Sunday, May 14, 2006

Road to Serfdom

I found an excellent article in this month’s issue of Harper's magazine called "The New Road to Serfdom" by Michael Hudson, illustrated by Nigel Holmes. Hit the bookstore quick before the June issue pushes them off the shelves because these eight pages of short paragraphs, charts and illustrations are keepers. A great "at-a-glance" reference for what I consider to be one of the biggest threats to at least 80% of the American population - inescapable debt servitude.

The article breaks it down into 20 simple observations that, when linked together, presents the aggregate danger very clearly. Some of these observations are common knowledge, such as the lure of the home mortgage loan, with which the financial industry tries to suck as many people into debt as possible. Try? Here's an astounding observation... 90% of the current national debt growth is in home mortgage loans. I'm pretty certain that the specific cause of the real estate boom is that people who can't afford houses are buying them anyway with long-term and/or low-interest loans, interest-only loans and even the negative amortization loan, which not only dispenses with payments on principal altogether, but requires only partial payments on interest, tossing the rest on principle. It would seem that the point is to load as much of the population with as much debt as possible.

If your looking for a motive, you only have to look at the secondary market created by government subsidies like Fannie Mae, which incidently is currently being fined for cooking it's books. Simply put, the banks can initiate loans then turn around and sell them like a hot-potatoes to companies like Fanny Mae that package them into investment portfolios. So, what does it matter to the banks when the borrowers run into trouble if they already made their money on the mortgage commodity market?

I'm not suggesting a vindictive financial industry. I'm sure the bankers are far more focused on the wealth pouring out of their end the deal than they are about the servitude at the debtor end. I think if anything, our projected servitude is an unfortunate by-product of financial aggression, but that doesn't mean it isn't a serious threat. Of course the money movement motives, whatever they are, transcend the financial industry.

We also have the government stepping into the picture with the IRS provisioning tax-breaks on loans, such as the famous “home-mortgage deduction” to entice the dreamers even further. It’s like those long TV ads that keep saying... "But wait! There's more!" ...and there is! Local and state governments continue to shift the tax burden from property to labor and consumption. Since 1929, the proportion of tax burden has almost completely reversed itself.

So, what all this means is that determined economic machines explain much of why and how more people currently owe money to the banks than in any other time in history. Michael Hudson indicates that currently at $11.8 trillion, the total value of home mortgages are on track to surpass the size of America's entire gross domestic product by the end of the decade. You have to figure there is something terribly wrong with that. For those who can't see it, Hudson and Holmes pull out the slide projector to explain some basic economic theory.

They start with the classic free-market model, which is the simplest of economic arrangements, involving a closed circuit of wages and sales between what I like to view as two separate pumps; the producer/employers (pump-1) and the employee/consumers (pump-2). Hudson and Holmes then add the Keynesian modification where the government steps in to regulate the sales/wages loop by acting as a third pump which circulates taxes and public funds. Then they add a fourth pump; something economists call the "FIRE" sector (Finance, Insurance and Real Estate), a collaboration of companies that Hudson points out are so symbiotic that the Commerce Department reports its earnings as a composite. The FIRE sector of course, pumps the credit, injecting loans and drawing interest.

Hudson points out that the FIRE sector has two advantages over the producers, consumers and governments. The first is that interest wealth grows exponentially, which means that as interest compounds over time, the debt doubles and then doubles again. The second advantage is that interest can be recycled back into more debt. The more interest paid, the more banks loan, the more banks loan, the more demand for real estate and again, the more interest paid. Hudson mentions that some economists call this perpetual-motion machine the "post-industrial" economy, but he prefers to call it the "Rentier Economy". Either way, both titles suggest the idea that money is made through ownership rather than production.

Did I mention that home mortgages are at $11.8 trillion and on track to surpass our GDP by the end of the decade?

The miserable reality of this system is precisely what Voltaire had said; that the rich require an abundant supply of the poor. In more specific terms, the rentier class requires an abundance of debtors. As Hudson points out, there is just no other way. This just happens to be the way it works and the massive migration of money into interest payments is all the proof you would need. Many optimists will point out that over the last few decades everyone has become a little richer, but they fail to consider the context. While the majority of Americans got a little richer, the top 10% and even more so the top 1% got much, much, much richer so in terms of relativity, the value of the money held by the majority is decreasing. In other words, the rich are getting richer and poor ARE getting poorer.

As with all natural systems, the economy is tied to an S-curve, where the indices start slowley and gradually pick up the pace turning into a rocket bull ride to a peak where inflation surpasses the ability for debtors to make payments. And that's when the demand for real-estate stalls which pulls the value of real-estate down below the value of the loans. It's this negative equity that will secure most Americans into debt servitude.

But this S-curve that Hudson leaves us with suggests something very similar to economic patterns of the past where commodities rise and fall to the measure of decades. The steeper paradigm shift here is the transfer of control from a broader span of Americans to a much smaller section of super-rich rentiers, who will be able to negotiate their way across the cycles, riding the collapse of economies and families like the stock market. They will be able to do this because they own debt so they can play the game those of us in servitude will be chained to the carts that take us back to the earlier centuries where men of labor gave all they had to the men of privilege.

statistical data source: "The New Road to Serfdom" - Harper's Magazine May 2006