Whenever a mainstream media person gets something right, I usually seize the opportunity to follow-up in the vain hope that whatever truth was broached might find a wider audience. Such was the case with Ambrose Evans-Pritchard's Deepening crisis traps America's have-nots. Evans-Pritchard writes for the UK newspaper the Telegraph, but we can console ourselves with the fact that he does quote some Americans.
There is a telling detail in the US retail chain store data for December. Stephen Lewis from Monument Securities points out that luxury outlets saw an 8.1% rise from a year ago, but discount stores catering to America’s poorer half rose just 1.2%.
Tiffany’s, Nordstrom, and Saks Fifth Avenue are booming. Sales of Cadillac cars have jumped 35%, while Porsche’s US sales are up 29%.
Cartier and Louis Vuitton have helped boost the luxury goods stock index by almost 50% since October. Yet Best Buy, Target, and Walmart have languished.
Such is the blighted fruit of Federal Reserve policy. The Fed no longer even denies that the purpose of its latest blast of bond purchases, or QE2, is to drive up Wall Street, perhaps because it has so signally failed to achieve its other purpose of driving down borrowing costs.
Yet surely Ben Bernanke’s `trickle down’ strategy risks corroding America’s ethic of solidarity long before it does much to help America’s poor.
Evans-Pritchard goes on to cite the food stamps numbers, tells us more and more Americans are relying on soup kitchens, briefly describes the latest horrendous jobs report, and so on. But then he loses his grip, and starts talking about militia movements in the United States.
It is no surprise that America’s armed dissident movement has resurfaced. For a glimpse into this sub-culture, read Time Magazine’s “Locked and Loaded: The Secret World of Extreme Militias”
Time’s reporters went underground with the 300-strong `Ohio Defence Force’, an eclectic posse of citizens who spend weekends with M16 assault rifles and an M60 machine gun training to defend their constitutional rights by guerrilla warfare.
Here Evans-Pritchard is trying to sell us the story that America is on the verge of social chaos, and the rebellion to come will be led by those ready to take up Timothy McVeigh's righteous cause. Presumably these armed militias will do so because they're so concerned with wealth & income inequality in the United States. What a bunch of nonsense!
Thankfully, he gets back to talking about Rich, Middle and Poor. This is the important part—
The Gini Coefficient used to measure income inequality has risen from the mid-30s to 46.8 over the last quarter century, touching the same extremes reached in the Roaring Twenties just before the Slump. It has also been ratcheting up in Britain and Europe.
Raghuram Rajan, the IMF’s former chief economist, argues that the subprime debt build-up was an attempt – “whether carefully planned or the path of least resistance” – to disguise stagnating incomes and to buy off the poor.
“The inevitable bill could be postponed into the future. Cynical as it might seem, easy credit has been used throughout history as a palliative by governments that are unable to address the deeper anxieties of the middle class directly,” he said.
[My note: Evans-Pritchard is quoting from Raghuram Rajan's How Inequality Fueled The Crisis. Rajan is an economist at the University of Chicago.]
Cyncial as it might seem? How about realistic? Unless Human Nature changed while I slept last night, I recommend you learn to take care of yourself.
It is a pity that very few Americans understand, or are willing to accept, Rajan's observation. The phony wealth created during the Housing Bubble was somehow meant to replace lost income and support continued over-consumption. Rajan's view is that there was no ill intent behind the political policies that pushed home ownership as the solution to the financial woes of the Middle Class—
... the political response to rising inequality – whether carefully planned or the path of least resistance – was to expand lending to households, especially low-income households. The benefits – growing consumption and more jobs – were immediate, whereas paying the inevitable bill could be postponed into the future. Cynical as it might seem, easy credit has been used throughout history as a palliative by governments that are unable to address the deeper anxieties of the middle class directly.
Politicians, however, prefer to couch the objective in more uplifting and persuasive terms than that of crassly increasing consumption. In the US, the expansion of home ownership – a key element of the American dream – to low- and middle-income households was the defensible linchpin for the broader aims of expanding credit and consumption...
In the end, though, the misguided attempt to push home ownership through credit has left the US with houses that no one can afford and households drowning in debt. Ironically, since 2004, the homeownership rate has been in decline.
The problem, as often is the case with government policies, was not intent. It rarely is. But when lots of easy money pushed by a deep-pocketed government comes into contact with the profit motive of a sophisticated, competitive, and amoral financial sector, matters get taken far beyond the government’s intent.
This is not, of course, the first time in history that credit expansion has been used to assuage the concerns of a group that is being left behind, nor will it be the last.
We could argue all day long about intent. I find it particularly telling that the banks own the politicians, who then turned around and, very conveniently for the banks, pushed home ownership along with the massive household debt that goes with it, even as income in the bottom 90% continued to stagnate. Sounds fishy, doesn't it? But Rajan can't both teach at the University of Chicago (my alma mater) while casting doubt on the integrity of our political system.
Getting back to Evans-Pritchard, it is in the sense just described that wealth & income inequality were the root causes of the Housing Bubble, the financial meltdown and the sorry state we find ourselves in today. His theme—leaving out the oddball social unrest/armed militias part—is that "self-congratulation by the US authorities that they have this time avoided a repeat of the 1930s is premature." He quotes Robert Reich—
“Corporate America is in a V-shaped recovery,” said Robert Reich, a former labour secretary. “That’s great news for investors whose savings are mainly in stocks and bonds, and for executives and Wall Street traders. But most American workers are trapped in an L-shaped recovery.”
Most Americans are not trapped in an "L-shaped recovery." They are not experiencing anything resembling a recovery. They are trapped in a new kind of Depression which affects only them. And this time around, there won't be a new Housing Bubble (or anything else) to give them the illusion of financial relief. Regarding the views of Evans-Pritchard, Rajan and Reich, I am glad to accept their clumsy attempts to figure out what went on, and what the future holds. At least in these matters, part of the truth is better than none at all.
Dave said, "And this time around, there won't be a new Housing Bubble (or anything else) to give them the illusion of financial relief."
I would disagree, the federal government can continue to inflate their debt bubble, as they are in fact doing, to increase the size of paychecks "employees" take home. We are merely transferring the debt bubble from the private to the public sector. Is Washington going to end the "tax cuts" just in time for the 2012 election? Is Washington "really" go to cut spending and drive up unemployment, just in time for the 2012 election? How do you tell when a politician is lying? Their lips are moving.
As we can see by the BLS statistics, Washington has already cast aside millions of Americans. If you have no money, how much can you impact American politics, where public perception can be twisted, if you have enough cash. We American's are extremely easy to manipulate, just ask the advertising industry. The tail wags the dog, and the dog can't get enough of it.
Now Washington does provide the "forgotten" with a few table scraps to keep them complaisant, so little niceties like food stamps will continue, least we form food lines and start to form into an organized and visible body of people. They not only want us out of site, but separated into armies of one.
One jet fighter for the defense industry, table scraps for the poor.
Posted by: BJ | 01/11/2011 at 12:22 PM