By Ben Funnell,  June 30 2009 19:14

Just why is there so much debt in the Anglo-Saxon world? Bankers and regulators know well that it is in nobody’s long-term interests to have allowed borrowing to escalate to a position where the US now owes far more, as a multiple of the economy, than at the start of the Great Depression.

The answer is capitalism’s dirty little secret: excessive lending was the only way to maintain the living standards of the vast bulk of the population at a time when wealth was being concentrated in the hands of an elite.

The amount by which the elite has benefited is startling, and illustrates the problem with lightly regulated free markets: the rich get much richer while the rest do not get richer at all. According to Société Générale economists, the inflation-adjusted income of the highest-paid fifth of US earners has risen by 60 per cent since 1970, while it has fallen by more than 10 per cent for the rest. As was recently pointed out in the New York Review of Books, the Walton family, of Wal-Mart fame, is wealthier than the bottom third of the US population put together – about 100m people. These are staggering statistics, confirmed by measures such as the US and UK’s ever-rising Gini coefficients, which estimate income disparity. Another way of putting this is that the share of profits in gross domestic product is at a 100-year high, or was until very recently.

Put simply, the benefits of economic growth have gone into the pockets of plutocrats rather than the bulk of the population. So why has there been no revolution? Because there was a solution: debt. If you couldn’t earn it, you could borrow it. Cheap financing was made widely available. Financial innovations such as the asset-backed securities market aided this process, as did government-sponsored agencies such as Fannie Mae and Freddie Mac. Regulators welcomed it all while perhaps taking insufficient account of the moral hazard problem it posed: that ever-increasing leverage meant the authorities had to keep interest rates low, otherwise the debt burden would cripple consumption. This prompted more leverage, which exacerbated the problem.

A walk in any low-income area in the UK confirms this. There are BMWs in the driveways, satellite dishes on the roofs and furniture delivery vans on the streets. In both Britain and America the jobless were encouraged to buy their own homes. No one begrudges anyone else the right to own a home or buy luxury goods. The problem is that the luxuries need to be paid for out of earnings and the houses out of equity topped up with an affordable amount of debt.

The question is whether the debt load – total US credit market debt outstanding was $53,000bn (€38,000bn, £32,000bn) at the end of March, or 3.7 times GDP – is at all sustainable and, if not, how it can be lowered without sinking the economy. Those pushing extra debt in an effort to boost the economy via increased consumption point to the scale of assets backing the debt. The net worth of US households, including their houses and after counting debt, was $50,000bn in March, according to the Fed. Not a bad tally for 306m people: $165,000 each. However, the cost of servicing this debt as a proportion of income, even with record low rates, is at a 30-year high, above 15 per cent, as incomes have stagnated and the total level of debt has risen.

The debt burden has to come down, which means more saving and lower economic growth for many years to come. Along the way inflation is likely to return, probably sooner and more violently than most expect, which will prompt investors to demand a higher return and make it even harder for governments to tackle the debt. At best the debt will fall slowly over many cycles and simply trim otherwise resilient growth. At worst it could cause growth to lurch upwards before tumbling again, with all the attendant uncertainty that entails. At this point, no one can know which is more likely. I incline to the more benign view because of the size of household assets but, if the dollar’s reserve currency status should come under serious attack, rates would have to rise to defend it and that could itself cause a consumption crisis.

What can be done? First, although it is not ideal, we should not be too hasty about abandoning the capitalist model. It is less bad than any other system yet invented. But we should redouble our efforts to increase productivity through innovation and creating new markets; simply squeezing lower-income workers is a bad option, which helped get us into this mess in the first place. This requires investment in education and research. Second, we have to learn to live within our means. This means spending less than we earn, perhaps doing without the BMWs, flat-screen television sets and leather sofas. Third, we should be careful in distributing the higher tax burden that we will inevitably have to bear over the coming decade. Very high marginal tax rates did not work in the 1970s and will not work now. That said, income disparity at current levels is a political time-bomb that needs to be dealt with. Finally, we should all come to terms with the fact that these are structural issues needing structural solutions; they need to be enforced over a longer time period than any one government’s term. So we need a new political consensus, one aimed at reducing overall debt levels while reducing inequality by encouraging education, entrepreneurship and investment in innovation.

The writer is asset manager at GLG Partners

It’s clear that the torrents of money poured in the banking systems since Lehman went bust last September haven’t halted the recession, but have so far prevented the worst, namely a generalized depression. Unlike in the early 30s, the Fed’s stance has been countercyclical  (the ECB, much less so). This is enough to mitigate nosediving, but not enough to rescue the economy from the doldrums of recession. Only Obama’s fiscal stimulus has a chance in that respect. Merkel’s (and also Sarkozy’s) stubborn insistence on not expanding deficits amid a world recession, could make the situation worse for the international economy and much worse for the eurozone.

We on the radical and reformist left must stop thinking that since neoliberalism has been proved wrong by history, this automatically translates into a revival of progressive policies of wealth redistribution and welfare expansion. It won’t happen until we have shaken off the bankrupted elites of europe. They are still dictating the terms of the game, making employees and households pay for the gargantuan errors of managers, bankers, and the politicians bribed to sing their song.

Let’s shred the Maastricht Treaty! Let’s overthrow Europe’s failed élites!

(!new! check out this:
http://zoescope.wordpress.com/2008/12/22/comparing-usa-outlay)

Capitalism is in crisis. Neoliberalism is dead. Neoconservatism is deader.

We are in the Great Recession, the biggest slump since the Great Depression. And 2009 will see many more us unemployed and our wages slashed.

America, Europe, China, Russia, all the regions of the world are reeling from the consequences of the financial tsunami. The Zero Interest Rate is the last bastion of business-as-usual capitalism. Massive inflation will come next, as Central Banks will print money and buy bonds and assets to avoid deflation.

This situation presents ample opportunities for radicals of all stripes to put forward new forms of conflict, political organization and social relations, but the possibility of an authoritarian solution looms just as large, exploiting the fear and uncertainty of the millions who will be laid off, or live in the shadow knowing they could be next.

This blog comes from people that predicted the oncoming of a recession of historical proportions as early as 2004 and wanna share their knowledge of macroeconomics, political economy, and the riot sciences with people at large, starting from women, youth, immigrants, and including students, activists, unionists, free-thinkers, rabble-rousers. One thing: we might be lefties, libertarian marxians, pink radicals, green hacktivists or what have you, but we certainly are not dogmatic.

We wanna look at the chaotically unfolding economic, social, geopolitical reality with a critical mind which makes use of the tools of radical social theory and keynesian-kaleckian macroeconomics.

We wanna know how things happen for, to, and by movements. We wanna describe and discuss how insurgent strata affect socioeconomic reality and determine the redistribution from capital to labor, from state to multitude, from investment bankers to office temps.

So we’ll write, explain, report on the crisis and its consequences, while trying to keep it entertaining, and expect that you do the same. Let’s get the facts straight, keep the theory grounded, and start building in the cracks exposed by the Great Recession.