Sunday, 24 July 2011

Of (Bounced) Cheques and (overdraft) balances

U.S. House of Representatives Speaker John Boehner - "That ceiling is leaking in so many places I'm just going to sit here and try and look cool"

For those following and concerned about the summer 2011 American political epic battle to raise the debt ceiling, a deeper understanding is needed of the problem. First, when I say "concerned about", I assume that that is the state of mind of most people who become acquanited with the phenomenon. It is a very serious problem and one that shows and the reasoned, rational observations of the American financial and political system diligently pounded day-in, day-out on the internet by "obscure cranks and doomsayers" like Charles Hugh Smith, Chris Hedges, and James Howard Kunstler are catching up to the inane, irrational, deluded thinking of mainstream North American media culutre, and they will complete the journey when the ensuing crisis is brought to bear.

Unfortunately the fruition of that journey is nothing more than "being right", which doesn't help anybody in the long run, and which anybody using their head and paying attention could have seen that they were all along. The real question, though, is what the United States hopes to accomplish by raising the debt ceiling.

Money and capital created out of thin air are not actually the problem. If the financial system collapsed and we had to start all over again, regardless of how right we got it, we would be required to engage in the practice of the same fundamental principle - the suspension of disbelief that makes fiat currency possible - that we do now. This twenty dollar bill is only worth something because I think it is and you think it is. The minute one of us realizes that it is not worth the paper its printed on, one of us has been taken and one of us has made a profit off the exchange. One of us is an exploiter and one of us is a fool. But human nature is amazing, and the discovery of one thing can make us realize that - the truth. The truth (in brief, that money is worthless) is publicly available at no cost, yet people continue to act based on habit, convenience, materialism, etc. Many people know the truth, but it has yet to wreak serious havoc. A detailed accounting of OECD countries current account balances does nothing to real estate values in those countries, even though the accounting is devastating and public knowledge. This is because there are still enough people who think they are participating in worthy exchanges (money, toil, commuting, poor health, in exchange for status, inflated real estate, etc.) They either know the truth and don't care or are unwillingly ignorant of it.

The worth of any given thing is arbitrary, negotiable, and subject to change just as that of our cash. When I walk around my hometown of Toronto and look at regular modest bungalows selling for $650,000 - three times what they were worth maybe 10 or 12 years ago, I simply refuse to believe that is what they are worth. When this kind of astronomical increase occurs, it is not because young, child having guys with families like me can afford to get into the market and retain any kind of sanity and/or quality of life (To give you an idea - I have been working in the white collar world for over 4 years, living simply, have made choices most people don't make like to grow food and forego a car, scrimped and saved money, accumulated no debt, and I'm nowhere near a down payment on one of these). It is because two key policy decisions have been made - to manipulate market conditions to make it very easy for people and encourage them to take on enormous amounts of debt they can only afford with low interest rates, and to essentially skim the rich people off other countries and society and import them and their money under the guise of "immigration". So you are placing an additional huge strain on our already strained health care and education systems by letting people work themselves to death and stress about money, and by importing people who think our country is great because they can send their kids to great universities for $5,000 a year and get free health care for the rest of their lives.

It is these kinds of complicated problems that are the logical extension of what I term a "balls to the wall" economic system in which no result but growth is acceptable, and no guiding principle but rising expectations is followed. Politicians are scared to tell the mob anything else other than things will keep getting better, your house will be worth double again in 2 years, just keep working hard and paying taxes and subsidizing the oil and auto industries with your choices and shut up. Unfortunately, this logic would never work if it applied to individual humans because it refuses to acknowledge cycles, maturity and evolution. Imagine (you may know one) a 35 year old who is still coddled by their parents into thinking you're special, you're the best, we have such high hopes for you, we'll ruin ourselves to help you make it. It doesn't have to come through the telling of these phrases, either; actions such as laundry, dishes, cooking and bill payments performed by parents for their children beyond a certain age affirm these statements in their childrens' minds. And the government has become a caretaker and enabler for our childish, insipid, irresponsible population in North America. The logical step for the extraordinarily wasteful and greedy society Canada has become at this point would be to "power down" and de-leverage; instead we seem hell bent on repeating the mistakes that the U.S. economy is still reeling from in its spin all the way around and around and down the toilet bowl (although their effects will be less pronouned, thanks to a huge supply of environment we can destroy by extracting resources from it. Whoopeee!).
So, what does any of this got to do with the debt ceiling? Well, the first thing you need to know is the United States in in 14.6 trillion dollars debt and that that amount now rises by 1.6 trillion a year, or .2 trillion (200 billion dollars) every 2.5 months. How does the American government raise money to fund its operations? It does what every country, state, province and munipality does - it issues bonds (decades long, interest paid ballooning "promises to pay".) Isn't that insane? What if we allowed heavily indebted people(which all entities I listed definitely are) to engage in this practice? There would be so much debt in the system our money would be - hey check it out! - worthless.
Governments such as America's and Canada's also raise money through taxes (which they refuse to increase, and in response to which there is a never ending growing and never-ending set of loopholes the rich can use to avoid) and spend money (more than ever, all the time) But because America's forefathers who authored its constitution foresaw this possibility, they created an ingenious system of "checks and balances" in which that one well-heeled irresponsible individual (the president) or 100 well-heeled, irresponsible individuals (senators) could not unilaterally take the decision on the whim to spend the country beyond its means into oblivion.
They made it so that you needed the approval of 535 well-heeled, irresponsible individuals (congress) to raise the nation's acceptable level of debt. Unfortunately, no provision was provided as to what point this became an actual legislative process and not a thoughtless friday afternoon rubber-stamp. That is why it took a number (14,600,000,000,000) to make the nation have this conversation for the first time ever in the summer of 2011.
While the debate over whether the United States will default on August 2nd remains in the hands of 100 or so Tea Party congress representatives who are utterly intransigeant on the matter of raising taxes (which any basic math knowing person can see needed to happen a million years ago to prevent this thing from descending into chaos.), chances are they will settle the matter amid much fanfare because between denial and reality, who really chooses the right one when they are given a choice? President Obama will make some lame speech filled with adjectives (courageous, reasonable) and nouns (adversity, resolve) that don't really apply to america anymore but he does it because thats his job. Making lame speeches. And they are lame because they don't actually denote any accomplishments. America will have pulled together at the 11th hour and extended itself credit for 2.5 more months. Phew. Do you need a statuatory holiday to go with that achievement?
We could go on for days about the 3 trillion of the debt held by China, or Europe and the Euro living beyond their means due to their inclusion of countries that are heavily indebted and will never be economically productive again, but what's the point? The economic system is a house of cards. And until we get back to what's real (real money for real value and real cash for real services), the illusions, speculation, lies and fraud will continue to run rampant.
The $600,000 bungalow, as much as its value is an artificial creation, is definitely worth that right now and any reasonable person would agree on the legitimacy of that price. But what happens when the sewer backs up, the trash piles up, the emergency services stop and death piles up inside, the foliage overgrows and reclaims the property, natural gas is not delivered to the furnace, and rocks thrown by the anarchist youth fly through the windows and go unrepaired? The $600,000 is not the inherent value of some crappy bricks and mortar from 60 years ago but a huge premium on top of those crappy bricks and mortar for a well-functioning, well-run, well-lubricated by petroleum society.
And the above described society, up until now, has been bolstered by a "strong" U.S. economy. But those checks and balances on which the nation's stability and strong democracy were founded have now, in addition to airing out the dirty laundry of the nation's financial system, become its ruin. Consider a 2,300 page health care bill that was supposed to provide care for everyone yet somehow provides care for less and makes insurance companies richer. There is no way for a massive, three branch government operation to get a handle on a legislative challenge without entirely lousing it up - and that is by no means restricted to America. They are just world and leaders and champions at it. But the collective failure of top down government structures to address the rot and the inherent bullshitting of the system is ultimately why we will go back to smaller, localized, accountable governments that live within their means whenever these big ones screw this debt boondoggle up so bad that nobody can ignore reality anymore. And with the word "default" on everyone's lips when they're talking about the U.S. for the first time, in 2011, I don't see how it can be much farther off.

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