Monday, October 06, 2008

The Devil Comes Due

America's 30-year binge of maintaining its lifestyle on credit is now finally coming due. This is no mere temporary crisis, but the long decline into the darkness. Am I sounding too dark and apocalyptic? Depends on how closely you were paying attention all these years:

Here's the simplest way to look at what has happened over the past thirty years and just peaked. Americans wanted to live beyond their means. They wanted the good life. They wanted to consume and they wanted to have lots of rich people and they wanted to have the unearned wealth that comes from real-estate. Buy a house, wait thirty years, sell it and retire on the proceeds somewhere in the South, where it's sunny and cheap. They didn't want to pay taxes, they didn't want to save and when they wanted to buy something they wanted it now, didn't want to pay till next year and didn't want to put any money down now.

The rest of the world was willing to go along with this. As long as the US paid, or promised it would pay, well, sure, the money spigots would stay on. So China loaned you a ton of money and you shipped your manufacturing base to it. Japan kept selling you goods with money you borrowed from them. The Indians took your service center jobs and loaned you money. The Arabs sold you gas and gave you the money back to invest in your markets.

The US ran consistent trade deficits. It couldn't make enough stuff that the rest of the world wanted. So instead it made paper - it sold debt and equity. It said "we'll package up the revenue streams from these houses and sell them to you." Or it sold treasuries "we'll tax people more in the future in exchange for you lending us money now." It sold stocks in the 90's "you can have the future revenue stream of this new industry." And so on.

What the US was doing was selling its future. In order to pay for stuff now - whether high end Japanese electronics, or lousy Chinese goods, or oil to run the cars and heat the houses—instead of paying now, it said 'we'll give you revenue from the future in exchange for it."

Now here's the problem. The US has run out of future to sell. The leveraged bets that were made on top of America's future, in various swaps and collateralized debt obligations and mortgage backed securities total more than the value of the entire world economy. The US has promised every little bit of money it will produce for a couple decades at least.

And it's not enough.

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