The Hollowed-Out American Dream

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“I sing of ARMs and the Man…”

~ Virgil’s Aeneid

We don’t really have that much more to sing about ARMs, dear readers, but we just couldn’t resist the headline.

Still, now that we think about it, our cautionary tale is likely to end just as bloodily as any epic poem we’ve read. Imagine what would happen if mortgages were adjusted upwards to rates anywhere near 10% — or anywhere near where they were 25 years ago?

That is why the Bernanke Fed cannot really fight inflation or stagflation the way Paul Volcker once did. Too many homeowners wouldn’t be able to afford it. ARMS were meant to give marginal borrowers flexibility. Instead, they have locked both the borrowers and the Fed itself into…well, leg-irons. The borrowers have no margin. Most cannot afford even the slightest boost in their payments. And with such boosts now automatic, the Fed can only react to inflation threats by prevaricating.

According to David Rosenberg at Merrill, discretionary items are now rising at a 5% annual rate — far beyond Ben Bernanke’s target. But what can he do?

ARMs were supposed to be a way to realize the American dream of home ownership. But, like much else in American life, that dream too has been hollowed out.

For two reasons. The first is “declining marginal utility.” The more you have of something, the less each additional unit is worth to you. A little defense is precious. But add more soldiers, weapons…more office workers, consultants, crony contractors and pension programs, the less real defense you get for your dime. And eventually, if you spend enough, you get a negative return…as we have in the Middle East today. There, once, only a few extremists hated us. Now, a couple of hundred thousand soldiers and two wars later, whole countries and civilizations hate us. And, we are less secure than ever. The marginal utility of defense spending has fallen below zero.

The second reason for the hollowing of America is that the horde of parasites — aging institutions, picks up managers, hangers-on, hustlers, opportunists — who pursue their own agendas, and subvert their clients’ goals.

And so it is with the American home. People fantasize about the peace of mind, the security, and the independence they will get from owning their own piece of earth. Even if things go against them, they tell themselves wistfully, at least they will have a place to rest their heads…a castle of their own where they will be king, emperor, tyrant, and elected chief-of-state all at once. Home sweet home.

But look what they actually get. Peace of mind? Security? Independence? Only if they are comatose enough not to notice the incessant barrage of property taxes, zoning laws, building codes, and mortgage payments that rains down on them from the first day they become owners. In fact, with today’s mortgages, they never actually own their house — it owns them!

The kings of today’s castles are not independent; they’re chained to the grindstone of work to meet mortgage payments. And they’re not secure: miss a payment, and their houses are snatched from them. They have no peace of mind; the dream of free and clear ownership swings perpetually just beyond their grasp, like Tantalus’s grapes. Our kings switch from one mortgage to another like galley slaves trying out oars.

And well they know it. People may be slow to think, but they are fast enough to feel. In surveys of American attitudes, pollsters have discovered that people already have a vague feeling that they are not as well off as their parents, and that they expect to be even less well off in the future. Of course, social scientists and economists dismiss these sentiments in favor of the numbers. Per capita consumption, they claim, is way up over the last half-century. People have two and a half times as many cars and watch a lot more television. They earn more money. They have about three times as much house per person and graduate from college more often. They can now go into supermarkets and select from as many as 200 different kinds of breakfast cereal. How’s that for a great country?

Thus the number crunchers prevaricate. But behind the dissembling numbers are the sentiments that tell the truth. People feel worse off because their real quality of life is falling. Real earnings — after inflation and taxes — have been falling for the working stiff for the last 30 years. Highway traffic moves more slowly. It’s harder to find a parking place. People spend more on education and health care — with less to show for it. They work more hours than before, only to have more shopping malls than high schools. They use vastly more energy than the rest of the denizens of the planet and make more per hour, but they live in a way scarcely better…and perhaps much worse.

All institutions age, decay, and collapse, we observe. Even the American dream…

And back to Ouzilly…

• We were accused recently of being tight. We hasten to defend ourselves.

We do not deny our tightness. Indeed, we are mildly proud of it.

There is something vulgar about throwing money around, when a more modest expenditure will do the same work. For example, we always travel in second class on the Eurostar, because we feel first class is just not worth the money. And between a $10 bottle of wine and a $50 bottle, there’s not enough difference to make us want to spend the money either.

On the other hand, we’ll pay more (or less) to get the piece of property we want, because there is typically a lot of difference between an ordinary place and an extraordinary one. And we don’t mind paying extra for business class on a long-haul flight, because otherwise we couldn’t sleep. And if we couldn’t sleep, dear reader, we couldn’t bring you these daily reckonings. Of course, in that case, perhaps, some of you might prefer we flew coach.

In any case, tightness is, we believe, a capitalist virtue that has simply got itself a bad name in the current intellectual climate. In other words, tightness, like exploitation (that other capitalist sin) may lie ultimately in the eye of the beholder. We offer this from the spy classic, Ninotchka:

PORTER: May I have your bags, Madame?

NINOTCHKA: Why?

KOPALSKI: He is a porter. He wants to carry them.

NINOTCHKA (to Porter): Why? Why should you carry other people’s bags?

PORTER: Well, that’s my business, Madame.

NINOTCHKA: That’s no business…that’s a social injustice.

PORTER: That depends on the tip.

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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