US Economy: You Think You are the Consumer, But You are Really the Product
Forget what you have been told about the financial crisis, because most of what has been written has been written from the view point of the financial system. That system exists to be an investment bank for the global wealthy. It packages revenue streams, and sells them. The most important one, was you. Your house, your willingness to pay for college, your willingness to pay for health insurance. What Goldman Sachs sells is you, in the same way that broadcast television sells viewers to advertisers. You aren’t the customer of Citibank, you are the product.
What is happening is that the dollar is breaking into two parts. The financial system dollar is one issue, the US economy dollar is another. The rich of the world are still willing to loan the US government money to do the international things that the dollar does, but they are not willing to loan US consumers money. While people talk about fraud in the financial sector, the real root of this downturn is that people with money to loan don’t want to loan it to American consumers. Citibank pays 0% for its money. You pay a great deal more for yours.
We can see this by what might seem a paradox, the dollar has strengthened, but the US trade balance has improved. If the relative cost of goods were the driving factor, the dollar getting stronger should have worsened the trade balance. The reality is that exports have gone up, and imports have gone down, because prices of US goods are not going up by much, and the recession has crippled US demand for imports. From now on, the US consumer is on pay-as-you-go from the rest of the world. Our economy is, as a result, likely to remain in a depression for some time to come, until the US starts selling things to the rest of the world that the rest of the world wants, and reduces the cost of being in the middle class.
This is a decoupling of the dollar as the world’s fundamental currency, often called being the world’s "reserve" currency—but the term reserve currency has a narrower technical meaning from its role as the currency of the American economy. Once the world loaned money to US consumers so that US consumers would support the policies required to maintain the world trade and stability system. The outside world hated what Bush was doing, but they did not hate it enough to stop him from doing it. Thus it let the US keep itself happy on a borrowing binge. But now the wars that this binge was meant to cover over are winding down, and there is a belief that the US will support the current level of engagement no matter what. Why keep us happy when we aren’t going to pay back?
What this simple reality means is that there are now two kinds of dollars: financial system dollars and consumer dollars. One is very cheap—the US can borrow all the money it needs to keep the global financial system afloat. One is very expensive—US consumers are going to have credit lines slashed, and the equity in their homes has been given a haircut. The US is going to be in a situation which looks like Europe, with many more people who want jobs than can have jobs, because only the goods that America is genuinely better at making will have a market outside. That is the cold reality.
The truth of banking is it is about giving people permission. Permission to do something they otherwise don’t have permission to do. The deep money of the world wants the permission it has given us to be paid back. That’s why the Peterson Foundation is all over budget deficits. Deficits don’t cause inflation, deficits tempt governments to use inflation to reduce the burden of debt, and encourage governments to invest in growth that reduces the relative burden of debt. However, current holders of that debt hate both of these things. They want money to retain buying power, and they want the economy to be weak, except in so far as it grows to pay them back. The budget hawks want a crippled America—because that is in their best interest—but their position is in contradiction. The economy that is slow enough to keep old debt powerful is too slow to ever pay it back. That is why—using the Federal Reserve’s US economic model—the recovery will be what is called "L" shaped, rather than "V" shaped. We will not bounce back, but will get dragged along the bottom.
The alternative course is argued for by Keynesian economics: that both a return of the power to discount the past, and the power to expand the future, are better. To reach this situation however, the United States has to realize that it cannot recouple the dollar as a weak dollar. This means that we will not be able to export cheaply by making cheap dollars, but must instead engage in public investment, so that people will pay expensive dollars for what we make. The only people who can give us permission to do this is ourselves. The solution to the economic crisis on Main Street comes from Main Street. Wall Street ran one way: in to the crisis.
The choice is up to us. . . and no one else.