Notes on the deleveraging economy…
In a previous post we pointed out that the expansion of superfluous working time was achieved by the addition of billion of superfluous hours of work to economy through leveraging the overly long hours of work in the goods producing sectors of the economy.
According to most economics analysts, we are now undergoing a massive deleveraging in this crisis.
It makes sense, considering the above, to discuss how our idea of leveraging/deleveraging differs from the idea as presented and discussed by economists, and to clearly delineate how this difference implies very different descriptions of the deleveraging process.
Generally, when economists speak of deleveraging, the idea they are trying to convey can be captured in the following quote:
First, in many Western countries the boom was created on a pile of debt held by consumers, corporations and some governments. As the global financier George Soros put it: “For 25 years [the West] has been consuming more than we have been producing … living beyond our means.”…
Second, these debts were racked up on the back of skyrocketing asset prices. In several countries, stock prices and house values soared far above their true long-term worth, creating paper wealth that millions of households used as collateral for their growing debts. The value of global financial assets grew from less than 45 per cent of global GDP in 2003 to nearly 490 per cent in 2007…
The final layer of the house of cards was the huge volume of money funnelled from China, Japan and the Middle East to Western banks and governments. Cheap savings from the East flooded into the West to finance ballooning deficits. From 1999 to 2006 the US current account deficit more than tripled, from $US63.3 billion to $US214.8 billion, balanced by huge surpluses in other countries, especially China.
Which is to say, economists think of leverage simply as a debt problem, an accumulation of debt to fund current needs: The individual who borrows money to put food on the table, the family who borrows to put an addition on its home, or, the country who borrows to cover their imports.
This form of leverage can be thought of as consuming before producing – we “purchase” a good today, a car for instance, but only complete the transaction some time in the future, perhaps in four or five years.
We have consumed the car before we have actually purchased it, using money borrowed from a third source – a bank; and, the transaction is completed only when we deliver the final payment to the bank, and receive the title to the car.
The logic of the economists’ debt leverage assumes the individual, family, or country, eventually produces something of equal value to the thing he/she or they have purchased with the debt they incurred in the transaction – perhaps ten or twenty 42 inch wide screen, high definition televisions.
The promise to pay hinges, therefore, on delivery to the market of those televisions having the same value as the car they purchased on credit.
Beijing, in other words, loans Washington $2.7 trillion, in expectation that the United States will some day produce the equivalent sum of exports to retire the loan.
A simple enough concept, but the difference between our conception of leverage and the one described above is this: In our conception of leverage the production part never takes place!
No televisions are produced to replace the car that gets consumed on credit, since the point of the transaction is to consume a car which, otherwise, would simply rot on the dealer’s lot.
Instead, in return for the car, the buyer/debtor sits through endless meetings where people discuss the quarterly marketing strategy for a new financial product designed to encourage more such transactions.
They use the word impact as a verb, consume lots of coffee or bottled water, and watch the clock, in excruciating agony, as it slowly ticks off the seconds until lunch.
Dutifully, the economist records this misery and adds the results to the Gross Domestic Product.