Thus far we have been swamped by only three waves of what will probably be a 7 or 8 wave tsunami. This inherited mess has been developing for more than 25 years—only made worse at a faster pace during the Bush presidency— and can be thought of as a community of interrelated bubbles produced by wishful thinking and excessive credit: 1.housing bubble, 2. stock market bubble, 3. employment bubble, 4. credit card bubble, 5. commercial real estate bubble, 6. trade debt bubble, 7. Government debt bubble, and 8. population bubble. Bubbles are situations in which supply of something such as credit or people far exceeds sustainable levels, kept there by eating into reserves of credulity and resources until those reserves are exhausted.
So far the housing, stock market and employment bubbles have largely deflated… but haven’t yet bottomed. Credit card debt and commercial real estate are just starting to deflate. The trade bubble has burst in developing countries and parts of Europe, which has temporarily benefited us with cheaper imports and a stronger currency, but in the longer run will drag down our recovery efforts when other nations (such as Germany, China, Japan, Korea, just to name a few) realize that we—the largest debtor nation of all time— lack the political will and personal self discipline to repay the loans they’ve already made to us, stop lending us money and work to repatriate some of their earlier loans. Loss of international credit will stimulate rampant inflation to offset and deflate both our governmental and trade debt bubbles (accumulated with the eager support of or acquiescence by the vast majority of citizens and politicians who chose to borrow and spend rather than tax and spend to fight two wars and keep the economy growing). We may still have a choice about these debt bubbles; either to deflate them under control with much higher taxes or out-of-control with hyperinflation.
We can only choose our poison, not avoid it; thus far we are leaning towards the out-of-control path.
Our recent attempts to recover our financial health have included making credit cheaper and more readily available through government funding that further inflates its debt bubble. That’s like suggesting the way a heroin addict can get healthy is to lower his costs and increase his dosage. TARP is based on that theory, and seems more like getting a quick fix to feel good, than a plan to return us to health. Regaining a healthy economy will require sacrifices from all of us, including significantly higher taxes, particularly on our upper economic quartile; so far the whiners and whiner enablers like FOX News have dominated the discussion of taxes. With their help, we’re a long way from even thinking about starting down the road to recovery. We listen to them because they are telling us what we’d like to believe; tales of Santa Claus and the tooth fairy.
Obama may well be an excellent president, but unless we all work for recovery, rather than expecting quick fixes from government or business, or whining about the government or the taxes we pay, we won’t return to that natural and vigorous economic health last enjoyed by our Greatest Generation. They were financially healthy because they delayed personal gratifications, fought WWII and the Korean War with full participation on the home front and on the battle front, built up the economic infrastructures and educational systems we’ve lived off of and allowed to decay for the last 30 years, paid income tax rates of 91% over $200k from 1940 to 1970, and saved over 8% a year from the end of WWII until 1982. As they left the work force, savings rates and tax rates plummeted, our houses got bigger to hold our ever larger accumulations of stuff, our trips to the mall more frequent, the bubbles started to build, and the sounds of childish whining for more benefits with lower taxes were heard in Congress and throughout the land.
We could still become the Greatest Generation of the 21 century, but the first step is to suck it up and face reality. The next is to go through a painful, cold turkey withdrawal from credit addiction and self-indulgence. It took us over 25 years to ruin our national health; it’s going to take at least 10 years of hard work and personal sacrifice to restore it.
Edwin Lee
