future share would only be what they were willing and able to contribute to someone else in that future.
What sort of people would come out OK in such a situation? Younger people starting out with nothing (and having nothing to lose), with their whole lives ahead of them. Immigrants, who are used to coming here with nothing and building from scratch. Other people who are capable of being happy with less, and are happy to be more valuable to other people than they expect other people to be to them. And older people who had put their children and other people first in the past, so that those children and other people would be willing to care for them when they were in need in the future. The same sort of folks, in other words, that are suckers, losers and fools under today’s social arrangements.
Once you decide you don’t care about the future of the transit system, the city’s schools, the City and State of New York in general, even the United States, once you give up on Social Security and Medicare and expect to die a little younger and a little poorer, once you concede the parks are going to be deteriorated (except for Governor’s Island only accessible to the Municipal Arts Society class by private ferry), once you try to rethink and re-imagine life without these institutions and stop worrying about other people who can’t be helped through them, you’ll feel a whole lot better. Once you accept that you will paying drastically higher taxes, only because you would be imprisoned otherwise, and the money will not go to services or benefits, you’re less frustrated. Hopefully the stimulus package will allow my youngest child to get through her junior year of high school before the city’s schools collapse.
Meanwhile, everyone else is trying to keep the game going. But I’ve instructed my children, however, to expect to have to rebuild new social institutions out of the wreckage created by Generation Greed once they are gone. The existing institutions don’t belong to most of us; they’ve been captured by others. Let’s have some bankruptcies to wipe out the special deals, favors, and privileges, and start over. If it happens, I’ll feel more sympathy for the Chinese than for those who have been grabbing up in Albany all these years.