Middle Class Credit Bubble – Part 2

They’re closing down the textile mill across the railroad tracks
Foreman says these jobs are going boys and they ain’t coming back to your hometown (“My Hometown”)

Part 2 “The End of the American Empire?” (Click here for Part 1)

What does the de-leveraging of the middle-class credit bubble mean?

It means we’re caught between a rock and a hard place. Middle-class Americans aren’t paying down debt because we’ve all caught a sudden case of conservative financial management. We’re paying down debt because the credit card companies and banks are turning the screws on us if we don’t. Many people as well as small businesses are going underwater and/or bankrupt.

Larger companies have cut jobs and inventories; sold bonds to rich investors; and hung onto their cash because they know there are no new buyers for their products. The US dollar is about as low as it can go to encourage sales of American made goods abroad. Americans themselves can’t afford those goods. Increasingly, the middle class is going broke.

A secondary change that’s happening in America is a shift of income from the States to the Federal Government. The new financial reform bill is necessitating the hiring of thousands of federal civil servants. Meanwhile state and local-level civil servants are being laid off, furloughed, payed in IOUs, and vilified as “special interests.”

Will the new hires in the federal government balance out the losses of income by state and local government workers? Or will unemployment keep rising as more and more government employees too wait at home for unemployment checks?

The government is the last bastion between us and total economic stagnation in this country. Almost one-third of all jobs lost since the crisis began in 2007 were connected with the mortgage market. No one likes Fannie Mae or Freddie Mac, but their extinction will not resurrect the private mortgage market if American workers (private and government combined) cannot afford to buy houses and if the foreign investors from Asia who fueled the US mortgage bubble do not return.

The third factor affecting America is the loss of corporate headquarters to other countries. More and more American companies are being bought out, taken over, or simply out-competed by foreign corporations. (Click here for my posts about the book manufacturing industry.)  It’s happening in other sectors too. Even the mortgage industry in America has European banks like Switzerland’s UBS now moving in on American banks’ territory.

It’s clear the American empire is entering into a waning phase. Unless the United States gets out of costly wars, takes on the challenge of developing new technologies, and embraces the rising information industry with better education and training of workers, there won’t be much hope for us regaining what we had before the crisis. Wealth from corporations in traditional sectors like manufacturing and finance is moving abroad. And it’s taking American jobs with it.

Where’s the hope?

The hope is in knowing that neither “the free market” alone nor the federal government alone can be expected to solve a problem that is not merely a short-term aberration. “Monetary or fiscal” arguments are useful in looking a short-term crises. They’re not so useful when facing long-term declines.

We’re looking at a growing imbalance that has been going on for over a half-century. The huge private debt of individuals has now become the gigantic public debt of our federal government. There’s really nowhere else to keep “passing the buck.” The dis-ease we’re suffering from now is not being able to see that we’re all in the same boat. And we’re sinking together while the captains keep on arguing about which way to sail the ship.

The nature of capitalism’s global dominance (in all except a few patches of the earth, like China and Cuba, where national economic planning takes place) is that wages everywhere will keep decreasing (or in poor countries, increasing) until wages are relatively equal around the world. The current crisis is a long-term crisis within all developed capitalist economies.

Something has to give when it comes to banks and corporations hoarding cash, the wealthy few gambling on extremely risky investments while brokers grow rich of their fees, and a vast number of other Americans watch their pipe dreams going up in smoke, never to return.

The question is, will we cling to an old dream of past glory that can’t ever come true? Or will we commit ourselves to a principle of true entrepreneurship and caring, and make them work for the benefit of all people, not just a few?

Copyright © 2010 Nancy K. Humphreys