20 March,
2008
It Makes
no ¢ent$
Halfway
through last year, while listening to a radio program, I heard a statistic that
made me cringe: in 2006, the average person saved -.75% of their income. That
means that on average, each wage earner in the US spent more money than they
earned – about one percent more. Clearly this pattern isn’t
sustainable for an individual or family. In the most elementary terms, when
more money goes out than in, the end result is inevitably bankruptcy.
When I
heard this statistic I thought to myself, well, perhaps more people took out
loans for education or to pay home mortgages in 2006, or people spent on investments
that will pay off in the future. But I was dead wrong. Essentially, we just
spent more money than we earned. Well, so what? It’s easy to do, with
lines of credit so readily available. Borrow now and pay later is the creed of
the day. Everyone does it. Maybe it’s not such a big deal.
But the
next statistic was scarier still. The negative .75% savings rate was the lowest
rate at which Americans have saved since the Great Depression, a time when
there was almost no money to be made, unemployment was at an all-time high, and
the world economy was in freefall. This, however, was the economic dark ages
compared to today. We are not in the 1930s. So how could we be saving equally so
little? As Americans, we currently dwell in the most prosperous of times in the
most prosperous country in the history of humanity. Basic necessities such as
food are at historic all-time lows, relatively. The interest rate is very low
and decreasing further, while inflation and unemployment are quite low. Wages
are high; goods and services are relatively cheap; US businesses are running
smoothly, comparatively. How, in these bountiful times of overabundance, can we
be losing money?
Alarmed by
these statistics, I felt the need to begin pointing fingers at potential
culprits for fiscal mismanagement and financial irresponsibility. I wanted to
know why we are going broke and who was at fault. With a lack of any background
in economics, other than high school, where I mistakenly sunk the balance of my
fantasy stock into Pep Boys because it had a round share price that was easy to
calculate, I asked around to people I know who are closely associated with
markets and finance. The arcane responses I received as to why we are losing
money were fraught with economic mumbo jumbo, unsureness, differing opinions,
and most of all, complexity that sparked only more questions. I believe such
multifarious solutions are what have gotten us into this mess to begin with.
Simple, sound and fundamental economic policy has been lost in the shuffle of
modern day convoluted financial solution. Therefore, I decided to simplify
things, based on my understanding of the most rudimentary economic principle:
you can’t take more than you make. Here is my assessment on who is to
blame for the recent financial woes in the US.
First and
foremost, it is always convenient, if not our duty as Americans, to blame the
federal government. I do so for two reasons. Reason number one: Iraq. I
remember clearly, in late 2002, living in Las
Vegas, watching interviews with Hans Blix on Fox News. The chief UN weapons inspector was
pleading with the US not to
invade Iraq
until the body of inspectors had finished ruling out whether there were weapons
of mass destruction being hidden by the Hussein regime. But the Bush
administration refused to wait. Whatever true purpose they had for invading the
country was imminent and needed to bee addressed that instant. Could it be that
Bush and Co. didn’t want the weapons inspectors to find the weapons? Or
that the government knew that no weapons even existed? Well, as it turns out,
yes. But that is another long story.
I paced
around my apartment, screaming non-sequiturs at the television or anybody else
who would listen, “You can’t do that! Why invade? It’s
illegal! What is the good in starting a war?” How can an invasion on a
sovereign nation be rationalized, I wondered. Just
eleven years earlier, when Iraq
invaded Kuwait in a similar
manner to the US invasion of
Iraq, the US used the grounds of an unprovoked invasion to
pummel Iraq
into oblivion, with the support of the world, I might add. However, in a true
definition of double standard, the US
was permitted to march into sovereign Iraq, remove its leader, and
destroy the country’s infrastructure without a single repercussion from
the rest of the world. Who is in charge of pummelling the US? Despite my
isolated verbal outrage directed at Fox News’ positive coverage of the
invasion, and the UN Security Council’s stern warning and opposition to
it, the US went into Iraq five years
ago today and began a long, bloody and costly occupation. I was flabbergasted,
not so much for what was to become a crippling economic mistake, but on the
principles of basic human rights and Geneva Convention protocol.
It turns
out, though, that the economic repercussions, not loss of lives, will likely be
the costliest outcome of the invasion for the average US citizen. A
report released on March 10th, 2008 tracked government spending on
the wars in Iraq and Afghanistan so far, and that number is close to a trillion
dollars (http://news.yahoo.com/s/ap/20080310/ap_on_re_mi_ea/iraq_war_costs).
Every month the occupation continues, the US drops 12 billion greenbacks just
to keep the operation intact, with another $13 billion already being paid out
monthly to ailing veterans and for the associated costs of war. Besides the
fact that the US will likely
be in Iraq until at least
2015, the money wasted there, not the thousands of lives lost, is what is really
going to hurt the average US
citizen personally in the long run. Spending on war veterans usually tops out
about 50 years after the end of a conflict. Payouts to World War II veterans
peaked in 1992 – and in this war, due to a less developed military triage
and hospital systems, a much lower proportion of troops survived the war and
received aid in their later years. In contrast, due to enhanced medical
procedures in the past few decades, the number of veterans severely wounded in Iraq,
who will require government assistance for the remainder of their lives, is
staggering. We haven’t even seen the beginning of the spending for this
unwarranted invasion.
The costs
of the invasions and occupations are already taking their toll on the US economy. In
past wars, the US
economy was stimulated by having to produce massive amounts of military
equipment and weapons for the war effort, reducing unemployment. This time,
however, the contracts and payouts from the wars are going to private
contractors and companies with ties to government officials. This money is
effectively wasted, not that going to war is an excuse to stimulate the
economy. Although, I sometimes wonder if the Orwellian nightmare, described in 1984,
where goods are only produced so that they can be squandered in pointless or
imaginary conflict, which propels a, cyclical, self-serving economy and
government, is taking place in its own manifestation here and now.
Further,
not one dollar spent in Afghanistan
or Iraq
has come from money budgeted by the Bush administration. Each additional $100
billion spending packaged funded by congress, whose members are rightly
frightened to cut the financial supply line to the troops for fear of being
labelled unpatriotic, is an enormous sum the government is borrowing from
itself. All this cash is considered emergency funding and comes from outside
Bush’s proposed budget. This means that every cent has to be paid back to
us by us in the future, with interest. By racking up a several trillion dollar debt
against ourselves, we are devaluing our currency worldwide and adding to our
unbalanced budget, which we, as taxpayers, will all have to chip in for. This
blank check spending is the definition of irresponsible financial management.
And unfortunately this irresponsibility is mirrored in other sectors of the
economy.
Secondly I
fault the government for its lack of financial regulation within the business
market. With the magnificence of our get-rich-quick, free market economy come
its inevitable repercussions. Non-regulation in the credit sector has led to
the current ‘credit crisis’ the US is now facing. Credit and
mortgage companies have been permitted, without any government oversight, to
offer variable rate loans to consumers, who do not have the means to pay back
the loans when the rate rises from 3% to 12% a couple years into the mortgage.
More often we are seeing that the consumer is forced to declare bankruptcy and
concede the loss of their home. When many home owners stumble in this way, the
next step is the faceless companies themselves, who expected high payouts from
their devious loans at the expense of consumers, are hit so hard by the lack of
loan repayment that they slide close to bankruptcy. This is the current trend.
Finally, the federal government, again borrowing from its imaginary coffers,
financially bails out the creditors and consumers, increasing federal debt
further. On March 14, the government saved the 5th largest
investment bank in the US,
Bear Stearns, from going under. This is another prime example of irresponsible
fiscal management, for which I believe the feds are again mostly at fault. By
permitting the unreasonable business practice of allowing consumers to enter
into leases which will stretch them beyond their means to pay, they exacerbate
the woes in the economy further.
The next
culprits in the war on savings are the credit card companies. Perhaps taking a
cue from the federal government policy of money mismanagement, and spurred on
by the lack of regulation in the credit market, large credit banks have also made
a habit of allowing the consumer to borrow money well beyond their ability to pay
it back, especially with exorbitant interest and hidden penalties tacked on.
Clever marketing by credit card companies, coupled with a consumer culture
where individuals are constantly barraged by consumer pressure to buy new and
better products, only exacerbates this situation. And the credit card companies
are laughing all the way to the bank-ruptcy court, as
that is where many folks end up. Neither consumers nor creditors win in this
scenario and again the economy is hit. The feds must gain some control and pass
regulatory legislation in this freefalling free market economy.
Finally,
some blame falls on the consumer. Although most people simply emulate the
example of irresponsible spending set forth by the federal government and spend
without caution, or exploit the ridiculously large lines of credit offered to
them by the banks and credit card companies, financial ignorance in these
economically cut-throat times will only get a person so far. To me, at least,
it seems logical that I cannot feasibly spend more than I earn. If I do I am in
debt, and the only way out is a steadily increasing uphill battle. But
apparently many people in the US
are taking the Bush administration’s approach and planning on paying their
debts back in the future – a future that isn’t looking as bright
anymore. A sense of individual accountability must be established if the
country is going to get a handle on its overspending and debt, and that will
have to start from the top down – the government must lead by example,
regulating its own spending first, then regulating business practices second
and consumers third. Because apparently we can’t
regulate ourselves. We have a long road ahead. No wonder the financial
prophets and pundits are predicting recession.
Thus ends
my assessment.
As a
contrast to the bleak outlook for the US economy, over the last six years
I have watched the American dollar slide against the Euro, plummeting from 1
dollar purchasing 1.17 euros, to 1 dollar buying only .63 Euros – almost
a 50% drop! During this time, the Australian government, as an example of
non-mismanagement, has done three major things differently than the US when it
comes to economic policy: not borrowed uncontrollably from itself, not started
any wallet-draining wars, and disallowed variable-rate mortgages and loans. The
consumer is well-protected down under. That is not to say that life is easy:
interest rates are high and housing is barely affordable, but the economy is
not in freefall. In fact the Australian dollar is itself bordering on parity
with the US dollar, which was incomprehensible just a few years ago. The Aussie
dollar, like all 19 of the other top 20 performing currencies in the world, is
putting the US dollar to shame at the moment. That definitely says something
about our current practices.
George Bush
spoke to the US public
yesterday, in his speech commemorating the five year mark since the invasion of
Iraq,
and defended the decision, adamantly stating that financial and human cost of
the war has been well worth it. I believe the evidence firmly points in the
other direction – so clear are the facts that I don’t even feel the
need to defend that statement. This obstinate regime, which the US populous
re-elected on the campaign motto ‘Stay the course,’ is too proud to
admit its past or current military mistakes, which slows down the process of
recovery from such blundering errors. The same is true for the economic
rationalizations that come out of Washington
lately. So when I hear “Stay the course,” whether militarily or
economically, whether in reference to surging troop levels or pumping billions
of non-existent dollars into an already overspent economy, I absorb the
cliché with a handful of salt. If the government isn’t going to do
its job and look out for us, we are going to have to do it ourselves. I will
start right now by saving more than I spend this next year.
