American dream, American
nightmare.
By Nick Louth
October 2008
It was in
August 2005, in the aftermath of Hurricane Katrina, that TV
viewers around the world first started to question whether
America was truly a great nation anymore.
Days after
the winds had subsided, footage showed the homeless, the
destitute and disabled gathered around the partly-flooded New
Orleans Superdome begging for water while armed National
Guardsman ignored them in their hunt for looters.
How can
this be?
Many asked
how it can be that the richest nation the world has ever seen,
which put man on the Moon, which has a standing military of 2.3m
troops and reservists, which created the microchip revolution,
and has for half a century dominated global commerce; how could
this country not bring bottled water to its weak and vulnerable
in their time of need?
These
shocking pictures brought a human face to the statistics that
have long baffled Europeans: that 56m Americans, 18% of the
population, have no access to affordable medical care, that life
expectancy, education and poverty in large swathes of the inner
cities and rural south are worse than in parts of central
America or the Balkans, yet alone long-embargoed Cuba.
The
invisible nation within
It is
almost as if within the USA, there is an underdeveloped country,
held within invisible borders, in areas where the comfortably
off do not go. This forgotten nation of tens of millions of
people, many black or Hispanic, some recent immigrants but most
not, live in a shadow that no light from Hollywood illuminates.
Their cheap labour underpins the economy’s competitiveness, yet
they are largely excluded from the growing wealth it has
produced.
Yet now
these are the people who have taken down the Masters of the
Universe, put out the lights in Manhattan investment banks, and
helped put Treasury Secretary Henry Paulson on his knees in the
corridors of Congress begging for help from Democrat leader
Nancy Pelosi to get his $700bn bank rescue package passed.
Because in
the past five years, these so-called Ninjas (No income, no jobs,
no assets) were offered the chance to buy a home and live the
American Dream, no money down. And hardly believing it was
possible, they took it.
A
trillion bucks? I’ll take it!
According
to a paper by Carmen Reinhart of the University of Maryland and
Kenneth Rogoff of Harvard, a trillion dollars in mortgage loans
was offered to the lowest-rated sub-prime borrowers in the last
few years. But the trillion-dollar dream was about to become a
nightmare.
The average
earnings of the poorest fifth of Americans were $19,178
(£10,700) in 2007, just 40% of the U.S. average, and the
majority subsist on welfare alone. Such crazy loans were only
possible because the companies offering them were acting on
commission, passing on the mortgage agreements to others who on
a wave of easy credit failed to check the quality of the loans
they were funding.
As we all
know, these loans have gone “toxic” but because they were
knitted by Wall Street wizards into intractably complex
mortgage-backed and asset-backed securities it is very hard to
put a value on them, even as they are unravelling within the
vaults of banks around the world.
A
seismic blow to the global financial system
This
seismic blow to the global financial industry has led to a wave
of bank failures, nationalisations, state-funded rescues and
even currency crises from Germany to Iceland, and from South
Korea right to the doors of the Capitol Building in Washington
itself.
However,
the reverberations go deeper still, because the financial
position of the United States itself is not so very much better
than the very sub-prime borrowers who were at the root of the
crisis.
Big
economy, but bigger debts
Certainly,
the U.S. has world-beating companies, vast manufacturing
industries, and a giant services sector, which produced a
national income (GDP) of $14 trillion last year. Yet it owes
almost five times that in government promises to its own
citizens in terms of education, healthcare and retirement-linked
benefits. That is $67 trillion, a figure that has ballooned from
$29 trillion in 2000.
"No goose was ever so golden as the US economy, but that doesn't
mean it's immortal," wrote Jim Grant, publisher of Grant’s
Interest Rate Monitor.
Even the
debt clock can’t keep up
While the
economy has grown around 5% a year over the last seven years,
government spending promises have grown 13% a year. Indeed, the
National Debt Clock in New York, which since 1989 has recorded
the amount owed by the state, in September ran out of digits to
keep track of it.
Government
debt is quite separate from the debts of American individuals
and companies. They have been splurging on Asian-made goods, but
the packed container ships traversing the Pacific to the U.S.
have been returning empty. Money has been pouring year after
year into the coffers of China, Japan and other Asian nations,
as well as the oil exporters of the Middle East. In 2007 the
U.S. ran up a balance of payments deficit of £739bn, 5% of its
GDP. It’s been doing so for year after year.
A
Himalaya of cash
These trade
creditors have in turn lent back this Himalaya of cash, $5.2
trillion since 2000. Much of it has gone to the U.S. government
in exchange for Treasury bills. The rest has been invested in
other dollar-denominated investments. This infusion helped fill
the budget gap, and for years stopped the dollar from undergoing
the necessary weakening to restore the American competitive
trading position.
This is
also the money that funded the easy credit which inflated the
U.S. housing bubble, and this is the borrowing which the U.S.
economy, even with all the bailouts planned by the government,
will struggle to service and repay.
Whether you
are a disabled single mother living in a trailer park in
Mississippi, or the world’s greatest economy, the basic strategy
for getting
rid of debt is the same. You spend less, you earn more, and use
the difference to work off the borrowing over an extended
period.
Tough
times now, tougher in future
For U.S.
consumers and employees this is already tough, and going to get
tougher. They have seen the value of their homes plummet, and
not all of them can afford their mortgages. They are already
spending less, driving less and have cut back on fresh
borrowing.
Many more
will lose their jobs. Their taxes are unlikely to fall, because
the government has its own debts to look after. For the same
reason future promises in Medicare, Medicaid and retirement
benefits may be broken. That’s also going to be true of the
occupational pension plans whose ultimate value depends on the
stock market.
Even if all
goes smoothly, it is going to take many years to get over this
binge. While Americans tighten their belts, China and other
Asian countries will continue to grow, albeit at a slower rate.
When western consumers falter in consumption, the burgeoning
middle classes in these emerging nations will step in, buoyed by
their own prudent savings.
This eclipsing
of American power will mean curtailed foreign policy ambitions
too. “What
we are witnessing today is how empires end,” lamented
right-wing commentator Pat Buchanan.
“The
Last Superpower is unable to defend its borders, protect its
currency, win its wars or balance its budget. Medicare and
Social Security are headed for the cliff with unfunded
liabilities in the tens of trillions of dollars,” he wrote last
month.
The most
important economy, for now...
The U.S.
economy is still going to be the most important in the world,
for years to come if not decades. But it will have to become
leaner, less dependent on borrowing both at home and abroad, and
more austere. Whether that’s just a recession or a 1930s-style
slump, no-one yet knows.
But we now
know one thing for certain. The myth of American invulnerability
has been well and truly broken. The homeless of New Orleans
already knew that. Now, after this financial maelstrom, the rest
of the world does too.
Get a
signed copy of Nick Louth’s gripping thriller ‘Bite’
http://www.ludensianbooks.com/bite/bite.htm
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