America's triple-A credit rating may be in danger, says Standard and
Poor's.
If the country has to bail out Fannie Mae and Freddie Mac through a
prolonged recession, it could cost the nation's treasury as much as
10% of GDP.
We're beginning to see the whole world financial situation as a U.S.
problem. There is a lot going on...but the big story seems to be about
America (and Britain, to the extent it shared the Anglo-Saxon economic
model)...its money, its wealth and its place in the world.
The plot is simple enough. After an extremely successful run, the
United States is struggling to maintain its edge. Its people are
deeply in debt. Its currency is being sold off. Its labor...its
capital markets...and its technological lead are all being challenged
by faster, more youthful competitors.
Like any Greek tragedy, the hero is a victim of his own hubris. He
thought he could steal the gods' fire and get away with it.
Americans thought they could do things that have always been off-
limits to mortals. They believed they could operate a financial system
based entirely on paper money, for example. They believed they could
spend money they hadn't earned - and live off credit forever. They
believed the myths of the Efficient Market Hypothesis and Benign
Capitalism...the Black Scholes Option Pricing Model and the Great
Moderation...that Deficits Don't Matter and the War on Terror does.
And now...the whole society is being marked down - by inflation,
deflation and a trillion-dollar, unwinnable war.
On the surface, it is merely another chapter in the world's financial
history. George Soros elaborates:
"The current financial crisis was precipitated by a bubble in the US
housing market. In some ways it resembles other crises that have
occurred since the end of the second world war at intervals ranging
from four to 10 years. However, there is a profound difference: the
current crisis marks the end of an era of credit expansion based on
the dollar as the international reserve currency. The periodic crises
were part of a larger boom-bust process. The current crisis is the
culmination of a super-boom that has lasted for more than 60 years."
Those last 60 years were the 60 glorious years in which the United
States was on top of the world. It's the period roughly corresponding
to Baby Boomers' lives. Born after WWII...growing up in the
'60s...taking command in the '80s...and now looking forward to
retirement. Was there any better time to be alive? Was there any
better place to be alive in than the United States of America? Its
money was the world's best. Its economy was the most dynamic and
productive. And its people were the world's richest. Full employment.
Full stomachs. Free love and open bars...what more could you ask for?
Yesterday, the dollar hit another record low against oil. It now takes
$111 to buy a barrel of oil...and, in Atlanta, $3.36 to buy a gallon
of gasoline.
"That's nothing," said our driver in Manchester yesterday. "Here, the
price of gas is nearly $10 a gallon. Of course, you don't see any big
American gas guzzlers either."
Our driver showed us the instrument panel of his 2-year-old Skoda. It
revealed an average fuel consumption of 56 mpg.
The car was comfortable and reasonably large. It didn't seem to lack
power.
"Here in England, we couldn't afford to drive your cars," he
concluded.
Our guess is that Americans can't afford to drive American cars
either. The latest numbers show consumer spending rising - but only
because consumers are forced to spend more on fuel. And experts
believe that the summer of '08 will be the first in which Americans
actually drive less - forced off the road by high fuel prices.
Most people think of inflation as affecting prices they pay for bread
and magazines. But inflation has a bigger agenda; it adjusts the
wealth of whole societies.
The problem for Americans - and many others in the developed world -
is that their wages are too high. They are used to earning a lot more
money than their counterparts in, say, China or Vietnam. But why? Only
because they have more capital and more skills, so they can produce
more. But that situation is changing fast. Capital is piling up in
China, Russia, Brazil and India - and elsewhere. As a result - wages
in those places are soaring. Nestle just agreed to a 16% wage increase
for its St. Petersburg, Russia, staff. In China, urban wages rose
18.7% in 2006. Ten percent annual increases in India are said to be
the average.
In the United States, the last real, hourly wage increases came in the
1970s. Since then, adjusted for inflation, wages have been flat. But
we Baby Boomers scarcely noticed. Because we were entering our peak
earning years, our assets (stocks, then houses) were rising in value,
and the expanding credit cycle left us with more money to spend.
But now, as Soros points out, that credit cycle has turned against us.
The super boom is over. Our houses are going down. And the value of
our labor and our stocks - which have held fairly steady - are being
marked down by inflation. We are not becoming a Third World
country...but we are becoming a poorer one...with a labor force that
is less and less overpriced each year. Seems like a good time to
retire. But forget the Winnebago - with gasoline at $3.36 a gallon,
who can afford to cruise around on the wide-open spaces?
"Inflating is immoral in a sense because it steals," Ron Paul said to
us in an interview for I.O.U.S.A. "It steals value if you double the
money supply and your prices go up twice as much...it's an invisible
hidden tax. But the real immorality here is that some people pay
higher prices then others. So if you're in the middle class, or
especially low middle income, your prices might be going up fifteen
percent a year. Somebody on Wall Street working leverage buyouts
doesn't have to worry about the rising cost of living. This to me is a
immoral act, that is prohibited by the Constitution, and the outcome
is always tragic."
Could it be downhill from here on out - to the end of our lives?
Maybe...
Bill Bonner
The Dayly Reckoning
|
