“Buried deep in the financial pages, telltale signs are appearing that suggest America may well be headed for a financial meltdown. In January 2004 the staff of the International Monetary Fund, who normally worry about profligate nations like Argentina, took direct aim at the United States, warning that we are careening toward insolvency… As a nation we are running on empty.”
~ Peter G. Peterson, Running on Empty, Preface
America and the world today are firmly mired in a General Crisis which is made up of many Great Crises, themselves made up of many little crises, which are highly interdependent and in many ways synergistic [reinforcing and multiplying each other]. This General Crisis is so vastly complex and so institutionalized that it is impossible to give more than an overview of it. The many little and Great Crises that make up the General Crisis are financial, political, and cultural. They are not scientific, technological, or primarily economic, all of which are the positive factors that are being slowly overwhelmed by the financial, political, and cultural Crises.
I and a great many other people from all the intellectual disciplines have been analyzing these Crises for decades. Peter Peterson’s splendid books, most notably his recent book Running on Empty, are representative of the best of these I have drawn on in my own work. I strongly recommend that people read that book and related ones for details on what I shall be dealing with here and in my other articles related to this [Part I of the series]. I know all intelligent and knowledgeable people know a great deal about many of the details of these Crises at all levels. But all of us have immense difficulty in trying to “wrap our minds around” these immensely complex Crises — that is, get a Big Picture of them. We need a Big Picture as a General Framework for seeing and grasping them: otherwise, we feel completely lost in the vast details. Even one book like book Running on Empty can leave one feeling drowned in details. So my purpose in these few brief outline essays is to highlight the Crises which seem to me to be the most important — the biggest, most pressing, and most irresolvable by standard measures. (A crisis is defined as a problem that is not clearly solved by standard measures, but they come in all degrees of severity, lack of clarity, and insolvability by standard measures.) My analyses are certainly problematic and meant to encourage creative thinking about them, not to impose some abstract framework of ideas on the vast and inherently problematic realities of our world. I begin here with the financial Crises because they are more pressing and may lead any day to a crash or implosion of the sort we are all too familiar with from the Soviet example, the Japanese Crash, the Crash of the Mexican and Asian economies, the U.S. Stock Market Crash of 1987 and the first years of this new century (especially the Nasdaq Crash) and lesser Crashes in recent years, such as that of bonds in the Russian default and the Crash of LTCM in its wake. (Robert Shiller’s splendid book on irrational exuberance, second edition, is vital on these.) I shall then proceed to the more problematic political Crises and finally the Big Picture of The General Crisis made up of all these.
The crucial, general point about the Big Picture of the financial Crises is that the overall, total, accrued financial Crises are so immense and generally soaring so rapidly. Some of these taken alone, such as the medical and Medicare cost crisis, could “bankrupt” or otherwise cripple the U.S. over the long run, if the recent trends continue for very long. But the crucial point is that there are so many of them soaring. Any one Crisis might be resolved by radical reforms and probably would be, if it were the only Great Crisis we faced. Most Great Crises do not “cripple” a nation because at some point before it is too late the nation makes massive reforms to prevent catastrophe. But any move to resolve one or two of these Great Financial Crises we face will seriously detract from our resources to resolve the others, so, even if we do radically reform to resolve one or two, there will still be the others and they will likely be worse because we have redirected our resources to deal with the one or two. Moreover, each of these Crises is now so great that any possible radical reforms to resolve any of them leads to explosive political fights that involve the great political crises we face (to be addressed in Part II of this Series)
Because we have delayed dealing effectively with these Crises so long, we are now in the situation of someone who has diabetes, obesity, immobility, severe heart and circulatory problems, and the many lesser problems each of those causes. Dealing with any one of these problems would be difficult, but The Total Risk Factors are extremely high and interdependent. It is, for example, very hard to reduce obesity without more mobility, so it is very hard to control the blood sugar problems that come with obesity, and so on and on. I will return to this crucial point later.
My arrangement of each of these Great Financial Crises is just a rough, inherently problematic ranking. Number 10 may look less “Great” to me now, but look like the worst of all to you, and may in fact wind up being the one that proves fatal in the end. There is nothing simple or obvious about ranking one over the others, nor is there any completely clear definition of each Crisis or clear measurement of each. Phony official statistics are one of the worst aspects of the pseudo-science attitude of our government “experts” today and their mis-measurements are a vital factor in deceiving the public and allowing the Crises to continue growing, to come home to roost in some future political administration. The crucial thing is the obvious order of magnitude and general dimensions of the Crises, not pseudo-scientific precision. I see each of them as so big and cutting across so much of our society that I am merely pointing out a great mountain range — THERE it is looming on the horizon, you can’t miss it, if you just look. It does not really matter if it is a $10Trillion Crisis or a $30Trillion one: it’s huge and can trigger a fatal cascade of problems that grows into a catastrophe of some sort, such as a CRASH or even a system implosion.
Number 1. Soaring hundreds of trillions in derivatives contracts that have never been tested in a major financial crisis.
The most recent guesstimate I’ve seen by a good financial source of the derivatives contracts outstanding is supposedly rapidly approaching $500,000,000,000,000. I say supposedly because the number is so immense and mind-boggling I do not really believe the estimate is right. My rational mind keeps saying “just say no!” As the analyst said, it seems beyond reason that people in finance would want to “hedge” ten times the total global annual domestic products. But the number has certainly been soaring. Just a few years ago estimates were about $150,000,000,000,000. (Yes, Alice, that’s trillions, what we call real money down here in our humble rabbit hole.) I see this half quadzillion (or whatever!) dollars worth of contracts cutting across all major legal systems in the world as a Mushroom Cloud hanging over us that could snuff us out because it is so immense as to be unbelievable, the contracts are often so complex no one can understand them, they have never been tested in a great financial crisis and all past experience shows that this is the golden hallmark of looming disaster in finance, and no one can even be sure how much there is, how immense the turnover of contracts is, or exactly what is being done with them. There is no system of effective, spontaneous morality governing them around the world and no central regulation, a deadly combination in many markets in recent days, such as the cataclysmic corruption of the partially deregulated electricity market in California. Those are no doubt thoughts Warren Buffet had in mind some years ago when he called the then small number of outstanding derivatives weapons of financial mass destruction. The mere thought of this immensity of unknowns fills me with fear and trembling, like discovering a parallel universe of negative matter would. My mind quails before the thought: It’s impossible, therefore I do not believe it is happening, but they keep soaring. It reminds me over and over again of what David Stockman said back in the halcyon days of mere federal budgets, No one knows what these numbers really mean. We know derivatives have locked up in many lesser financial crises; we know hidden derivatives losses brought down the venerable Barings and recently Deutsche Bank discovered about $53 million in such hidden losses; we know the collapse of LTCM was seen as a danger to the whole global financial System by the Fed and the Big U.S. Corporations which saved it because they held a tiny position of about $1trillion in derivatives with little capital to back them up when the world bond market was hit by a very small default compared to the immense dangers today; we know there is some pretty wild speculating going on in Korea and other places in new equity derivative instruments; we know they are used for far more than hedging risks…and everything we know seems scary to me. What can we do to contain this unknown, awe-inspiring RISK? God knows, I hope, but I haven’t the foggiest what he knows.
Number 2. Soaring tens of trillions in medical and Medicare costs as far as anyone can pretend to see.
Medical costs have been soaring for decades, with ups and downs, and are soaring at about 8% officially each year recently, about three times the official inflation (CPI) figures. Our society is being ravaged by soaring epidemics of many kinds of degenerative diseases — diabetes, obesity, autoimmune problems, dementias (especially Alzheimer’s); we are facing soaring costs for old epidemics of cancer, heart disease and others; and avian flu in the near future may annihilate us. The diabetes epidemic alone is getting awful in all ways, especially financially. Some will be curtailed, but probably at soaring costs, as is true of heart problems. We are living longer, getting sick more, dying more slowly, running up soaring costs. The immensely bureaucratic System of medicine is highly corrupt, increasingly inefficient and dangerous, and totally misconceived to deal with our soaring problems because it is aimed at dealing with the catastrophic problems when they happen rather than at preventing them, a much cheaper way to go. This year the Big Pharma Corporations spent over forty billion dollars on R&D but got only about 20 really new drugs to market. Some new drugs cost far more than an arm and a leg combined, as much as $100,000 for an anti-cancer drug to extend the survival of colon cancer patients several months. Meanwhile, the Baby Boom tsunami has hit 60 and starts retiring at soaring rates in several years. Medicare individual payment costs are being cut at the federal level, leading doctors to cut patient care. Medicare alone could bankrupt the U.S. if these trends continue. They won’t continue, but they can wreak havoc on everything. And the political paralysis of Big Brigades fighting each other prevents any move to effective resolution of this soaring, immense Crisis.
Number 3. Soaring social security and pension system costs and bankruptcies.
This Great Crisis overlaps greatly with Number 2 and is due in part to the same longevity and aging disabilities problems. The projected cost increases run into the tens of trillions, will lead soon to having one retiree for two workers (two and a half the current load), corporations are already rapidly eliminating defined benefit programs, going bankrupt and turning costs over to the federal government, whose pension insurance program is de facto bankrupt. The Bush administration proposes “growing our way out of the Crisis” by letting people take part of their money out of SS and invest it in very volatile, risky baskets of assets they know nothing about. This reminds me of Reagan’s “growing our way” out of the soaring bankruptcies of the S&L System, which led us into a Financial Black Hole and tsunamis of corruption. Optimists sing the praises of the “Chilean Solution,” not noting that a country one hundredth the size of the U.S. is not a good comparison and the fact that Chileans are screaming bloody murder over the costs and failures of their System after just a brief time. Many millions of Americans are losing their pensions and medical benefits and going back to work or not retiring at all. This synergistic twin of Medicare and Medical costs is a very Great Crisis that will not be resolved soon, if ever.
Number 4. The Chinese-American bubble is the greatest financial bubble in history and is the result of the unsustainable imbalances of currencies, currency manipulations, debts, investments, and much else.
If recent trends continued for long China would soon own the U.S. Treasury market, the U.S. would have no jobs left for anyone but speculators, and the Chinese Communist Party could defeat the U.S. by pulling the financial plug on us without going down the tubes with us. It won’t happen because no nation is that insane. (God forbids, I hope.) The Bubble will come to an end. If it leaks faster and faster over many years, we will likely have soaring interest rates to buoy the dollar and, thus, a rapidly sinking economy which threatens to trigger a cascade of falling dominoes. If the Bubble crashes rapidly, keep an eye on the Black Hole below us, especially that of derivatives. Optimists promise us that God looks after drunks and American speculators. I hope so, since I can see no way any form of “unwinding” of this immense Bubble which has pioneered new forms of imbalances can end in any way other than disaster. The Chinese soaring purchases of commodities has produced a Bubble in major Commodities of most forms and led to bubble-like conditions in Japan, Korea and other nations. We have little bubbles on Great Bubbles and that is always a scary situation.
Number 5. Soaring energy costs threaten us with soaring inflation, decreasing competitiveness, loss of all energy-intensive production here, declining investment returns and more.
The Great Chinese-American Bubble may have led to a short run soaring in these costs which will decline when the Bubble dissipates, but it seems clear we are at or near the historic peak in oil reserves that will lead to soaring prices over the long run until new technologies come on line to cut those costs. Any serious cut in exports from the Persian Gulf or other dangerous areas due to attacks, soaring insurance costs, etc., could lead to sudden jumps in oil prices and catastrophic results. There is a long run resolution to the Crisis, but the U.S. has adamantly refused to embrace it (alternative energy sources, soaring efficiencies mandated by carbon taxes or other means, etc.). Those who refuse to adjust, will not, and they will not reap what they have not sown. We have sown waste and refusal to adapt, so we shall reap the Energy Crisis. Count on it, though we may have a breather if China crashes — or an overnight catastrophe if Israel or the U.S. attacks Iran and they shut down the Straights of Hormuz or sink a few ships and send insurance costs sky-rocketing.
Number 6. The great real estate bubble will sink one way or another and take much of our consumption with it.
The vast tsunami of free paper money the Fed and other central banks poured out into the financial web to avoid a Crash when the U.S. stock assets crashed (wiping out maybe eight trillion dollars on paper) and the Chinese-American Bubble have led to Real Estate Bubbles around the world, including a huge run-up on the U.S. coasts and some other urban markets. These are now cooling, most clearly in hyper-inflating California. They will leak year after year or crash, bringing prices and consumption down. Wild financing and spending built-up equity to fuel the U.S. inflation out of the beginning crash in the early 2000’s have left many millions of Americans very vulnerable financially. It is likely we will see a reverse multiplier effect lead to cascading downward in consumption. However it ends, it will not end well.
Number 7. Debts of all forms have soared in the U.S. and much of the world and savings have hit sub-zero in real terms in the U.S.
The U.S. has roughly the total indebtedness now that it had at the end of WWII. Then we totally dominated the world, had an unchallenged control of the global currency, were the great creditor nation, owed debt only to Americans, and faced no major, immediate threats. Today everything is topsy-turvy. We are now the Great Debtor Nation and owe soaring percentages of our economy to foreign lenders — roughly 8% more a year, almost as bad as a nation living on credit cards. The dollar seems wildly overpriced in this situation, because the Chinese, Koreans, Japanese, et al., buy it to keep our currency high relative to theirs so they can hollow out our productive investments needed to pay the foreign creditors and take away the jobs needed to pay for everything. It was hard to get out of that debt after WWII. Today it will take the help of God, which I certainly hope will be forthcoming on time. Our nearly $800,000,000,000 a year in current account deficits [Yes, Alice, billions] is an incredible imbalance with incalculable risks. Optimists assure us that God is a great juggler who can balance the wildest imbalances and soaring disequilibria. I hope so.
Number 8. We have a great stock market bubble and all the obvious signs of speculative excesses in financial markets.
The price-to-dividend ratio is so high that no one mentions it. The only ratio the used-car stock dealers mention is price to pie-in-the-sky future earnings that they make up (“projected earnings,” as they say), just like last time around. The same analysts are screaming the sky is no limit and making bushels of dollars for their wild touting. There are now scores of times more stock and hedge funds than a short time ago, apparently about 8,000 so-called hedge funds selling every inconceivable paper asset bundle with wild leverage. These wild hedge funds make up between half and three quarters of trading volume each day in most major markets, obviously so in the U.S., and seem clearly to be swaying the markets to fleece the sheep. There may soon be as many Funds milking the ignorant stock buyers as there are Lobbyists in D.C. milking the nation dry (though right now the Lobbyists have a big advantage in numbers). They assure us prices can only go up, just like in all the previous boom-to-bust cycles. Unless God becomes a buyer of last resort for distressed stocks, which I am praying for diligently, expect a serious change of course, all over again, and far more serious fall out. Can the Fed push real rates below zero again for years and the government go many more trillions into debt to “prime the pump” after having barely managed it in the beginning of this century? I doubt it. How many rabbits can you pull out of the same hat?
Number 9. We face soaring long-run costs from pollution control to prevent global warming and other catastrophes.
The climatologists are getting very scared. The evidence and analyses are looking more and more bleak. The U.S. is by far the biggest polluter and has unilaterally refused to do anything to cut the gases that threaten us with many catastrophes, from inversions of the Gulf Stream and annual hurricane bashings with huge costs (a mere $80,000,000,000 this year?) to an ice age. Unless God provides us with a global air conditioner, we will most likely have to pay vast amounts for this one or suffer a cataclysm some day, such as an inversion of the Gulf Stream or a New Ice Age.
Number 10. The U.S. faces soaring military and security costs of all forms in its permanent world war against roughly sixty Muslim nations with one and a third billion (and soaring) enemies.
The U.S. is spending about $300,000,000,000 (Yes, Alice, billions) more a year in these costs in just the past five years. The War has just begun, since the Muslim World thinks in terms of centuries and has been fighting Israel for almost a century already — and Israel is totally bankrupt, depending on the U.S. for its financial existence. One nuke in New York or Washington would be Dooms Day for a long time to come. One nuclear generator or massive dirty bombs or bio-chemical disaster could send insurance rates sky high and then. You get the idea. Closing the Straights of Hormuz in the Persian Gulf would be catastrophic enough. Blowing up major oil terminals in Saudi Arabia…The possibilities are as limitless as the human mind and stretch around the world. This is a Fool’s War financially, even if we wind up creating shining nations of pure democracy in the deserts — may Allah allow it!
Number 11. We face soaring education costs with no clear idea of how to resolve the education crisis.
Way back in the 1980’s the Reaganites declared the U.S. was a nation at risk because of our low and sinking relative education achievement. Trillions more have been poured into the Goliath Bureaucracy with little to show for it. We’re still at risk, especially as we sink into a Black Hole of Debts and Risks that demand a technological revolution to get us out. Don’t count on it. In America experience is the great teacher and one thing we have learned from our experience is that new trillions in the education bureaucracy pay few dividends.
What are the soaring assets to pay for all of this? Greenspan assured us in messianic terms back in the 1990’s that the endless prosperity of soaring efficiencies of production and rational exuberance would resolve all our Crises. The Bubble he did not notice crashed and he spent four years pumping wildly to prevent a Financial Armageddon, that Black Hole which threatened to swallow us. So much for endless prosperity. Cycles are still the eternal rule. What happens this time, with all those Great Crises above, when the great wheel of financial karma turns? More wild pumping? We’ve been getting financial Crises around the world about once every three or four years since the Japanese Miracle turned into a Nightmare in the late 1980’s. We’re overdue. And now we have Bubbles on Bubbles around the world and in all directions. Greenspan did not reverse the iron-rule of business cycles, but the trillions in new government debt and the Bubbles they generated did convince Americans that “deficits don’t matter,” so they have spent and speculated more wildly than ever before and created a vast Mushroom Cloud Bubble with Bubbles on top of it.
They have continued to soar and build up immense imbalances with their immense risks. This is not because all financial thinkers have gone insane. They have not. All serious, very knowledgeable financial thinkers have been screaming for years that the Crises are soaring and have been begging the government to stop producing these and probably praying to God to help us stop them. But the feds assert that “Deficits do not matter,” as if we had suddenly been transported into a parallel negative universe where everything is turned upside down and account books have only an asset column and no debit column-and what used to be called debits are now only assets.
Are the politicians and officials merely insane with hubris? Maybe. Absolute power corrupts thinking absolutely. The political rulers of America today routinely make financial pronouncements that make intelligent Americans burst out laughing, or crying — or chill their blood with dread. But there are also some terrible Great Political Crises that are blocking our way in any attempts to seriously deal with the Great Financial Crises. Most of these have been largely created by the politicians, but they are now such Great Crises that they would stymie even the most brilliant, honest and dedicated people trying desperately to reverse our ever more rapid gallop into a General Crisis and Implosion. I will address these Great Political Crises in Part II of this Series.
