Political economist: America is bankrupt

Political economist Scott Goold (2008 Photo by Denise Tessier)

ALBUQUERQUE – Politicians and economists may couch the current economic crisis in words like “intensifying solvency concerns” and “brink of systemic meltdown,” but political economist Scott Goold comes directly to the point in delivering his assessment: The United States of America is bankrupt.

“What we are witnessing today is a global, steroid-driven run on the financial institutions,” the Albuquerque economist and former University of New Mexico professor told a meeting of the Albuquerque chapter of New Mexico Press Women on Monday.

In what stretched well beyond the hour allocated for his talk, Goold offered something of a primer on how the markets and the economy arrived at this point, laying out the rise of the U.S. debt economy and what he characterized as “lying to ourselves” in the political arena.

He also made clear at the outset that while he works for the state Workers’ Compensation Administration, his views do not reflect any official state government position. Goold is also director of InfoImagination, a Web-based social, economic and market research consulting firm.

Addressing head-on the “intense political season,” Goold said:

We all knew, deep in our gut, that it would not be possible to continue on a national strategy of increased indebtedness and dependence on credit. Collectively, we knew this was wrong. We turned away and shunned the dooms-dayers, as we preferred to deceive ourselves.

During a question-and-answer session after his talk, Goold said he was one of the dooms-dayers who told his friends the economy was “going over a cliff.” He said that when George W. Bush assumed the presidency in 2001, he and his wife stopped spending, eliminated their debt and were careful where they invested their money.

At that time, he said, the national debt hovered around the $5 trillion mark. “This accounted for all the debt the United States of America had accumulated over 200 years of history …”

In fewer than eight years, that debt has doubled to more than $10 trillion and it increases by nearly $40,000 a second, he said. “I scheduled this talk to be around 20 minutes. In this time, our national debt increased by $48 million.”

Goold likened the recent sales of assets by large financial institutions to the way farmers reacted when creditors called in loans during the Depression:

They needed cash to meet credit demands, so they sent more produce to market. The overwhelming and increased supply of goods caused prices to collapse. The more they tried to sell, the more prices fell.

This is why the federal government limits the amount of produce farmers can grow today. This regulation helps stabilize farm prices and protects farmers as well as the consuming public.

With the collapse of the mortgage markets, companies — rather than individuals — needed to access their funds. Simply put, there wasn’t enough cash to meet their demands. Companies began selling assets … The more they offered to sell in the market, the more prices fell. This created a downward spiral…

Likely every bit the professor he was during the early 1990s, Goold illustrated how the economy works by holding up a dollar bill and explaining that it is actually a “Federal Reserve” note that until 1971 was redeemable for gold. Dollars are received for work rendered.

But commercial paper, he said, is different. “It is a business IOU. It is my promise to work tomorrow.”

The financial sector discovered that this “future promise” was highly profitable — even more so than selling the product itself. A car dealership might make $2,000 from the sale of a mid-size sedan. Yet by financing the sale of the vehicle, they might make an additional $3,000 to $4,000.

Long-term IOUs, he continued, can be sold. “They are packaged and bundled and auctioned to the highest bidder. Those who purchase them can consider these financial instruments as assets.“ With the American consumer considered a good credit risk, “the business is now able to obtain a line of credit by using your IOU, bundled with thousands of other consumer IOUs, as collateral. They are borrowing off debt.”

Goold called these lines of credit supporting subsequent lines of credit “unregulated promises of faith,” and noted, “Warren Buffett referred to these as financial weapons of mass destruction.”

In all this chaos, companies like AIG stepped in to insure the entire process — to the tune of an estimated $60-$70 trillion.

(For a primer on the AIG bailout and a concise explanation of credit default swaps, the derivative securities that allow institutions to insure against bad loans, read this Sept. 17 article from Financial Sense University. It includes a chart that shows clearly that credit derivatives dwarf sub-prime mortgages in terms of sheer size. As the chart below shows, the relative size of credit derivatives is greater than the entire global economy.)

Essentially, Goold said, the system collapse resulted from the collapse of the American consumer, who has too much debt. He compared the entire system to a pyramid scheme, which functions as long as new money is pulled in each day. When confidence erodes, and the money no longer comes in, the whole thing collapses.

How much debt have individual Americans incurred? Goold said the average household owes 20 percent more than it makes each year, and:

The national savings rate became negative a year ago — the first time since the Great Depression. In general, as a nation, we save 30 cents out of each $100 we earn. … In 1981, we saved about 12 percent of take-home income, or $12 of every $100.

But blaming the consumer “is part of the lie,” he said. Citizens complied with President Bush’s request that citizens continue shopping after 9/11 and similar pleas were made when the federal government released stimulus checks worth $150 billion in the spring. “Most people didn’t have a choice” but to spend that money — on gas or food.

“The truth is,” Goold added, if Americans had saved instead of spending that money, the recession or depression could have come sooner. “We are utterly and completely addicted to our allowance of credit, because this is what perpetuates the continued deception that the foundation of our economy is strong.”

Goold said the fundamental principles of capitalism will survive, but he declared that Reaganomics, “The Republican flavor of capitalism,” has “expired.”

Ronald Reagan, and his principal ally in Europe, Margaret Thatcher, led the Western world on an aggressive and risk-taking venture: They championed deregulation of markets, low taxes, lack of concern for rising public and private debt, and a laissez-faire market-based economy. They hoped to reverse what they called the stifling rules of FDR’s New Deal.

President George H.W. Bush warned against “voodoo economics” and raised taxes to prevent a national financial meltdown, which “cost him his job.”

Goold said he had believed in Reagan’s “supply-side economics” in 1980, but learned that “it simply does not work.” When an ordinary citizen spends money, it is spent locally and helps the local economy, he explained. But when those with wealth look to spend it, they invest it to make more money, which in today’s global economy often means sending the money out of the country to emerging markets because America is a “mature” market.

“Excess capital chases capital solely for the purpose of profit,” he said.

More profit rewards CEOs and stockholders, not necessarily society. This system is undisciplined and erratic, which leads to a series of bubbles.

These bubbles have been the “dot-com bomb,” the real estate bubble, the oil bubble and now the commercial credit bubble.

He said we’ve manipulated the energy markets as well, and that keeping energy costs artificially low allowed the export of businesses that might continue producing closer to home if energy costs were realistic. “We’ve cheated ourselves in this regard as well and it’s coming back to bite us.”

Despite the time restraints of the luncheon format, Goold said he would be “irresponsible” if he failed to talk about the “political adventures” that “place great demands on our economic engines.” He said, “We will never be on firm economic or political ground until the (Middle East) is stabilized,” and added, “A nation simply cannot reduce taxes while waging two wars.”

He noted with irony America’s efforts to “collapse the tiny nation island of Cuba” for leaning toward communism, while on the other hand trading with communist China, on whom the U.S. will “no doubt” depend for help during the financial crisis. He noted that the Cuban policy and U.S. warmongering against Venezuela “opened the door for China to exploit oil development opportunities in Cuba and encourages stronger relations between Russian and Venezuela, evidenced by recent Russian war ships staging maneuvers with [Venezuelan] President [Hugo] Chavez.”

He also noted that the Chinese approach to capitalism is to stimulate small businesses so that they compete and innovate, instead of trying to do it from the top down.

Democracy is also partly at fault, he said, because two-year election cycles create a constant need for a good economy and further extensions of lines of credit “until you have an overdose of credit” without allowing for corrections in the market.

Goold acknowledged during questioning that he would have “started more at the base” and banned foreclosures as part of the recent $700 billion bailout plan. But without the bailout, he said, we would have been in the Second Great Depression, as credit would have slowed to a point where businesses would lay off people en masse.

Quoting FDR’s “nothing to fear but fear itself” speech, Goold noted that there has been a lot of fear-peddling over the past half-century.

We were fearful of communists, yet today we see that communism and capitalism… can coexist… We were told to be fearful of government regulation, but now see that human failings, such as greed and immaturity, lacking sufficient watchful oversight, result in devastation.

We were fearful of trusting our economy to move along naturally, and thus, continually stimulated the system with the cocaine-like drug of unlimited credit and excessive debt.

Hopefully, we will once again learn to trust the greatness of the system created by our Founding Fathers. I believe the world shares this hope with us as well.