Poor Supply-Sider

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Poor George Gilder. The man is hallucinating again. You recall back in the late ’90s, Gilder was the “John the Baptist” of the Tech Bubble. One-third visionary; one-third lunatic; one-third incomprehensible. Gilder turned his face up to the stars of the Internet firmament and went a little mad. This brave new world of the Information Age was based on a new sphere of cornucopian radiance — reality un-massed and unmasked, leaving only the Promethean light, he wrote in his book, Telecosm. What that meant, we never knew. We still liked the man; he could say things like that with a straight face.

A lot of people come to the wrong conclusions about things, but Gilder does so admirably, almost heroically. While Thomas L. Friedman is dim, Gilder is bright. And, while Friedman is such a lightweight he practically evaporates from the page, Gilder is heavy, sinking into his own dizzy thoughts like a coin into a vat of corn syrup. Friedman fetches up his ideas by not really thinking about them; George Gilder thinks about them too much. When he focuses his intellectual energy on the subject of the imperial finances, for example, sparks fly. Soon, he is able to take what any sensible man can see is a disaster and weld it into a delightful new shape, a chimera, but pleasing to the eye. In his recent speech — we mentioned it here yesterday — Gilder makes two points about American finances:

1) The trade deficit is good, not bad 2) America’s debts are not so bad when you compare them to her assets.

On both points, Gilder is hallucinating.

As to the first, if we sell an apple overseas, he says, it is gone. But, if we borrow money from overseas or if a foreigner buys one of our companies, we still have the money. Hmmm. We don’t think we will bother arguing with that. Let it just stand there in the middle of the street, like a naked plumber claiming to be the king of Abyssinia.

The second point is absurd as well. Yes, our debt has gone up, says Gilder, but so has our amount of assets — much faster, in fact. Now, Americans own things worth $71 trillion, he points out. What’s a $500 billion federal deficit compared to that!

Imagine a man locked in a closet, dear reader. His guardians give him all he can eat, but his access to air is tightly controlled. Gradually, the air holes clog up. He gasps for breath, but the man is still in good spirits. Look how much fatter I am, he says to himself!

Now imagine a typical householder. We saw him just the other day, courtesy of a Fed study. He has a house, but he has almost no money. He has no pension, no stocks, no bonds, and no savings. Nada. Zilch. His real hourly earnings are either flat for the last several years, or actually going down, depending on whose numbers you believe. He can barely pay his mortgage. He cannot seem to pay off his credit cards. When the week’s bills are paid, he has less money left over to spend as he pleases — according to Elizabeth Warren’s calculations — than he did during the Carter administration.

Now imagine that his house suddenly doubles in value. Is he really better off? What can he do but borrow against the inflated value of the house. When he borrows, the air holes grow smaller. He’ll have an even harder time paying his bills. He can barely breathe as it is. Being a fatter cat makes him feel good about himself, but it doesn’t really help. Meanwhile, a friend (we can’t remember which) sends this — another way of bringing Gilder back into orbit:

“America is living off its historic mojo and going deeper into debt to do it — a high flyer who refuses to pare back their lifestyle in line with their newly reduced income. The game goes on because our mercantilist credit suppliers have gone into the box canyon with us — they have no political will or short-term capability to cut off the taps without major dislocation in their own economies.

“And on top of that, as Caroline Baum has observed, large foreign purchases of U.S. treasuries are credit stimulative if not economically stimulative, with the perverse result that the more dollars we send that China and the Middle East can’t spend, the more they got recycled back into treasuries to push down long-term rates. The credit line gets bigger the more we fall behind: A bizarro cycle that has only encouraged the housing bubble/shopping spree.

“As for America being the economic leader for whoever’s lifetime, methinks it requires a touch of hubris to say that about any country, given how fast the pace of change has accelerated and will continue to accelerate. We may indeed still cultivate the best, the brightest and the smartest, but they are only a modest chunk of the population. For America to wind up in a world of hurt, things don’t have to change radically. All we have to see is a proliferation of the trends in existence right now.

“If, say, 20% of the U.S. population is seeing its opportunities and income double or triple thanks to opportunities in this brave new world, their spending habits will put the further squeeze on the other 80%. Remember the Silicon Valley effect? Policemen and teachers living in trailers because San Jose was so damn expensive they couldn’t afford a place to live? We’re seeing that strata wash over the entire country in slow motion. It may be true that the nation’s piss-poor savings rates are due to a disproportionate amount of spending from the haves versus the have-nots. But if so, you still have the major issue of at least 50% of the population — if not a good chunk more — treading water in a rising-cost environment as the IP-enabled folks charge ahead.

“The West’s traditional societal models are going away, in large part because they were based on an anomaly in the first place. Now that the non-Western world is catching up and getting in the game, they are bidding up the cost of energy, bidding up the cost of materials, and bidding down the cost of manual labor and brain-power, which for a long time were artificially high. It’s a new equation, and one that we should welcome, if we are honest, because high-minded notions of America should not be sustained on the back of four-fifths of the world being poor.”

u2022 Today’s paper brings new tales of folly. “Demonstrations choke French cities,” says the Paris-based International Herald Tribune. What to make of it? Elizabeth has been following the story:

“It’s a fascinating story,” she begins. “But it’s hard to see anything good coming of it. France has very high unemployment among young people — about 20%. For the people in the suburbs — you know, the immigrants from North Africa — the unemployment rate is 40%. So, the government decided to do something to make it easier for employers to hire these people. Rather than have them for life, the way you have to with regular employees in France, you would be able to fire them any time in the first two years…without paying a big penalty.

“But the students and the labor unions see the move as the tip of an iceberg. They have it pretty well. They don’t have to work very hard — remember the workweek is only 35 hours and they have about six weeks of paid vacation. It’s unbelievable; they must know they are getting more than they deserve and that it comes at the expense of a lot of other people who don’t get jobs at all. So, they’re determined to flex their muscles and stop anything that might lead to a general reform of the labor market.

“But there’s something else going on. The suburban riffraff — les casseurs — are taking advantage of the situation. These are the same people who were setting fire to cars in the autumn. They are mostly hoodlums, but they come into the city and get in with the protesters and the next thing you know, there is violence. This is despite the fact that they are the very people the reforms were designed to help.

“It would be nice if the government could stand firm — like Ronald Reagan against the air traffic controllers, or Maggie Thatcher against the coal miners, but the French have different ideas. They treasure “solidarity” with the workers. Most likely…the government will cave in completely. In fact, I think it already has.”

u2022 Also on the front page of the IHT is news that “Bush ‘doesn’t accept’ Jaafari.” For those not following the news, Jaafari is the fruit of America’s fatuous effort to bring democracy to Mesopotamia. You remember, dear reader, in the absence of weapons of mass destruction or any other plausible reason for going to war in Iraq, the world improvers in Washington declared it part of a campaign to “build” a republic, based on the American model, on the banks of the Tigris.

Well, the Iraqis dutifully went through the motions of imitating their conquerors; they fell in line to pick elected leaders. Now, their imperial master tells them that it doesn’t like the leaders they’ve come up with.

Bill Bonner [send him mail] is the author, with Addison Wiggin, of Financial Reckoning Day: Surviving the Soft Depression of The 21st Century and Empire of Debt: The Rise Of An Epic Financial Crisis.

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