26 March 2008

Spend, spend, spend

Surely we can't have Americans spending responsibly
March 25, 2008 CBC News

More frightening news about the economy here this week.

Housing prices are down nearly 10 per cent over the year for the first time since the Great Depression.

Consumer confidence is sagging and spending is flat. The stone fortresses of Wall Street are shaking. Some are cracking.

So completely has the economy eclipsed other concerns here in the U.S. that the 4,000th military death in Iraq and the new spasm of violence there have been drowned out in a national fit of anxiety over when the pain here will end.

You can hear the collective cry: When can we all go back to buying lots of stuff without worrying about how to pay for it?

For non-Americans, whose houses are generally in better order, it may be tempting to smile, ant-like, at the big self-pitying grasshopper. But we should all share his fear.

The rest of the developed world orbits the American economy, utterly dependent on it. Let's not pretend otherwise. The only logical hope for the rest of us is that the U.S. keeps behaving like a 13-year-old with a credit card.

Canadians, Europeans and Asians of good sense should join together and lead the cheer: Get out there, America, and shop. God love you. Borrow if you have to. Borrow even more if you can get away with it. Just keep spending and ignore the debt monstrosity that slouches down the pathway toward you, maw gaping, hands grasping.

Figure out some way to redefine the debt. Or pass it on to another generation. That has worked so far.

Because someday, Americans are going to have to do one of two things: Start paying their bills, or just walk away from them. And we should all dread either of those eventualities, especially Canadians, who sell more to the United States than anyone else. If anyone has a vested interest in voracious American consumerism, it is us.

Compound borrowing
Living within your means would seem to be a universal wisdom. Not here.

"If we do that," says Pete Morici, an outspoken professor of economics at the University of Maryland, "if we pay off our bills, we're going to consume much less than we produce. When that happens, the global economy will go into a severe recession."

Nobody wants that.

Still, if Americans had more collective fiscal sense, they would look at their aggregate consumer debt — $2.5 trillion, not including mortgages — and they would hold their credit cards over candles. They would get rid of the expensive behemoths parked in the driveway and enter into a long, sober, luxury-free period of financial detox.

They would then tell their government to stop borrowing unimaginable sums from Chinese and Middle East investors. They would try to live in their houses and enjoy them for a few years, instead of treating them like financial milking machines.

But none of this is likely to happen, thank goodness. Because Americans are addicted to the opium of leverage. They love to buy, usually without much down payment or any down payment at all and then, as a market frenzy inflates the value of the thing they have bought to nosebleed levels, siphon off the artificial wealth and spend it anew.

That siphoning requires copious amounts of borrowing, which banks here happily enable as long as the value of the underlying collateral — the house, or the stock portfolio — keeps on expanding.

Banks bundle up the loans and sell them as securities to rich foreigners, and the U.S. spending-go-round just goes merrily on its way.

Bubble bath
When the U.S. is in full-spending mode, its revelers are making us all rich, loading up on Canadian wood, oil and beef, on Japanese electronics, European clothes and cars, and the endless boatloads of low-tech stuff disgorged from the mega-factories operating round the clock in China.

Everyone is happy. Never mind that the wealth fuelling it all may not be real.

But from time to time — and now is one of those times — the party slows down to catch its breath, and the rest of the world stares, frightened out of its wits, waiting for the music to start again.

That happened after the technology-stock bubble exploded at the end of the 1990s, and it is happening again now that the real estate bubble has also blown apart.

The mess from this latest explosion is everywhere to be seen: Economic statistics are abysmal and getting worse, and the news from Wall Street suggests the people running the economy these past seven years or so weren't behaving any more responsibly than consumers.

So, as this nation of rugged individualists tends to do when things get rough, everyone is turning to the government for help.

Bailouts 'r us
The first help came in the form of a financial stimulus package early this year — $145 billion worth of direct cash handouts across the board in the form of tax rebates.

The cheques, which should be issued in a few weeks, come with an implicit government plea: This money is for spending, not for debt repayment. Please, please spend it and spend it fast.

Then came the corporate welfare, as banks on Wall Street threatened to collapse under the weight of their own bad investment decisions.

The U.S. Federal Reserve stepped in to help save Bear Stearns, which had been rendered practically worthless by its bets on subprime loans, the ones made to so many people who obviously couldn't afford them, people who were even allowed to lie about their incomes if they were willing to pay a few more interest points.

The Fed also extended an unlimited line of what is called discount credit to securities firms, which have jumped in to the tune of about $600 billion.

More bailout help is likely on the way.

Standard & Poors, the big ratings agency, is considering cutting its ratings on Goldman Sachs and Lehman Brothers, two other big-name investment banks that feasted at the subprime trough.

"This is not over," Morici predicts. The collapse of Bear Stearns, he says, "was not the big event that defines the bottom."

There is always tomorrow
So far, the Bush administration has been far more tender in seeing to the ailments of Wall Street financiers than ordinary American mortgage-holders.

Both groups made greedy, stupid decisions. But at this point anyway, only the uber-class finds a government safety net spread under it. (That may change, however, as both Hillary Clinton and Barack Obama, the Democrats running for president, are advocating expensive buyouts for homeowners, too.)

Treasury Secretary Henry Paulson, says Morici, is "running around telling small people they have to pay their mortgages, or pay as much as possible, when the Fed is letting the big banks off scot free.This is the kind of stuff that caused the French Revolution. He should just thank his lucky stars that people don't work on farms and don't have access to pitchforks anymore."

The other issue here: As the cost of the bailouts rise, as they are bound to do, where will the money come from? More borrowing, naturally.

Washington's credit is still good and foreign investors probably can't stop bailing it out even if they wanted to. It's the old adage: Lend someone a thousand dollars, he has a problem. Lend someone a million, you have the problem.

Of course, if another bubble should suddenly arise, everything will be fine again, at least for a while.

Government revenues would re-inflate, personal wealth would balloon (on paper, anyway), and Americans would once again be able to spend their way out of trouble.

One prominent publication here recently suggested green technologies will be the ones to bubble up next. The time for that is certainly now.

With energy prices up, everybody suddenly wants a green house and a green car. Toyota's unprepossessing Prius is actually something of a status symbol now.

Whatever the bubble that provides the next leverage bonanza, though, we should all start cheering for Americans to find it as soon as possible.

By all means, America, party on. Please.

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