It was in August 2005, in the aftermath of Hurricane Katrina, that TV viewers around the world first started to question whether America was truly a great nation anymore.Days after the winds had subsided, footage showed the homeless, the destitute and disabled gathered around the partly-flooded New Orleans Superdome begging for water while armed National Guardsman ignored them in their hunt for looters.
How can this be?
Many asked how it can be that the richest nation the world has ever seen, which put man on the moon, which has a standing military of 2.3 million troops and reservists, which created the microchip revolution, and has for half a century dominated global commerce; how could this country not bring bottled water to its weak and vulnerable in their time of need?These shocking pictures brought a human face to the statistics that have long baffled Europeans: that 56 million Americans, 18% of the population, have no access to affordable medical care; that life expectancy, education and poverty in large swathes of the inner cities and rural south are worse than in parts of central America or the Balkans, yet alone long-embargoed Cuba.
The invisible nation within
It is almost as if within the USA, there is an underdeveloped country, held within invisible borders, in areas where the comfortably off do not go. This forgotten nation of tens of millions of people, many black or Hispanic, some recent immigrants but most not, live in a shadow that no light from Hollywood illuminates. Their cheap labour underpins the economy’s competitiveness, yet they are largely excluded from the growing wealth it has produced. Yet now these are the people who have taken down the Masters of the Universe, put out the lights in Manhattan investment banks, and helped put Treasury Secretary Henry Paulson on his knees in the corridors of Congress begging for help from Democrat leader Nancy Pelosi to get his $700 billion bank rescue package passed. Because, in the past five years, these so-called Ninjas (No income, no jobs, no assets) were offered the chance to buy a home and live the American Dream, no money down. And hardly believing it was possible, they took it.
A trillion dollars ? I’ll take it!
According to a paper by Carmen Reinhart of the University of Maryland and Kenneth Rogoff of Harvard, a trillion dollars in mortgage loans was offered to the lowest-rated subprime borrowers in the last few years. But the trillion-dollar dream was about to become a nightmare. The average earnings of the poorest fifth of Americans were $19,178 (£10,700) in 2007, just 40% of the US average, and the majority subsist on welfare alone. Such crazy loans were only possible because the companies offering them were acting on commission, passing on the mortgage agreements to others who on a wave of easy credit failed to check the quality of the loans they were funding. As we all know, these loans have gone "toxic", but because they were knitted by Wall Street wizards into intractably complex mortgage-backed and asset-backed securities it is very hard to put a value on them, even as they are unravelling within the vaults of banks around the world.
A seismic blow to the global financial system
This seismic blow to the global financial industry has led to a wave of bank failures, nationalisations, state-funded rescues and even currency crises from Germany to Iceland, and from South Korea right to the doors of the Capitol Building in Washington itself. However, the reverberations go deeper still, because the financial position of the United States itself is not so very much better than the very subprime borrowers who were at the root of the crisis.
Big economy, but bigger debts
Certainly, the US has world-beating companies, vast manufacturing industries and a giant services sector, which produced a national income (GDP) of $14 trillion last year. Yet it owes almost five times that in government promises to its own citizens in terms of education, healthcare and retirement-linked benefits. That is $67 trillion, a figure that has ballooned from $29 trillion in 2000. "No goose was ever so golden as the US economy, but that doesn’t mean it’s immortal," wrote Jim Grant, publisher of Grant’s Interest Rate Monitor.
Even the debt clock can’t keep up
While the economy has grown around 5% a year over the last seven years, government spending promises have grown 13% a year. Indeed, the National Debt Clock in New York, which since 1989 has recorded the amount owed by the state, in October ran out of digits to keep track of it. Government debt is quite separate from the debts of American individuals and companies. They have been splurging on Asian-made goods, but the packed container ships traversing the Pacific to the US have been returning empty. Money has been pouring year after year into the coffers of China, Japan and other Asian nations, as well as the oil exporters of the Middle East. In 2007, the US ran up a balance of payments deficit of £739 billion, 5% of its GDP. It’s been doing so for year after year.
A Himalaya of cash
These trade creditors have in turn lent back this Himalaya of cash, $5.2 trillion since 2000. Much of it has gone to the US government in exchange for Treasury bills. The rest has been invested in other dollar-denominated investments. This infusion helped fill the budget gap, and for years stopped the dollar from undergoing the necessary weakening to restore the American competitive trading position. This is also the money that funded the easy credit that inflated the US housing bubble, and this is the borrowing which the US economy, even with all the bailouts planned by the government, will struggle to service and repay. Whether you are a disabled single mother living in a trailer park in Mississippi, or the world’s greatest economy, the basic strategy for getting rid of debt is the same. You spend less, you earn more, and use the difference to work off the borrowing over an extended period.
For US consumers and employees this is already tough, and it’s going to get tougher. They have seen the value of their homes plummet and not all of them can afford their mortgages. They are already spending less, driving less and have cut back on fresh borrowing. Many more will lose their jobs. Their taxes are unlikely to fall, because the government has its own debts to look after. For the same reason, future promises in Medicare, Medicaid and retirement benefits may be broken. That’s also going to be true of the occupational pension plans whose ultimate value depends on the stock market. Even if all goes smoothly, it is going to take many years to get over this binge. While Americans tighten their belts, China and other Asian countries will continue to grow, albeit at a slower rate. When western consumers falter in consumption, the burgeoning middle classes in these emerging nations will step in, buoyed by their own prudent savings. This eclipsing of American power will mean curtailed foreign policy ambitions too. "What we are witnessing today is how empires end," lamented right-wing commentator Pat Buchanan. "The Last Superpower is unable to defend its borders, protect its currency, win its wars or balance its budget. Medicare and Social Security are headed for the cliff with unfunded liabilities in the tens of trillions of dollars," he wrote last month.
The most important economy, for now…
The US economy is still going to be the most important in the world, for years to come if not decades. But it will have to become leaner, less dependent on borrowing both at home and abroad, and more austere. Whether that’s just a recession or a 1930s-style slump, no-one yet knows. But we now know one thing for certain. The myth of American invulnerability has been well and truly broken. The homeless of New Orleans already knew that. Now, after this financial maelstrom, the rest of the world does too.
By Nick Louth, exclusive to MSN October 09 2008
So there you have it – we the british taxpayers some of whom are lucky enough to have small bank accounts are bailing out the american economy – The time has come, now that we see that the ‘american dream’ is in fact a nightmare, that we should accept that we are Europeans and stop the churchillian fantasy of becoming another plastic state of the union.