Meanwhile Back In The Materialist Conception of History
Stephen Roach at Morgan Stanley's Global Economic Forum
Lacking in support from labor income generation, America's high-consumption economy has turned to asset markets as never before to sustain both spending and saving. And yet asset markets and the wealth creation they foster have long been balanced on the head of the pin of extraordinarily low real interest rates. The Fed is the architect of this New Economy, and most other central banks -- especially those in Japan and China -- have gone along for the ride. Lacking in domestic demand, Asia's externally led economies know full well what's at stake if the asset-dependent American consumer ever caves. And so they recycle their massive build-up of foreign exchange reserves into dollar-denominated assets, thereby subsidizing US rates, propping up asset markets, and keeping the magic alive for the overextended American consumer.
Asset markets around the world are now quivering at just the hint of an unwinding of this house of cards. And they quiver with the real federal funds rate barely above zero. What happens to these markets and to an asset-dependent US economy should the Fed actually complete its nasty task of taking its policy rate into the restrictive zone? It wouldn't be at all pretty, in my view. The main reason is that the Fed and its reckless monetary accommodation have fueled multiple carry trades for all too long. And those trades are now starting to unwind, as spreads widen in investment-grade corporates, high-yield bonds, and emerging-market debt. Can an ever-frothy US housing market be too far behind?
In plain English labor income generation means new jobs and wages. They aren't there, they haven't been there since 2000, and they won't be there from now until the next recession because oil price driven inflation. Asset markets and the wealth creation they foster is all that stuff in your IRA and your 401k and your profit sharing plan. It is, further, the profits your health insurance carrier is making off of you and your company. It is also that home you are buying under a 30 year mortgage burden of 200%+ payment in interest of your home's nominal value. I have written about it in more detail here and here.
All these things depend on depressed interest rates. Hike interest upward sharply enough to combat intractable oil price driven inflation, which means sharply enough to significantly decrease gasoline demand, and you must create an American recession, because only a true recession, with further massive job losses, will significantly decrease our crude oil demand. Have a true recession and all these things that you have been counting on (besides Social Security and Medicare) to ease your transition into old age will contract in value like a turtle withdrawing into its shell. Not to mention both the consequent rising cost and contracting coverage of your health insurance. But the debt you have assumed to own that house will not budge an inch.
Depressed interest rates have also made possible all your consumer debt for your gas-guzzling SUV, your family's multiple cell phones and laptops, and all your other toys. These depend on your job to keep the bubble of your debt expanding. Your job is in the crosshairs just waiting for a true recession to pull the trigger.
If it does, none of your assumed debt will go away. Nor will you now be able to bankrupt now under the liberal terms of Chapter 7 where a new job and a fresh start on your future in the recovery from the recession would be possible. The Bush Administration has just seen to that. As long as you are not utterly destitute from having your assets totally stripped away, you will be burdened with continuing to pay off your debt under Chapter 13 with the reduced income (probably by 30% if my experience from the last recession is any indication) of your new and lower paying job--if you find one.
Where will your wealth and assets go if they are stripped away? Some, of course, will be totally lost in the general contraction. But the rest will go to the 10% of us whose wealth completely insulates them from real lifestyle changes no matter what the market outlook. I have talked about this in more detail here. Where will the slow bleed of your bankruptcy debt service, while you fight to retain something of your life, go to? To the same people. How will you recover? You won't.
You will have to simply stop consuming. And for the real oil-driven inflation to completely go away, you will have to stop consuming so much that a world-wide depression cuts the consumption of places like China, Indonesia, and India--who all now stand ready to take up the slack of the gasoline you will stop using when they repossess your SUV. I have also talked about that in more detail here. And it will take a real world wide depression to do that because Europe is fast becoming the primary consumer, rather than the secondary consumer, of goods and services from Asia. And Europe has been frugally reducing its dependence on foreign oil for decades.
I could quote Karl Marx about it all, but since that's verboten in these United States, I'll just quote Bugs Bunny:
"So long, sucker!"