Last week, we were explaining how the empire and the credit bubble depend on each other. To make a long story short, after the 70s there was not enough juice in the US economy to pay for both a welfare state at home and an imperial juggernaut all over the world.
The solution? Credit. Borrowing by the private sector created some $33trn in excess (above the traditional level of debt/GDP) economic activity. It provided sales, spending, jobs, corporate profits (heavily concentrated in the financial sector) and investment profits. All of these things gave the voters the feeling that they were making progress. And they gave the government tax revenues.
Debt grew. We’ve been over the numbers so often that we don’t need to repeat them. More importantly, the economy – and the empire – became more and more dependent on debt just to continue doing business as usual. Debt no longer provided a big boost, it was necessary just to stay in the same place. Take it away, the stock market crashes, and the economy goes into recession or depression. That was what happened in 08-09. The private sector stopped taking on debt. And all hell broke loose.
The background: the Bush II administration had gone hog-wild on spending money. It did so largely because it was the most overtly pro-empire administration ever. Covertly, it was also the most pro-welfare state administration in history. Guns and butter – the Bush team liked them both. It never met a country in which it didn’t want to meddle, never found a trap into which it didn’t want to put its big foot and never saw a spending bill it wanted to veto. Under cover of ‘security’ spending it blundered into the biggest deficits in history.
After the 9/11 attacks, serious budget discussions became clouded by imperial jingoism. ‘Security’ depended on a strong economy, which depended on continuing credit expansion. Then, and again after the crisis of 08-09, the credit expansion seemed in danger of coming to an end. But the Fed came to the rescue, its chiefs hailed as Scipios and Caesars. Both Alan Greenspan and Ben Bernanke got their mugs on the cover of Time magazine, as though they were conquering heroes, rather than nerdy economists with dubious theories. In 1999, Greenspan, along with Rubin and Larry Summers were called “The Committee to Save the World”. Bernanke was labelled ‘The Hero’ by The Atlantic magazine, and named Time’s ‘Person of the Year’ in 2009. Their real contributions? They helped Americans go further into debt,and thereby helped unproductive industries keep their grip on a large part of the nation’s resources.
And now, the feds exert more and more control over the way money is spent, and invested. The Economist reports:
EVER since Lehman Brothers went bankrupt in 2008 a common assumption has been that the crisis happened because the state surrendered control of finance to the market. The answer, it follows, must be more rules. The latest target is American housing, the source of the dodgy loans that brought down Lehman. Plans are afoot to set up a permanent public backstop to mortgage markets, with the government insuring 90% of losses in a crisis. Which might be comforting, except for two things. First, it is hard to see how entrenching state support will prevent excessive risk-taking. And, second, whatever was wrong with the American housing market, it was not lack of government: far from a free market, it was one of the most regulated industries in the world, funded by taxpayer subsidies and with lending decisions taken by the state.
[But…] The more the state protected the system, the more likely it was that people in it would take risks with impunity.
That danger was amply illustrated in 2007-08. Having pocketed the gains from state-underwritten risk-taking during the boom years, bankers presented the bill to taxpayers when the bubble went pop. Yet the lesson has not been learnt. Since 2008 there has been a mass of new rules, from America’s unwieldy Dodd-Frank law to transaction taxes in Europe. Some steps to boost banks’ capital and liquidity do make finance more self-reliant: America’s banks face a tough new leverage ratio. But overall the urge to regulate and protect leaves an industry that depends too heavily on state support.
Since investors know governments will usually bail out big financial firms, they let them borrow at lower rates than other businesses. America’s mortgage giants, Fannie Mae and Freddie Mac, used a $120 billion funding subsidy to line shareholders’ pockets for decades. The overall subsidy for banks is worth up to $110 billion in Britain and Japan, and $300 billion in the euro area, according to the IMF. At a total of $630 billion in the rich world, the distortion is bigger than Sweden’s GDP—and more than the net profits of the 1,000 biggest banks.
In many cases the rationale for the rules and the rescues has been to protect ordinary investors from the evils of finance. Yet the overall effect is to add ever more layers of state padding and distort risk-taking.
Predictably, the return on investment falls, and growth slows. As it does, current output is less able to keep up with debt and current spending. The need for more credit increases.
But now we hear that the federal budget situation is improving. Tax receipts are up. Expenditures are down. Alas, this is a very temporary phenomenon. Congressional Budget Office estimates show the federal deficit bottoming out this year and next – still over $500bn! – and then turning up again.
This is good news for the empire, and for the credit-dependent economy.
Debt can’t grow unless someone is fool enough to borrow. The US government will become the borrower of last resort, and will continue to borrow to fund the empire, and its zombie industries.
Until they all blow up.