I was one of these 77 million little statistics: the Baby Boomers. Bonnie Kavoussi put us in perspective in analyzing the contrary circumstances today in her article “Birth Rate Plummets, Young Americans Too Poor to Have Kids.”9 Kavoussi pointed out that countries with fewer jobs also typically have lower birthrates, which therefore act as an indicator of a nation’s economic well-being.
Her summary of the reasons for the plunging birthrate in contemporary America show how far conditions have deteriorated since fertility per childbearing woman peaked at 3.7 live births in 1957. The decision by so many American families to have more children was itself a clear reflection of the good times in America. These advantages were squandered during the ensuing decades, resulting in the slowest population growth rate since the Great Depression, according to the US Census.
Raising kids is expensive—around $13,000 per year in a middle-income family, according to the Department of Agriculture—and today, younger Americans are experiencing lower wages, while 12.8 million Americans are out of work. As a result, many college-educated men and women between the ages of twenty-three and twenty-nine are moving back in with their parents rather than becoming parents themselves.
“The Future Ain’t What It Used to Be”–Yogi Berra
From the distance of six decades, it takes research and imagination to realize how optimistic Americans in 1950 were about the future, how gung-ho they were about technology, and how crazy they were about artificial foods and, yes, plastics. They fully expected to live in the future like The Jetsons, buzzing around the city of the future in flying cars.
As a prime example of our long lost expectations of a brighter future, consider a February 1950 article from Popular Mechanics by Waldemar Kaempffert, the then science editor of the New York Times. In “Miracles You’ll See in the Next 50 Years,” readers were told to “drop in by rocket plane on Totteneville (an imaginary town in Ohio), the sootless Garden City where you will live in scientific comfort in A.D. 2000.”10
Kaempffert projected that the twenty-first-century American city would be built around new, rather than legacy, infrastructure, including a downtown airport with triple-decker highways radiating outward. Automobiles were to be powered with alcohol. The family helicopter pad would be on top of the garage. If you wished to visit Paris, you could travel there by supersonic rocket or jet plane or by atomic powered ocean liner. You would be cooking your meals with solar heat, and artificial foods made synthetically from sawdust and wood pulp were projected as staples of the twenty-first-century diet. The author also projected that soiled linen and used underwear would be recycled into candy.
As underscored in his article, he confined his predictions to processes and inventions that were then being hatched in American laboratories. Apparently, they were not only busy concocting high fructose corn syrup and trans fats galore in the 1950s; they were also working on ways to process the waste products of the lumber industry into your diet as a full range of artificial carbohydrates.
Note that researchers at Virginia Tech have recently succeeded in converting sawdust, tree bark, and grass into artificial carbs called “amylos”—more tasty treats in your future. Before long, the worst aspects of Kaempffert’s projected future may come true. And you could find yourself munching pizza processed from sawdust.
Back to the Future . . .
Kaempffert went on to say that televisions would be ubiquitous and double as videophones. And housecleaning in the year 2000 was to be a cinch, because everything in the house would be waterproof, so all cleaning would be done with a hose.
Also, there was to be good news for the aging Baby Boomers by the year 2000. Doctors’ understanding of diet and hormones would help them treat old age as a degenerative disease, increasing not only people’s ability to maintain their youthful looks but also their life-spans.
The take away of the article was that everyone by the year 2000 was likely to enjoy a standardized life of luxury, and we should be glad of it. Little individuality was to be tolerated: “After all, is the standardization of life to be deplored if we can have a house like Joe Dobson’s (Kaempffert’s ‘John Doe’), a standardized helicopter, luxurious standardized household appointments, and food that was out of the reach of any Roman emperor?” It was a view informed at a time by mass production, when one-size-fits-all uniformity was the ideal.
For my part, I find it hard to imagine food synthesized from sawdust being the envy of a Roman emperor. And don’t get me started on the soiled linen and used underwear being recycled into candy. I know we eat some pretty vile artificial foods today, but I am glad that trend never got as far as the “best and the brightest” of 1950 anticipated.
The Disneyland of Rust and Ruin
Still, we have traveled a long way from the bright promise of “a standardized future,” as envisioned in 1950, to the decline so evident today. Nowhere is that decline more starkly displayed than in the Disneyland of rust and ruin, Detroit. Fittingly, Ayn Rand, set her dystopian novel, Atlas Shrugged, about a future collapse in America in Detroit. Consider further this prophetic passage:
A few houses still stood within the skeleton of what had once been an industrial town. Everything that could move, had moved away; but some human beings had remained. The empty structures were vertical rubble; they had been eaten, not by time, but by men: boards torn out at random, missing patches of roofs, holes left in gutted cellars. It looked as if blind hands had seized whatever fitted the need of the moment, with no concept of remaining in existence the next morning. The inhabited houses were scattered at random among the ruins; the smoke of their chimneys was the only movement visible in town. A shell of concrete, which had been a schoolhouse, stood on the outskirts; it looked like a skull, with the empty sockets of glassless windows, with a few strands of hair still clinging to it, in the shape of broken wires.
Beyond the town, on a distant hill, stood the factory of the Twentieth Century Motor Company. its walls, roof lines and smokestacks looked trim, impregnable like a fortress. It would have seemed intact but for a silver water tank: the water tank was tipped sidewise.
They saw no trace of a road to the factory in the tangled miles of trees and hillsides. They drove to the door of the first house in sight that showed a feeble signal of rising smoke. The door was open. An old woman came shuffling out at the sound of the motor. She was bent and swollen, barefooted, dressed in a garment of flour sacking. She looked at the car without astonishment, without curiosity; it was the blank stare of a being who had lost the capacity to feel anything but exhaustion.
“Can you tell me the way to the factory?” asked Rearden.
The woman did not answer at once; she looked as if she would be unable to speak English. “What factory?” she asked.
Rearden pointed. “That one.”
“It’s closed.”
Long the mecca of well-paying middle-class jobs for unskilled and semiskilled workers, Detroit was the richest large city in the world on a per capita basis in 1950. It was then home to the world’s largest corporation, General Motors. As late as 1965, the combined profits of the top thirty European companies (the top ten each from Germany, Britain, and France) were $250 million less than the profit of General Motors alone.
“Ta ra-ra-Boom-de-ay”
In 1950, there were 295,000 factory jobs in Detroit. It is indicative of the difference between then and now that when GM was the largest employer in America, it paid its workers the equivalent of sixty dollars per hour in today’s terms, compared to the average hourly pay of about ten dollars for nonsupervisory personnel at today’s largest employer, Wal-Mart. A large fraction of Wal-Mart employees are on food stamps and other forms of public assistance.
In 1950, when it was “Howdy Doody Time,” the lean, well-groomed middle-class children in the peanut gallery had good reason to look to the future with confidence. If they had been precocious enough to guess what the economy of the next quarter of a century would bring, they could well have applauded Buffalo Bob’s promise of
“a circus of fun for everyone.”
To a large extent, the quarter of a century of Hayek’s “Great Prosperity” really made for mass prosperity. Productivity rose by 97 percent and median wages rose by 95 percent. The incomes of the poorest fifth jumped by 42 percent, while incomes of the wealthiest 20 percent climbed by 8 percent. Then Nixon repudiated the gold reserve standard, facilitating the shift to financialization. In short order, “The Great Prosperity” came to a screeching halt. According to Harold Myerson’s 2013 American Prospect article “The Forty-Year Slump,” in 1973, the share of Americans living in poverty bottomed out at 11.1 percent.11 The following year saw the first general wage decline in a quarter of a century. Wages fell by 2.1 percent, while median household income shrank by $1,500.
Not incidentally, this proved to be the peak in the income share of the bottom 90 percent of earners. Thereafter, productivity increased by 80 percent, but growth in median compensation stalled. Indeed, as reported by the Washington Post in December 2014’s “Most Americans Best Days Are behind Them,” income peaked in the last century in 81 percent of US counties. In 572 counties, income peaked in the 1970s.12
Notes
1 https://www.parkviewmc.com/app/files/public/1484/2016-Poverty-Level-Chart.pdf.
2 Rosiak, Luke, “Fathers Disappear from Households across America,” Washington Times, December 25, 2012, http://www.washingtontimes.com/news/2012/dec/25/fathers-disappear-from-households-across-america/#ixzz2YtARqy6U.
3 Elliott, Michael, The Day before Yesterday: Reconsidering America’s Past, Rediscovering the Present (New York: Simon & Schuster, 1996), 49.
4 Pirenne, Henri, “Stages in the Social History of Capitalism,” in Class, Status and Power, ed. Richard Bendix and Seymour Martin Lipset (Glencoe: Free Press, 1953), 104.
5 Servan-Schreiber, J. J., The American Challenge (New York: Atheneum, 1968), 87–89.
6 Ibid.
7 See http://aufait.hubpages.com/hub/Working-2-or-More-Jobs.
8 http://www.housingwire.com/articles/25688-census-bureau-new-home-sales-inch-upward.
9 Kvoussi, Bonnie, “Birthrate Plummets, Young Americans Too Poor to Have Kids,” The Huffington Post, March 27, 2012.
10 Kaempffert, W., “Miracles You’ll See in the Next Fifty Years,” Popular Mechanics, February 1950, 113–18, 364, 266, 270, 272.
11 Meyerson, Harold, “The Forty-Year Slump,” The American Prospect, September/October 2013, 8.
12 Cameron, Darla, and Ted Mellnik, “Most Americans Best Days Are behind Them,” Washington Post, December 12, 2014.
Chapter Six
Financial Cycles and the Dollar in the Twilight of Hegemony
The central banks are clearly destroying the monetary system that emerged after Nixon went to Camp David in August 1971. So here we are 45 years later and we are nearing the end of an unstable fiat central bank driven system and the alternative is fairly obvious—at some point going back to real money. I don’t think governments will do that voluntarily, but certainly people trying to protect their wealth will. When that happens it will trigger a huge political crisis and hopefully an opportunity to change the regime and get back to some kind of viable and sound financial and monetary system.1
—David Stockman
The role of the dollar as the international reserve currency is an issue that has seemed of more pressing importance to investors than political economists. It is obvious why investors take an interest. The international standing of currencies forms a principal feature of the global monetary order, influencing a wide range of economic relationships. Despite the great impact of international currencies, however, political economists—with the notable exception of F. A. Hayek—have tended to neglect them. Perhaps this is because currencies are traded twenty-four hours a day, in view of which economists have found it wise to shy away from making heroic comments because of the nontrivial prospect of embarrassment by market movements.
This potential for embarrassment has been illustrated since June 2014, as the dollar rallied sharply in spite of many forecasts that it was destined to depreciate, even collapse, as the decay of US economic preponderance accelerated. If you look back as far as the 1960s, a flurry of investment commentary anticipating the demise of the dollar as the world reserve currency is stimulated each time the dollar has seemed poised to lose a lot of value.
William F. Rickenbacker’s 1969 book, Death of the Dollar, is the sole example among the more prominent works in this category to have been written before Richard Nixon repudiated the dollar’s link to gold. If you actually read this book, as I did almost half a century ago, you will be disappointed: it offers little insight into the current world monetary system and why it is flirting with collapse.
Rickenbacker made a name for himself pointing out that the industrial uses for silver made the metal too valuable to permit its continued use in coins at the low rates the US Treasury was willing to pay for it. Death of the Dollar was an extension of Rickenbacker’s argument to gold, which he also found to be too valuable to permit its price to remain set at thirty-five dollars an ounce (as contemplated by the Bretton Woods agreements that spelled out the ground rules of US hegemony at the end of World War II).
Rickenbacker pointed out that the annual industrial consumption of gold had tripled from 1.46 million ounces in 1957 to 6.1 million ounces in 1966. By the end of the 1960s, industrial consumption was four times the annual US gold production. Therefore, Rickenbacker’s conventional argument was that trends in supply and demand would make it difficult to achieve a sufficient deflation to preserve the dollar/gold peg at thirty-five dollars to the ounce. By implication, preserving fixed exchange would depend on a higher price for gold, and a devaluation of the dollar.
In that sense, Death of the Dollar was a very different kind of book than later volumes with similar titles; while Rickenbacker was writing it, during the final years of “The Great Prosperity,” the signal crisis of US hegemony was still to come. Unlike today, the United States was still the world’s greatest creditor nation. You may recall that the signal crisis begins with a negative judgment by capitalists on the possibility of continuing to profit from reinvestment in the material expansion of the economy. This isn’t because they are pessimists—it is because they respond rationally to falling returns.
Return on US Capital Stock Plunges during the Late ’60s
A crucial feature of the prelude to financialization in the 1970s was a 40 percent plunge in the rate of return on the capital stock of US manufacturers between 1965 and 1973, as reported by Giovanni Arrighi in Adam Smith in Beijing.2 When Eisenhower left the White House, only a decade before Richard Nixon repudiated the dollar’s link to gold, total US business investment was just a shade less than 50 percent of GDP, stronger even than what we have seen recently in China (46.4 percent in 2012) but without the artificial stimulus from a credit bubble. Eisenhower was no friend of easy money.
More recently, even in the wake of unprecedented monetary stimulus since 2008, US business investment was at the bottom of the tables at just 12.8 percent in 2012.
Over a longer period, the percentage of profits earned in manufacturing in the United States fell from over 50 percent in the early 1950s to just about 10 percent by 2001. Meanwhile, the percentage of profits accounted for by financial returns among so-called FIRE (finance, insurance, and real estate) companies, rose from about 10 percent to about 45 percent.
Equally startling, the ratio of financial revenues to operating cash flow for nonfinancial American firms rose from around 10 percent in 1950 to a five-year moving average of 50 percent by the turn of the century. By far the largest component of financial revenues was interest, reflecting the growing saturation of the US economy with debt while real income growth petered out.
The signal crisis represents the turn away from capital commitment to business assets in favor of financialization. As such, it is the prestage of a worsening crisis and the eventual collapse of the dominant regime in the terminal crisis of hegemony.<
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Growth of Financial Assets Vastly Outstrips Economic Growth
It should not be a surprise that long-term investment in the United States fell off a cliff as financial assets proliferated. London-based financial analyst Paul Mylchreest, of ADM Investor Services, reported in March 2015 that “the stock of globally traded financial assets has increased from US $7 trillion in 1980 to something approaching US $200 trillion.”3 This huge proliferation of financial claims growing at a compound annual rate of about 10 percent over thirty-five years, while the nominal growth of the economy was poking along at barely half that rate (5.33 percent), hints at greater crisis to come. Indeed, recent computations by the Bank for International Settlements show that total global debt was almost three times greater than the whole world economy in 2014.
It would be ominous enough that debt has been compounding at almost twice the rate of nominal GDP over three and a half decades. But the situation has become even more grim in recent years. Total public and private debt has grown by $60 trillion to 300 percent of GDP since the last financial crisis. The pace of total debt growth has increasingly diverged from the corresponding rate of economic growth. In fact, nominal GDP growth in the decade since 2007 has averaged just 2.92 percent. Part of the reason for the slowdown is the fact the economy is overburdened with debt. Other factors, explored elsewhere in this book, have also contributed to smothering economic growth—with ominous implications. The burden of debt is building toward The Breaking Point.
The Breaking Point Page 11
