How did the US become the world's biggest debtor?

Mar 24, 2015

- By Bill Bonner

Bill Bonner
Gualfin, End of the Road, Argentina

Dear Diary,

Yesterday, US stocks were flat. Gold moved up a little.

So today, we continue...mouth wide open...staggered by the shabby immensity of it...and a tear forming in the corner of our eye. Yes, we are looking at how the US money, economy and government have changed over the last 45 years. And it is not very pretty.

We already know about the money. So let's move on.

The economy of 1971 was still an economy with three key charms:

It was healthy: industry made things and sold them at a profit.

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It was fair: financial progress was fairly evenly distributed.

It was solvent: the US was a creditor nation, not a debtor.

Today, in the US, people still say they believe in free markets, democracy, and financial rectitude. But only as platitudes and hypocrises.

America's industries have largely been shipped out to China and other lower cost producers. That didn't 'just happen.' It was financed by feds' easy money. American consumers borrowed in order to spend more than they could afford. WalMart met their desires, if not their needs, with 'Everyday Low Prices' courtesy of the hard working Chinese. This sent dollars to China, which used the money to create even more factories. Pity the American who tried to compete. He was overwhelmed. Not only did he have to pay wages 10 times higher than the Chinese, he also had to bow to regulations - tax, environment, labor, diverse bullying - that left him hobbled and fettered.

There's not much left of America's industrial economy. Seventy percent of the GDP is now consumption, while manufacturing has fallen from 24% in 1971 to 12%.

The de-industrialization of the US is blamed for the slipping wages of low and middle-class Americans. So, is immigration from Latin America. And robots. "It's not unfair," say the people who caused it. "It's just the free market." But the free market was one of the first casualties of the post-1971 period. In a free market, people earn money by working, or by saving their money and investing it. The new money needed neither work nor saving. You just had to know the right people. The central bank created 'money" out of nothing, and lent it to its banking cartel members and their crony industries. The money then transformed itself as miraculously as water into wine. For the privileged, it was free, or almost free, money. For consumers, it became a heavy burden of debt. For example, the housing industry - and its lenders - got trillions in credit from the feds' easy money policies. This money was lent to consumers, who ended up with dollars of debt that had been used to buy over-priced housing.

And when the housing debt was shown to be unpayable, in 2008, the feds moved fast, not to help the poor homeowners, but to bail out Wall Street...the most reckless risk takers in housing finance...and the most incompetent of the big automakers, too.

Wages rise as workers become more productive. Productivity requires investment, which comes from capital investment, which savings make possible. But gradually, in the '80s and '90s, the savings rate fell. Why bother to save real money when you can get phony money from the Fed? Besides, interest rates fell, too, making saving money less and less attractive.

Less real savings resulted in less real investment in the factories, warehouses, new companies and new technologies that produce real 'breadwinner' jobs. Why bother taking the risk of starting a new line of business when you can just borrow from the Fed and buy your own shares? Why bother to start a new, small business at all, when all the credit goes to entrenched big ones?

For most working class people, real earnings peaked in the mid-'70s. Since then it has been downhill. The rich get richer, but the poor and middle classes go further into debt to try to keep up appearances.

Since the crisis of '08, nearly 100% of the financial gains - such as they were - went to the top 10% of the population. This was no accident either. The Fed put its credit machine to work for rich - heating up asset prices while leaving the real economy cold.

And now the US is the world's biggest debtor. Not in terms of GDP; that title goes to Japan. But it is still a distinction worth noting; the US went from the world's biggest credit to its biggest debtor in little more than a single generation.

What to make of it? A natural process of history? A fluke?

We don't think so. It is the result of public policy decisions made by the hacks, hangers on, and has beens who gain the most from them. There were no popular debates. There were no votes. The post-1971 dollar, Zero Interest Rate Policy, Counter-cyclical stimulus, Quantitative easing -- or more broadly, government's spending and regulation decisions over the last 45 years -- were made by small groups of people...and that they favored those same small groups of people and their cronies...was more than a coincidence.

This will be more obvious when we take up Part III of this inquiry - on our new form of government . Our old friend Jim Davidson calls it a "pimpocracy." At least street walkers give value for money, he says. The pimps don't. They take advantage of the prostitutes and the johns too.

For today, we merely note that cheap money has done what it always undermines an economy and the society that hosts it. It can even happen when you have a commodity-based (gold) money system. The Roman Empire was an early victim. Augustus seized the silver mines of Spain and put slaves to work, night and day, digging out the precious metal. This was hardly the cause of the 'Decline and Fall of the Roman Empire." But it was a stepping stone along the way. The trick was repeated in the 16th century. Gold came back from the New World in such quantities that the Spaniards found they could live off the easy money. They found a mountain of silver at Potosi, and put slaves to work - night and day - mining it. Prices rose sharply throughout all of Europe. And when the easy money came to an end, the Spanish economy collapsed...and didn't recover until Spain joined the European Union in 1986.

More to come...

Bill Bonner is the President & Founder of Agora Inc, an international publisher of financial and special interest books and newsletters.

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