Sunday, December 2, 2007

The Bobby McGee Moment

Commenting on yesterday's post about Mr. Bernanke's combating the current economic weakness with obsolete strategies and weapons from the Great Depression, edwardo had this to say:

THE problem isn't liquidity, or access to credit, as such, though they are problems, the problem is a fatal loss of CONFIDENCE.....
What is occurring now is a watershed event, multigenerational in nature that has the potential to shake what is left of the U.S. republic to its foundations....

The words "confidence" and "multigenerational" combined in my mind to produce a "what if?" moment. Naturally, I take all responsibility for tangential excess and Edwardo is thus not to blame for what follows, if you think it unworthy. But if you think it valuable, the credit is his.


What if the current generation of Americans lose confidence in the "system": financial, political and social? Americans are saddled with enormous debt, many of them from the get-go when they graduate from college and are supposed to spread their wings, fly free and start building a better world. Instead, many have a monthly student loan payment around their necks - and I don't have to elaborate on what happens soon thereafter: car loan, credit card, mortgage, HELOC.. everyone is familiar with the "debt slave" rote. Household debt has never been higher in the United Sates, and servicing it now takes a larger percentage of disposable income than ever (chart below).

Debt Service as Percentage of Disposable Income (Chart: FRB St. Louis)

I frequently have a picture of the average, young middle-class American spinning inside a hamster wheel, hoping that with furious running he/she is going places. To keep them running, there are pictures of some wildly successful young hamsters hung around the cage: a billionaire, an alfalfa hedge-hog trader. But the wheels are all connected to dynamos producing wealth for the cage-owner class and very little trickles back inside the cage as sunflower seeds and nuts for the common hamster.

What if - for whatever reason - the hamsters decide they have had enough of this running around? What if they refuse to power the wheel, lay down on their cotton-wool beds and watch Critter TV all day long, content to just munch on whatever is thrown in?

Debt is a two-way moral civic obligation. It's not enough for borrowers as individuals to accept their responsibilities for repaying their debt. Society's political, business and financial leaders must also ensure that the economy generates plenty of earned income, so that borrowers have enough to repay debt and improve their living conditions. If, instead of more income all that is available is even more debt, then borrowers feel cheated and the social compact between them and lenders ultimately breaks down.

History teaches that when debt obligations become onerous, society's confidence about the future is diminished. People may just reach a "Bobby McGee" moment and decide that freedom's just another word for nothing left to lose and stop paying off their debt because they see no way out, anyway. No bankruptcy lawyer, no attempt to salvage anything, just... repossess the house, repo the TV, repo the SUV. A p a t h y.

I think the latest scheme by Paulson and the banks to freeze re-sets on ARMs is an early warning that the "elites" are getting really and truly scared about exactly such an eventuality, and are attempting to create a glimmer of hope amongst the "hamster" class. I wonder what Janice would have to say if she was still among us...


  1. I notice from the graph that after some earlier recessions debt service fell to under 11% of disposable income. It would be interesting to know how much of this was from, respectively, repayment, default, and rising disposable income.

    If it was mostly due to repayment and default, and there are perhaps factors that make 11% a typical recession-exit debt level, what would that imply about where we go from here?

    I always recommend the reading of "Balance Sheet Recession", a description of Japan's long post-bubble recession by Richard Koo, formerly Chief Economist at Nomura Securities. It argues that the reason Japan's central bank was unable to prevent deflation was that debt loads had become so onerous that everyone went into a "balance sheet repair" mode of paying down debt, and had no interest in borrowing no matter how low rates went.

    Most people seem to think that can't happen here. It's an implicit underpinning of Bernanke's belief that deflation can always be prevented by running the printing press.

  2. Confidence? This is just an admission that our financial system is a "confidence game".

  3. Hellasious -

    This is the anon who commented on M2/M3 yesterday - my comment about about M2 was based on the dip in this chart (from the garynorth website but it appears to link direct to the St. Louis Fed). I haven't checked the site in about a month - thanks for the correction

    And thanks for another great post but I still have to think that the Fed and Others (not to be too conspiratorial) involved have prepared, in some way, for the results of the policy they are pursuing. Again, I don't mean to be too conspiratorial but in the spirit of this crazy Midwest weather and BCS havoc how about this -

    Perhaps the Fed (and Others) are banking on the fact that ALL fiat currencies are about to go through some serious "adjustments" (whether due to their own monetary/fiscal making or in reaction to dollar-pegs). Gold is the great but is not very practical for daily hamster transactions. Might the powers that be be thinking that, in an environment of adjusting financial situations, certain amounts of debt and dates-of-debt-payment will be shelved in the interest of maintaining some semblance of order until debt-agreements can be better met "at a later date" (as long as their is debt, and the debtor is still able to pay, the debt still exists - "debt" can even be "collected" in different ways - M3 is just digits after all).

    Thanks again Hellasious - I know the ground I am treading with my posts and promise not pollute your thread with more whacko-meanderings!

    Enjoy the rest of the weekend.

  4. You are starting to sound like my twin, Hellasious!

    I have written about this three times before:

    The End of the Innocence, Advice to Young Chiropractor: Just Make More Money and A Rise In Student Loan Defaults.

    I am curious on your take to my idea that we are creating "barriers to entry" to young entrepreneurs.

  5. To: okie lawyer..

    I am starting to see doubles myself (smile).

    In case you didn't notice you posted your comment twice. In the interest of saving all those poor bytes from needless electronic enslavement, I removed the doppelganger.

    I like your posts on these subjects. I think $165.000 college debt to make $44.000/yr working TWO jobs as a chiropractor is the very definition of debt peonage...


  6. to jmf:

    I think the 11% level had to do with much lower overall debt levels and interest rates moving lower due to the recession.

    What we got past the 2001-02 slowdown was a hike in debt/GDP levels and an increase in debt service, despite interest rates that dropped to extreme lows. This shows how we got out of the recession: we borrowed our way out of it.

    Thank you for the book recommendation, I will look it up.

  7. Anon/M2,

    Worry not about whacky thoughts. Worry when they seem
    Exactly like
    Everyone else's.


  8. That Eduardo piece gave me a real jolt:

    We have an Executive branch that is violating Constitutional and international laws willy-nilly. We have a legislative branch that apparently could care less--so much for political confidence.

    We have international financial corps that are running Ponzi schemes instead of aiding the productive sector--economic trust kaput.

    Then we have the importation of manual labor by 20 million undocumented workers flooding into the country to do the work our citizens won't do (certainly not at the wage poor immigrants will accept). The exportation (and importation) of technical jobs because we don't have enough technically educated citizens to fill these slots (its all about shortages of qualified applicants and not about cheap labor, just ask any Microsoft exec) There goes the social fabric.

    What's the message? Your Constitutional rights and economic security were sold by the Washington and Wall Street elites. And your social fabric? We got ours, and we don't give a fuck about yours as long as our expenses are kept low.

    The big question is whether a strong enough totalitarian state will be in place to resist a critical mass of people say "Fuck me? No fuck you." On the other hand, maybe all most of the hamsters want is cheap entertainment and a few scraps thrown into the cage on a regular basis.

  9. JM, abt. book recommendation

    I liked it so much (from the AMZN description, anyway) that I added it as separate link. I think I will make reader recommendations a regular feature. People reading this blog make a lot of excellent reading suggestions.

    Thanks again.

  10. What might dear old crazy Janice say? I think we all know:

    "I'd like to sing a song of great social and political import.

    Oh, Lord, won't you buy me a Mercedez Benz/ My friends all drive Porsches, I must make amends/ Worked hard all my lifetime no help from my friends/ So Lord, won't you buy me a Mercedes Benz."

    I like this attention to the poor hampsters.... it's like Walt Disnay said, "it all started with a mouse."

  11. I think the Booby Magee reference nailed it. My daughter is a senior at a state school and I speak with her frequently. Thus far, my wife and I have been able to pay for my daughter's tuition & some of her room & board. But my daugther shares a lot with me about college life of her roon's not real promising.

    My daughter says that most of her room mates have student loans that average 25 to 35 thousand and this is at a state school. She says that a lot of her room mates in addition to their student loans are taking advantage of the credit card apps that show up in their mail almost daily. A number of her buds in addition to their studnet loans have run up credit card debts in the area of 5 to 10 thousand more. Here's how that psychology already owe 30 grand for your education, what's the big deal to run up $5 to $10 grand in consumer card debt to let you enjoy your college years on the weekends.

    What I assume will happen is this: college grads, depending on their majors will find that when they are working, almost their entire paychecks will be going to debt service on their student loans and credit cards. They will quickly reach a point where the idea of being a hamster in the wheel is less appealing, The government will by then already be bailing out sub-prime borrowers,,, how do you think the college generation will be viewing their debts at this point???

    Love the site.


  12. Eva:

    Gimme Mine

    I wonder how many other songs are out there that express the same idea?

  13. Anonymous / Rob:

    You might be interested in the movie Maxed Out. It was based on a practice at my alma mater, the University of Oklahoma, whereby OU received $3 million to allow credit card companies to market to college students on campus. I highly recommend it...especially for your college-age daughter and her friends.

  14. Okielawyer,

    There's too many songs to count. And if you'll pardon the 80s flashback, do you wanna ride in my Mercedes, boy?

    It's diesel -- just like Willie Nelson's! "If you've got the money honey, I've got the time."

  15. "What if the current generation of Americans lose confidence in the "system": financial, political and social?"

    I all ready have, and while I have no debt and a fair amount of assets I retired at 51 a couple of years ago. I simply can't see working more and receiving a currency that is falling in value in return. Our political leaders in both parties are bought and paid for by special interest and business groups, our financial system is a joke, and the general population is oblivious to the fact that they are debt slaves for their Arab and Chinese masters.
    Had enough.

  16. Yeah. Just think, Paulson's signature is on Federal Reserve Notes too. That gives me a lot of gold.

  17. I dated a girl who went to an "unnamed" Southern California private college with a very good football team. Total bill for her bachelors/master's degree: $212,000. Her starting salary: $60,000. Don't get me wrong $60,000 is a nice starting salary, but not when you are over $200k in debt!

  18. I think there are lots of worried hamsters around. I'm in the land downunder and left university 20 years ago (luckily with no debt). An Aussie uni graduate these days could have between $30k-$200k debt depending on the course taken.

    A while ago I wondered aloud how these people starting out in the world now pay off this debt, save a deposit to buy house (entry level Australian house price $300K+), get married, have a honeymoon, pay for the mortgage and the upbringing and eduction of any baby hamsters they may produce. Baby hamster training wheels cost alot!

    I concluded it just wasn't possible without significant parental or some other support. And that's without the big screen TV and snazzy SUV car.

    I'm glad I started out 20 years and I feel for those starting out in life now.

  19. A dissipative structure must cycle energy and material to persist in a competitive and often hostile environment. Banks, corporations and government are dissipative structures whose main concern is growth, reproduction, and survival. They will do this at the expense of whomever or whatever is available. Nature is about warfare and consuming other beings that are reluctant to lose their lives. I am sure the United States would move into Iran and start sucking it dry tomorrow if it were not afraid of acquiring a fatal wound in the process. Banks and corporations create debt slaves of the sheeple, siphoning off most of their productivity while government applies a full spectrum of taxes. Medical saviors save lives only to demand a pound of financial flesh that more or less kills the patient.

    I decided a couple of years ago that I would no longer play the game. I defaulted on all unsecured debt. I was especially aggravated when all of my credit card rates went through the roof when I was late with one card’s payment. The evil had become too blatant. Then there was the bankruptcy reform legislation.

    Wait until the general populace figures out Peak Oil and then the crescendo of Peak Natural Gas about ten years later and that their houses are not an investment but rather just an unaffordable consumption item that has become obsolete in a new energy environment. They will soon realize it is better to live on the cheap and save real goods and capital rather than send it to the bastards of Manhattan. Borrowing for consumption especially is no different in the end from gambling, if you play long enough you end up broke.

    I keep an Easter Island moai figure, a giant Megalodon tooth and a copy of William R. Catton, Jr.’s Overshoot next to my monitor. These symbols keep me well grounded in reality. Imagine that you are one of two foxes and there is only enough food for one of you to survive the season. One of you will starve. If you catch more than half of the available food you will survive, but if your competitor catches more than half of the food they will survive and you will die. What should you do? Immediately try to capture more than half of the food? Perhaps you should consider another option. Perhaps you should try to kill your competition to ensure your own survival. Just make sure you have a clear advantage and lots of Patriot missile batteries around.

    Right now nations are trying to control as much prey as they possibly can. Round it up and put it in a pen for later consumption. But be assured that if one of the competitors (and there are many) finds that they are losing and facing a considerable die-off of industry and populace, they may decide to strike a lethal blow at their competitors.

    It’s time for everyone to have that Bobby McGee moment. The future will not be like the past.

  20. Thankfully you allow anon comments because I would never write the below under my own identity.

    I attend the most expensive private school in the US. My education is 100% paid for by my parents. I know that am beyond privileged. A unimaginable fractional decimal of the population.

    I kick myself everyday because I did not choose to major in finance. I kick myself because a major in finance would have led me into the get-rich fast lane - and allowed me to take the very first exit.

    I have lost complete confidence in my government and its leaders. An endless war, emasculation of our most sacred rights and a blind eye to climate change.

    As soon as I can amass enough assets I will establish permanent residence outside of this country - for good.

    What is offered by staying? On-going political disenfranchisement, a rigged economic system and crushing national debt that will result in my generation being the most highly taxed in 100 years.

    I reject.

    I'd rather live as a peasant in Nicaragua.

  21. I find it unthinkable beyond words that, just as the richest country in the world does not have a universal health plan, it likewise does not provide an affordable high-quality tertiary education system to its children.

    What does "richest" mean, anyway? 85% poor and nouveau-poor + 10% rich + 5% super-rich?


  22. we live in a world where the middle class are getting increasingly squeezed by more and more debt as the rich get richer and richer.

    This is clearly not sustainable and eventually the middle classes will rebel.

  23. Very well stated, Hellasious. But then, I don't need convincing.

    I started thinking this was the case 4 years ago when I read Kevin Phillips' book "Wealth and Democracy". He hit on some of these points and wrote about the danger of disillusionment resulting from the purchase of legislation by the hamsters at the top. That book, and section 3 of his more recent book "American Theocracy: The Peril and Politics of Radical Religion, Oil, and Borrowed Money in the 21stCentury" went into considerable detail about the creation of debt that cannot be serviced by earned income and the financialization of America.

  24. Wow. I can’t tell you how many times I’ve thought about this myself. “The people” have it within their power to cause a revolution. All they have to do is stop spending beyond what they can prudently afford; just spend and save in a manner similar to their grandparents. This simple change would rock the political and financial worlds, and lead to a radically different (and better) society than we have at present.

    As for “the hamsters”, they need to get off the wheel now. Just stop running. Live within their means. Quit smoking the credit “crack”.

    I believe the institutions of power in this country have ceased to demonstrate any concern for the long-term health of this country or its citizens. I want to see Paulson fail. I want to see Bernanke fail. I want to see Bush, Schumer, Bair, Goldman, Bear, Citi and all of the rest fail. I want the system to fail – deep and wide. Such a failure would lead to a serious national reassessment of beliefs, values, priorities and laws, and a golden opportunity to fix many of the problems we have today.

  25. given that real weekly wages for production and nonsupervisory personel peaked in 1973, fell by roughly 14% before rising somewhat during the later 1990s and have at best stagnated since then, it's easy to see the problem has been 'long time a comin.'

    besides the above, it stands out that progressively greater credit money creation, (consumer, financial sector, govt), has been unable to reestablish either an avg. nonfinancial corp profit rate or growth rates equivalent to those of the 1950s and most of the 1960s.

    the capital system will not disappear but, in association with the above, has been/is experiencing a deepening crisis of legitimacy compounded through the hegemon's struggle to retain its global position. Other moments echo in the present.

  26. Janice didn't write that - Kris Kristofferson did.

    Otehrwise, great article.

  27. To bob,

    Yup and I love Kris, too - but Janis's version is burned in my brain forever. That voice...