"David Roche, president of Independent Strategy, an economic consultancy in London, notes that throughout most of this decade "the world economy has been used to using $4 to $5 of credit for every $1 of GDP growth." Even if this "profligate use of capital is halved," Roche argues, "it still means credit expansion of 10% to 15% is needed to achieve real growth of 2% to 3%." The problem: credit, far from expanding, is still contracting around the world — despite governments' efforts to salvage the financial system." Bill Powell, "The Global Economy's Big Fear Becomes Real: Deflation" Friday, Nov. 21, 2008 Time online008 Time online.
Hmm. 4 or 5 to 1 seems profligate to me. But what do I know? I am not an economist in the area of national and international finance and fiscal policy. Still it strikes us economics laypersons as over-stretching things more than a wee bit. You could build quite a house of cards using this ratio of real goods produced and services exchanged to money minted and credited.
The thing I'd like to know is: Did it seem profligate to those who supposedly know about these things? Or was it just part of the big gamble, the game of chicken to see which huge conglomerate of investor capital would blink or fold first. The Shootist meets Wall Street. Or was it mostly a fantastical "noble experiment," a decade of experimentation in advanced capitalism: going in this direction this far to see what might really happen? Is this what risk taking and capitalist experimentation is about in a free-market economy? Is this what innovation and entrepreneurialism is about when unleashed in the otherwise conservative sector of mortgage finance, banking and insurance? If you can't stand the risk get out of the economy?
The professionals call what's happening now "de-leveraging." Credit decompression. Probably no fast way to do it without 'killing the diver' —aka, the whole damn economy — no way to surface that fast from this deep water debt.
Who was it that said in the early or mid years of the Bush Administration that the US government was showing our states, cities, and citizens, and the world at-large, a really poor example by running up its absurd debt, with year after year of deficit spending? Cheney of course said "Deficits don't matter." But others were warning of this problem of constructing an "economic surge" almost entirely on over-leveraged GDP. (The war hurt but was only a minor factor of the run up) Of course deficits have mattered all along. They helped set the tone and give a green light to the financial world. It said: it is okay to have a field day leveraging everything to the hilt. Which then became the smart thing to do, then eventually, the necessary thing to do to stay competitive with those others doing so. That is how capitalism as a market of competition actually works. Competition drives everyone in the direction of doing the what the other guy is doing to squeeze out just a little advantage over you; because customers are not used to (anymore at least) discounting these differences. They want the best deal, regardless. So consumers are of course to blame too.
Hard to blame Bush the President, in personal terms. He does not strike me as a guy who knows enough about any of this. Many of us have been criticizing his Administration for years, recognizing him as a figurehead mainly for the three-way combo that put him into office: neo-cons on the foreign policy front; Christianists on the social right; and corporatists on Wall Street in cahoots with Phil Gramm and other strong deregulators—the bought and paid-for Senators and Congressmen. Bush has been their patsy. The wealthiest, "the haves and the have mores" by his own words —and he only appeared to be joking— "are my base."
In the end, policy smarts, policy and philosophical leanings and instincts do matter in a President. They trump the criterion Rove used to hoodwink the voters in 2000: which candidate would you rather have beer with? Bush as owner of the Texas Rangers would make a fine tailgate buddy if you like the type and that scene. As President...
It is not clear that Gore knew economics that much better than Bush, but he was inclined to leverage the surplus: to shore up social security, for instance, work down the debt. Bush wanted to "give the money we've taken from hard working Americans back to them" forgetting that it was already spent, or at least allocated money. Or maybe to give him some credit. He knew that. He also knew he had a secret plan to gut Social Security anyway, so the money would not be needed for that. He also was convinced of this mindless, truly vicious meme that tax cutting actually stimulates the economy over the longer haul — that we can grow the economy out of the deficit spending. This mirage of supply-side economics is diehard, man. It's like the terminator, we just cannot kill it. It keeps coming back with its air of wisdom.
Still. We cannot let ourselves off the hook. I blame Boomers too. We were never raised to be disciplined about money. Of course it was folks in the generation and a half generation older than us who authored many of these policies but we sure went along with them. It seems boorish these days to even be speaking of a possible depression ... after 40 to 50 years of having our parents wag their finger in our faces to tell us about it, to scold us for not having had that and WWII to toughen us up.
What? You want us in another world war and a depression to build our character, to bring out the best in us? Looks like we may get our chance to be the next greatest generation after all. Probably not. We are like Prince Charles, waiting in the wings too long for the crown or the forge of greatness to come our way. Our children will inherit the debt for the long haul and live through the years of the de-leveraging economy. It will build their character and deliver the lessons in economic life we never got. We got everything but...