Tuesday 29 January 2008

Pic of the day: Men are truly foolish creatures, and not only Americans: This profound insight is found in a Japanese anime (Wolf and Spice) set in the European middle ages. The anime is about a merchant whose greed gets the better of him.

They're still borrowing

November is already a while ago, but this small article at about.com is still interesting, or will be for historical reasons.

"November [2007] Consumer Credit 11% Greater than Last Year" says the article, more exactly "revolving credit" such as credit cards. One of the most disturbing parts is her observation that: "The declining housing market has caused many families to switch from home equity loans to credit cards to finance purchases." In other words, now that people can no longer use their house as an ATM, they use their credit card rather than reducing their consumption. Because consuming less was, as of November 2007, inconceivable. Spending more and more has been the law of the land for a generation now. No serious, over the last 25 years America has only have two recessions, both of them small. In the one, there was hardly a blip in consumption, in the other the blip only lasted for months. So young people and people with poor memory may simply not be aware that consumption could be a two-way street.

By the time you read this, it has gradually become possible to imagine spending less. But it is still largely in the realm of imagination. Americans continue to borrow, spend and import more than they export – despite the weak dollar making exports grow, imports grow as well, even though they are now more expensive. It is as if the spending has taken on a life of its own, so people are no longer in control of their bodies and wallets. Then again, perhaps they are, but assume that Jesus or Barack will take away their debt and give them an eternal consumer paradise where the money never ends.

We may wonder how these people have managed to get credit at a time when banks even hesitate to lend to each other for fear that their borrower may go bust before payback time. I can only surmise that people have been maxing their existing cards.

***

By now I don't really have much to say that I didn't already say before it happened. By now I can just watch it unfold. Or perhaps I should say "unravel". How did it come to this? We have already for some years traced the events that led us here, but I am also gradually more convinced that the root causes are not economic.

As an economist of sorts, you may expect me to believe that all the problems could be solved with a better economic policy. And I can certainly think of better policies than we have seen lately. But it is not that simple. People get the economic policy they have asked for. America is a republic with a large degree of democracy, at least for the majority. Do you really think they would vote for someone who told them to save money for a rainy day and not borrow unless they had to? Would they take kindly to being told that they were not entitled to special treatment?

We have a generation that was largely raised on artificial self-esteem. It was the new gospel. Parents and teachers were instructed to praise the children whether or not there was a reason for it, so as to raise their self-esteem, which would automatically make them better people. While I certainly think this is better than using the kids as punching bags to take out your frustration from work (and this still happens to some), it comes with its own problems. Like a sense of entitlement: "You deserve the best" is the message of advertising, and why not? They already think they are the best, so it makes perfect sense. Someone else can pay the bills. Let the state do it, or the Chinese or someone. We borrow now and pay back with borrowed money another day.

You really can't blame the government for a stupid economic policy when they get their mandate from a stupid people. Did you hear anyone speak out and say: "Hey, we're in the middle of a war here, shouldn't we have a war tax or something?" Probably not. Did you hear people say: "Hey, the interest rates are low, this is a good time to PAY OFF our debt"? Probably not. Did you hear them say: "Well, the house is supposedly worth more now but it is still the same house, and it is not like I'm going to sell it without buying another so it really makes no difference to me"?

There is more fun ahead. I wonder if Americans will wake up before they suddenly find themselves part of the third world. That would certainly be a loss. More likely it will go with them as with the British Empire that once ruled the world, or Russia after the end of the Soviet era: They will find themselves just another nation among nations, their former glory mostly a matter for history and literature classes. And it is going to hurt for a while, but not enough to cause mass suicide. Well, unless you count suicide by vodka.

In short, I don't think the Americans have realized yet that their golden age has ended, and that they did it to themselves. They will continue to look for scapegoats for a while, thinking that if they vote for the right person the good old days will be back. But they won't think that the right person is the one who demands they clean up their mess and spend less than they earn rather than the other way around. No, they will go for whoever promises to make it all better in some unspecified or woolly way. After all, as psychologist say, "past behavior is the best predictor of future behavior". Economists don't count on repentance ... not until it is the only way left, at least.