What's Going On With The Economy: Part II
State and local governments, most businesses, and most people are, ultimately, not the problem. Spending is declining because the people have less ability and desire to spend. So, what is the root problem?
As the states bring in less revenue, they have less to spend. As the states' public employees are compensated less, they have less to spend. As the businesses receive less money in sales, they have less to spend. As everyone receives less money, they all have less to spend, and less to pay in taxes.
Where is the money going?
There are a few special players in the economy that can be divided out from the rest. These special players have very large impacts on the economic system because they can increase or decrease the overall amount of spending in the rest of the economy. These special groups are:
* the foreign countries
* the oil owners / corporations
* the banks
* the federal government
* the rich
We need to understand the role that each of these can play in reeking havoc upon the functioning of the economic system. Some of these groups are rather easy to understand. Others, not so easy. Let's take them from easy, to hard.
First, the foreign countries. We buy things from the foreign countries. The dollars go to them. To their bank accounts. That money leaves the control of our country. Depending on the needs and whims of the foreigners, they can either spend the money, so it comes back into the USA, or they can keep it outside. This is akin to an open bleeding cut on our economy.
The money or blood flows out, but it does not flow back it.
It is like a vampire, draining away the ability of the country to continue.
Of course, to a certain extent, we are the ones slitting our own wrists, as we do indeed send the foreigners our money, in exchange for their cheep goods, made cheap by the abject poverty of their lands, and the willingness of the people there to work for pennies a day, so that they can feed their families.
The trade deficit, as it is known, is, in reality, more complex, but the essential point is knowing that our spending behavior, and the spending behavior of foreigners, all impacts our economy.
The oil producers or oil owning companies are the next on the list.
There was only a certain amount of oil in the ground, when it was first seriously extracted a hundred and fifty years ago. Since then, we've extracted millions upon millions of barrels, and for the most part, burned it up, putting the carbon back into the atmosphere. What remains in the Earth is the oil that is very expensive to get out, very hard to get out, and very slow to get out.
At the moment, the world extracts about 85 million barrels of oil per day from the earth, and then we burn about the same amount up each day.
This rate of extraction, though, is soon to decline. Instead of extracting 85 million barrels per day, it will soon be 80 million per day, and then 75 million per day. Still, our desire to buy and consume this oil will continue. The result is that the prices for oil will rise, first, due to the reasons of geology, second, due to the reasons of economics, and third, due to the speculation that, in the future, oil will be worth more.
In any event, as the price of oil rises, the amount of money we spend on oil, and the products of oil, also rises. The amount of money in the bank accounts of the oil owners and oil corporations, this amount rises. In some cases, the amount of money coming into these accounts, and of course, out of our accounts, may increase by 50% or more from one year to the next.
This would not necessarily be a problem, if only the oil owners and oil corporations would instantly spend this money back into the USA's economy. But, as with anyone, when money comes in, it is not immediately spent, especially when there is a windfall. As in 2008, the rush of money leaving the people's pockets as they paid for $4 gasoline ended up in the accounts of the oil owners, and then, only much later, did they spend this money back into the economy.
This situation is very difficult, because the geology conspires against us. We have burned up and consumed all the easy oil. Now, only the tough oil is left, and we have to build multi-million dollar rigs just to pump up a tiny fraction of our consumption. What we have here is a clear constraint on the future. If there were the capacity to consume the oil faster, it would just be gone that much more quickly, and that much more shockingly.
Now, we come to the banks.
We all know the banks are doing some very strange and troublesome things with money. First, they would extend credit to pretty much anyone, so that the banks could make huge profits, by slicing and dicing and selling the resulting debts, and making tidy sums in the process. Liar loans. Alt-A's. Jumbo loans. No money down. No credit check necessary. The private, for-profit banking system, did everything that they were allowed to do, to do exactly what they must do as corporations beholden to the profit motive, they sought profit, no matter the long term impact on the economic system, or even the stability of the entire banking system.
During this time, the banks certified the quality of the credit of millions, resulting in trillions of dollars in credit or money, that flooded the economy, very much like an IV with a new pint of blood would revive the ones drained of blood by their purchases of foreign products, including, most especially, oil.
Yes, it was a credit bonanza, and despite the rapid leak of money out of the country, this sudden flow of cash, it kept things going in such a way that most thought things were good and just going to get better and better. In fact, some still believe that these "good times" will return, but in reality, and as I you shall soon understand why, this sort of "good times" is most likely a point in our history never to be reproduced.
The banks now, are doing exactly the opposite of what this sort of economy would need for it to stay afloat.
As people, businesses, and state/local governments are unable to keep up with all of their bills, they are breaking their promises made to the banks. People are simply walking away from thousands of dollars of debt, that they promised to pay to the banks. The banks, in turn, are forced to record that their assets are much less than they had previously stated. This leads to a situation where the banks are unable to verify the credit of most people who might go seeking for it. At the same time, with millions unemployed, the credit they might be extended is much, much less.
The net effect is that what money continues to be paid into the banking system ends up being extinguished in the write down process; and that the amount of money coming out to the banks is being severely diminished. For the economy, this means much less spending, as both businesses and individuals no longer have the ability to get credit. For the housing market, this means that people are unable and unwilling to pay higher prices for homes, which in effect means that the value of the homes are much less than before. This, in turn, convinces the owners of homes that they are worth much less, possibly less than they owe to the bank. All of this conspires to reduce the spending that regular people and regular businesses do, further contracting the economy.
While the banking picture is more complex, and more severe, with mortgage backed securities, collatoralized debt obligations, credit default swaps, and other obscured derivatives, which come together to threaten the very stability of the economic system, for now, just understanding that people were using credit to buy, which was supporting the economy, and now that credit is no longer being used, this is sufficient, for the time being, to understand what is happening with the banks.
Finally, we come to perhaps the two biggest players in "what is going on with the economy": the federal government and the rich.
As the states bring in less revenue, they have less to spend. As the states' public employees are compensated less, they have less to spend. As the businesses receive less money in sales, they have less to spend. As everyone receives less money, they all have less to spend, and less to pay in taxes.
Where is the money going?
There are a few special players in the economy that can be divided out from the rest. These special players have very large impacts on the economic system because they can increase or decrease the overall amount of spending in the rest of the economy. These special groups are:
* the foreign countries
* the oil owners / corporations
* the banks
* the federal government
* the rich
We need to understand the role that each of these can play in reeking havoc upon the functioning of the economic system. Some of these groups are rather easy to understand. Others, not so easy. Let's take them from easy, to hard.
First, the foreign countries. We buy things from the foreign countries. The dollars go to them. To their bank accounts. That money leaves the control of our country. Depending on the needs and whims of the foreigners, they can either spend the money, so it comes back into the USA, or they can keep it outside. This is akin to an open bleeding cut on our economy.
The money or blood flows out, but it does not flow back it.
It is like a vampire, draining away the ability of the country to continue.
Of course, to a certain extent, we are the ones slitting our own wrists, as we do indeed send the foreigners our money, in exchange for their cheep goods, made cheap by the abject poverty of their lands, and the willingness of the people there to work for pennies a day, so that they can feed their families.
The trade deficit, as it is known, is, in reality, more complex, but the essential point is knowing that our spending behavior, and the spending behavior of foreigners, all impacts our economy.
The oil producers or oil owning companies are the next on the list.
There was only a certain amount of oil in the ground, when it was first seriously extracted a hundred and fifty years ago. Since then, we've extracted millions upon millions of barrels, and for the most part, burned it up, putting the carbon back into the atmosphere. What remains in the Earth is the oil that is very expensive to get out, very hard to get out, and very slow to get out.
At the moment, the world extracts about 85 million barrels of oil per day from the earth, and then we burn about the same amount up each day.
This rate of extraction, though, is soon to decline. Instead of extracting 85 million barrels per day, it will soon be 80 million per day, and then 75 million per day. Still, our desire to buy and consume this oil will continue. The result is that the prices for oil will rise, first, due to the reasons of geology, second, due to the reasons of economics, and third, due to the speculation that, in the future, oil will be worth more.
In any event, as the price of oil rises, the amount of money we spend on oil, and the products of oil, also rises. The amount of money in the bank accounts of the oil owners and oil corporations, this amount rises. In some cases, the amount of money coming into these accounts, and of course, out of our accounts, may increase by 50% or more from one year to the next.
This would not necessarily be a problem, if only the oil owners and oil corporations would instantly spend this money back into the USA's economy. But, as with anyone, when money comes in, it is not immediately spent, especially when there is a windfall. As in 2008, the rush of money leaving the people's pockets as they paid for $4 gasoline ended up in the accounts of the oil owners, and then, only much later, did they spend this money back into the economy.
This situation is very difficult, because the geology conspires against us. We have burned up and consumed all the easy oil. Now, only the tough oil is left, and we have to build multi-million dollar rigs just to pump up a tiny fraction of our consumption. What we have here is a clear constraint on the future. If there were the capacity to consume the oil faster, it would just be gone that much more quickly, and that much more shockingly.
Now, we come to the banks.
We all know the banks are doing some very strange and troublesome things with money. First, they would extend credit to pretty much anyone, so that the banks could make huge profits, by slicing and dicing and selling the resulting debts, and making tidy sums in the process. Liar loans. Alt-A's. Jumbo loans. No money down. No credit check necessary. The private, for-profit banking system, did everything that they were allowed to do, to do exactly what they must do as corporations beholden to the profit motive, they sought profit, no matter the long term impact on the economic system, or even the stability of the entire banking system.
During this time, the banks certified the quality of the credit of millions, resulting in trillions of dollars in credit or money, that flooded the economy, very much like an IV with a new pint of blood would revive the ones drained of blood by their purchases of foreign products, including, most especially, oil.
Yes, it was a credit bonanza, and despite the rapid leak of money out of the country, this sudden flow of cash, it kept things going in such a way that most thought things were good and just going to get better and better. In fact, some still believe that these "good times" will return, but in reality, and as I you shall soon understand why, this sort of "good times" is most likely a point in our history never to be reproduced.
The banks now, are doing exactly the opposite of what this sort of economy would need for it to stay afloat.
As people, businesses, and state/local governments are unable to keep up with all of their bills, they are breaking their promises made to the banks. People are simply walking away from thousands of dollars of debt, that they promised to pay to the banks. The banks, in turn, are forced to record that their assets are much less than they had previously stated. This leads to a situation where the banks are unable to verify the credit of most people who might go seeking for it. At the same time, with millions unemployed, the credit they might be extended is much, much less.
The net effect is that what money continues to be paid into the banking system ends up being extinguished in the write down process; and that the amount of money coming out to the banks is being severely diminished. For the economy, this means much less spending, as both businesses and individuals no longer have the ability to get credit. For the housing market, this means that people are unable and unwilling to pay higher prices for homes, which in effect means that the value of the homes are much less than before. This, in turn, convinces the owners of homes that they are worth much less, possibly less than they owe to the bank. All of this conspires to reduce the spending that regular people and regular businesses do, further contracting the economy.
While the banking picture is more complex, and more severe, with mortgage backed securities, collatoralized debt obligations, credit default swaps, and other obscured derivatives, which come together to threaten the very stability of the economic system, for now, just understanding that people were using credit to buy, which was supporting the economy, and now that credit is no longer being used, this is sufficient, for the time being, to understand what is happening with the banks.
Finally, we come to perhaps the two biggest players in "what is going on with the economy": the federal government and the rich.