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
 


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Books That I am Reading:


The World Is Flat
A Brief History of the Twenty-first Century

Thomas Friedman

In this book Thomas Friedman continues his exploration of globalization and how the playing feild is leveling out.

War on the Middle Class
How the Government, Big Business, and Special Interest Groups Are Waging War on the American Dream and How to Fight Back

Lou Dobbs

This book is pretty much a print version of his TV program. This is what I call good investigative journalism


Books That I've Read Lately:


Catcher in the Rye


J.D.Salinger

My daughter is an avid J.D.Salinger fan and turned me on to this book. I'm glad she did. I read the first half on one airplane trip and finished the next half on the return flight. Salinger's naration is wonderful, his vivid style reminds me of Steinbeck.

Crash Proof
How to Profit From the Coming Economic Collapse

Peter D. Schiff

I've been reading the writing on the wall for some time now about the comming economic collapse and this book is one of those messages. I highly recomend this book for anyone interested in an easy to understand explanation of what is causing the crises and basic strategy for how to weather the storm.

A Peoples History of the United States: 1492 - Present


Howard Zinn

This book seems to draw a lot of criticism from people who point out that Zinn fails to present the complete picture, but I think that's the point. Zinn is simply filling in the gaps intentionally left by "politically correct" historians and in so doing, he sheds light on some of the real American heros who continue the "politically incorrect" American Revolution to this day. These heros are not the celebrated leaders and soldiers of the American Establishment who took the reins of exploitation from the British Establishment but the working class people who continued to stand up to exploitation regardless of what banner they wave. It's these working class people who continue to fight for liberty and justice and it's these unsung heros that we need to thank for our way of life and we can thank Howard Zinn for pointing them out, especially now that patriotism has somehow come to mean loyalty to a flag rather than to a principal.

Paradox Of Choice: Why More Is Less


Barry Schwartz

An interesting counter-view to the ever-so-popular notion that our vast array of options improves our culture.

Why I Am A Reagan Conservative


Edited By: Michael K. Deaver

I'm reading this book because I don't consider myself to be conservative. I suppose this is because I've been focused for so long on issues around which conservatives hold positions that I disagree with. But recently I've been looking beyond these issues in search of what I might agree are valid conservative positions and it seems the more I look the less I find, which is alarming to me considering the influence that conservatives have over the policies that effect our lives. Hopefully this book will provide me with some insight.

The Ayn Rand Reader


Ayn Rand: Edited by Gary Hull

I know, I know... what is Ayn Rand doing on this booklist? Answer: I read from as many perspectives as possible. Being a free thinker, I refuse to submit myself to a reading diet. Besides, I want to understand what it is that Ayn Rand fans are raving about and what institutes like ARI are pushing into our education systems.

A Thousand Barrels a Second
The Coming Oil Breakpoint and the Challenges Facing an Energy Dependant World

Peter Tertzakian

I've been trying to understand as much as I can about the coming oil crises. The author is Chief Energy Economist of ARC Financial, one of the world's leading private equity firms focused on energy. As far as I can tell so far, his book isn't a crack on politics or doom and gloom but a straightforward analysis of the realities of energy that so many people are ignoring.

TechGnosis
Myth, Magic & Mysticism in the Age of Information

Erik Davis

I've actually been reading the hardback version of this book, on and off, for long time now. The problem I have with this book is it's depth. Davis presents so many interesting ideas and references that I wind up placing a book mark and taking excursions into related materials. It can take me days to digest what Davis is saying in one sentence. Eventually, I always come back to the book, drawn in my Davis' poetic language of intellect. This book represents a true frontier for my mind.

The Moon Is Down


John Steinbeck

Steinbeck is always an easy read for me. His characters and scenes are so vivid. But this book in particular has the added significance of having had an extraordinary impact as Allied propoganda in Nazi-occupied Europe. Despite Axis efforts to supress it (in Fascist Italy, mere possession of a copy of the book was punishable by death) hundreds of thousands of copies were secretly translated into numerous languages, printed on unnaccounted paper and smuggled across borders. This story, a triumph of ideas in the face of cold steel and brute force, offered hope for the "unconquered" people under foreign occupation and celebrated the unbreakable spirit of free people. I feel like I should be sending copies to Iraqis currently under US occupation, but that could easily be construed as an act of terrorism.

Confessions of an Economic Hitman


John Perkins

I've been able to put two and two together for some time, so nothing in this book astounds me but it does bring the workings of the international banks and corporations as well as the US government out of the speculations of so-called conspiracy theories and into the matter-of-fact narration of one man's career path as an economic hitman.

Collapse:
How Societies Choose To Fail Or Succeed
Jared Diamond

Facinating book. Jared Diamond's name is what caught my attention as I was killing time at the bookstore at the airport. I was very impressed with his documentary "Guns, Germs and Steel" and figured he would make this study of societal destinies equally interesting. I was 100% correct. I especially enjoyed the chapters on the collapse of the Polynesian societies, realizing the scale-relativity with the evolution of our global society.

Brave New World

Aldous Huxley

Of course... the third book in my dystopian trilogy.

The United States of Europe:
The New Superpower and the End of American Supremacy
T.R.Reid

An excellent perspective on the power that's rising in Europe as we Americans continue to sleep with visions of our own glory in our heads.

Imperial Ambitions:
Conversations with Noam Chomsky on the Post-9/11 World
Noam Chomsky, David Barsamian

As always, Professor Chomsky presents that calm and collected voice of logic that cuts through all the noisy rhetoric, half-truths, corporate funded media hype and emotionally driven spin sessions. Barsamian's interviews with Chomsky are clear, crisp and sober conversations.

Farenheit 451
Ray Bradbury

Figured I'd continue my journey through "negative-utopia" that I started with 1984. It does seem appropriate given the current state of America from which I found much more connection with Bradbury's vision than I did with Orwell's, especially the way in which the real source of oppression is not the government but the people themselves.

Cuba
A New History

Richard Gott

Just a straight forward history book, but Cuba has a facinating history that reaches back to the days of Columbus and offers everything from pirates to revolutions.

1984
George Orwell

It seemed like a good idea to refresh my memory of a mid-century perspective on where the world is headed. Although I found some relief in knowing that we have not followed the Stalinesque course to the letter, I nevertheless found much of Orwell's larger concepts ringing ever so true in 21st Century America, especially Orwell's concept of continuous war and Big Brother.

The Best Democracy Money Can Buy
Greg Palast

Easy read... Palast is a circus ring master showing us unbelievable things. Penetrating investigation with a sense of humor.

One Market Under God
Extreme Capitalism, Market Populism, and the End of Economic Democracy

Thomas Frank

After reading the Lexus and the Olive Tree, I felt I needed a counter-balance view of globalization and how the liberated capitalism that I see everywhere around me, breaking the chains of regulation, is riding the globalization wave.

20:21 Vision
Twentieth-Century Lessons for the Twenty-First Century

Bill Emmott

The author, Economist cheif editor, tends to present very objective and slightly outside views of American economics/politics. I think this renders a more accurate assesment of how we fit in with the rest of the world. The book is a tour of the major forces of the 20th century with emphasis on how they are currently shaping the 21st century.

The Lexus and the Olive Tree


Thomas Freidman

Damned good book! Really opened up my eyes to what globalization is all about. Freidman's style of writing is engaging and his explainations are straightforward. I can see why people regard this book as the essential primer on the subject. I can also see why people think he is "pro-globalization" but I tend to think he's not so much promoting it as just pointing out the inevitability of it. I highly recommend this book to anyone interested in understanding globalization.

The Gnostic Gospels


Elain Pagles

I thought it was good. Explains a lot about the gnostic strain of Christain faith.

Consilience


Edward O. Wilson

Facinating. From the moment he starts decribing the Ionian enchantment on the first pages. This book describes the interrelation of seperate bodies of knowledge and how it all comes together.

The History of Money


Jack Weatherford

Human culture is possessed and these are some involving stories about the demon we call money.

Other material of interest:

Origins of the Federal Reserve (PDF) - Murray N. Rothbard

Excellent account of the monetary imperialism that led to the creation of the Federal Reserve.

The Elkhorn Manifesto
R. William Davis

This is an open letter to Americans that provides a historical perspective on the U.S. government's prohibition of Marijuana. Without stating any position on that particular issue, I have nevertheless saved a copy of the letter here because of what I think are some valueable and verifiable references to to what I call the "corporate priority over the better interests of the nation".