Decline of the Empire? – Moon of Alabama

July 17, 2004

Decline of the Empire?

Billmon did some premier economical pieces some time ago. It’s the Wages, Stupid and Wild Blue Yonder. These charts add to the picture.

Development from 1915 to 2005. End of 2002 Gross Domestic Product of the United States was about 10,600 billion US$. Total credit market debt was at 31,700 billion US$. This ratio of about 3 to 1 has increased since. Expressed differently, 3 $s have to be borrowed additionally to existing debt to have an additional production worth 1 $. This is unprecedented.
(There are discussions that GDP is “pumped up” statistically which, if true, would make the chart even worse.)

Total debt of household, business, financial and government sectors will be some 37,000 $ billion this year. National income of the US (a corrected GDP) will be some 10,000 $ billion. Debt is increasing much faster than income.
Incomedistribution

The 20% of the families with children who make the least money, saw their inflation corrected income decline by some 20%. The 20% of families with children who make to most money, saw their inflation corrected income increase by some 30%. Theses numbers are for the timespan late 1970s to 1997. The trent has since continued. The poor see their income declining in real value, the rich see it increasing.

Posted by b on July 17, 2004 at 12:44 UTC | Permalink

Comments

Thank you so much, Bernhard. These are the stats I’ve been looking for. Now I know where to find them when I need them for the next discussion about America as the financial beacon of the west. 😉

Posted by: teuton | Jul 17 2004 12:56 utc | 1

Bernhard, could you post a small explaination under the charts as to what the axis are and what they mean for those of us that are not economists. I get the middle graph, and I can guess at what the axis on the bottom graph means, but the top graph I have no idea on what the x-axis means. I can surmise that it doesn’t look good.
Thanks in advance.

Posted by: sukabi | Jul 17 2004 13:15 utc | 2

Top graph axis = years. You can see a huge burst after the 1929 crash, and pretty hefty growth in debt after the 1979 oil crisis.
Any more recent figures available for the income change distribution chart? I would guess that the percentages for a similar period (1985-2004) would be even more dramatic…
A tangential question, based on the third chart. We see a fairly stable debt to income ratio up to 1979 or so. One of the touted benefits of non-consumer debt is its leverage effect, shouldn’t it then follow that income is boosted in give or take a few years?
Another myth out of the window?

Posted by: fiumana bella | Jul 17 2004 14:45 utc | 3

@sukabi
– done – hope it helps and please always feel free to ask. Its my error if there is not enough explanation.

Posted by: Bernhard | Jul 17 2004 14:45 utc | 4

Leverage:
There is a point of optimal leverage for the longterm wellbeing of a company – so it is not bad to have debt when it used productivly. The point dependes on taxes, interest rates etc. and can be calculated. Shortem higher leverage can help to boost some numbers shortterm, but it kills a company longterm. Additionally to other factors there was a “change of mentality” in the late 70s that allowed for overleverage.

Posted by: Bernhard | Jul 17 2004 14:54 utc | 5

In know they are out there, but perhaps you have them at hand: Are there any current stats about the buyers of US government bonds? How much have the Japanese and the Chinese central banks bought in this year alone? (And how much leverage do the Chinese have now when it comes to non-military conflicts with the US?)

Posted by: teuton | Jul 17 2004 16:21 utc | 6

The treasury department benchmark surverys are a good place to start:
http://www.ustreas.gov/tic/fpis.html
Or, Commerce Dept – bureau of economic analysis:
http://www.bea.gov/bea/di/home/iip.htm

Posted by: fiumana bella | Jul 17 2004 17:12 utc | 7

Direct hit here:
http://www.ustreas.gov/tic/mfh.txt

Treasury Securities Holdings
(Billions of US$)

Mainl. China Japan
May 2004     164.1     668.1
Apr 2004     161.0     652.5
Mar 2005     157.3     646.4
Feb 2004     153.8     614.6
Jan 2004     156.6     583.9
Dec 2003     158.0     551.9
Nov 2003     152.9     532.1
Oct 2003     150.9     508.5
Sep 2003     146.7     491.1
Aug 2003     148.4     471.4
Jul 2003     150.7     463.1

Posted by: fiumana bella | Jul 17 2004 17:25 utc | 8

Mille grazie bello, oops, bella.

Posted by: teuton | Jul 17 2004 17:53 utc | 9

Interesting numbers with a big strategic implication. What may China do, if case of a cold or hot conflict with US? Even what happens if they just don´t buy any further bonds?
Trouble for the empire – at least

Posted by: Bernhard | Jul 17 2004 18:06 utc | 10

Via Kevin Drum
45 MINUTES….The Independent’s breathless prose makes it a little hard to make out the real story here, but it appears that the British government has been, um, a little less than totally forthcoming about some of its prewar intelligence. Here are (I think) the key points of what the Independent is reporting:
Prior to the war, Britain claimed that Iraq had ongoing chemical and bio weapons programs. This intelligence formed the basis for a sensational charge that Iraq could deploy such weapons within 45 minutes.
According to the Butler Report, MI6 withdrew its claims about active chem/bio programs in July 2003 after interviews in Iraq with the supposed sources of the intel showed they were unreliable.
The Hutton inquiry, which began in August 2003, was not told that this intelligence had been withdrawn. This is despite the fact that Hutton was investigating charges directly related to chem/bio weapons and the 45-minute allegation.
Hutton isn’t the only one who was kept in the dark. Apparently, neither the Prime Minister nor the Intelligence and Security Committee were told until yesterday that this intelligence had been withdrawn.
So a key piece of evidence was withdrawn a year ago, and Tony Blair says he didn’t know about it until last week? Either he’s lying or else his control of his own intelligence services is monumentally sloppy. I wonder which?

Posted by: Cloned Poster | Jul 17 2004 19:25 utc | 11

On your last two-choice question CP, the first alternative (lying) is by far the most likely. Blair is scared shitless, as he is not directly responsible for the scam, but is forced to go along with it. (My take) On the second choice,
his control is monumentally sloppy since he is trying to cover-up while pretending not to, and naturally a lot of his boyz won’t go along. If only the rank-and-file here in DC were so incorruptible.
If it blows up in his face, which the Independent seems to think it may well do, Tony takes the heat big time. Although everyone with a finger in the pie, including Hutton of course, is doing everything humanly possible to keep the wraps on this issue, little bits keep getting loose.
I’ve been watching this carefully since Dr. Kelly was whacked; I hope it comes to a head soon but I am patient enough to wait if it means the real perps are exposed. Somehow I don’t think they will, but at least Blair (and Bush) should see some time behind bars.
error error error if posted twice

Posted by: rapt | Jul 17 2004 20:58 utc | 12

BTW, looking at the stats on the Asian central banks buying US gov bonds: Where does the Japanese central bank get all that money from? The Japanese taxpayer? And does he/she like it? Am I missing even more than usual here?

Posted by: teuton | Jul 17 2004 21:32 utc | 13

The Asian central banks get all those dollars from American consumers, buying Sonys and Toyotas and everything that is made in China.
Asian governments have no interest in using their clout to undermine the USA — since we are the golden goose that fuels their prosperity.

Posted by: ck | Jul 17 2004 21:55 utc | 14

The Japanese Central Bank does like all Central Banks. They just print yen – create money out of thin air and use this to buy the dollar their exporters get from the US. In the longer run the is inflationary (see US) – in Japan this currently is exactly what they want, to get out of the deflationary environment.
The difficult thing is to print enough money, but not too much. Usually they miss the target and get adverse consequences.

Posted by: Bernhard | Jul 18 2004 7:47 utc | 15

Right on the theme, NYT Hourly Pay in U.S. Not Keeping Pace With Price Rises
The poor getting more poor and the rich more rich. LA Times OpEd How the Left Lost Its Heart – Now, the working class has no true champion and there is not party that is willing to take up their case.
This will not end pretty but in serious riots, though still some years away.

Posted by: Bernhard | Jul 18 2004 8:39 utc | 16

Things could get rough for Japanese economy soon – and for America too

Posted by: Nemo | Jul 18 2004 9:03 utc | 17

Another NYT article on jobs A Growing Force of Nonworkers

Since June 2000, according to the Bureau of Labor Statistics, the number of adults considered “not in the labor force” – those who don’t have jobs and are not looking for them – has grown by about 4.4 million, to 66.6 million.
…
Among adults in their prime earning years, ages 25 to 54, the work force participation rate has dropped to 82.8 percent from 83.9 percent in 2000. That may seem a minuscule decline, but it is the lowest rate since 1987, and it translates into millions of people.
…
older people snapped up about a third of the 1.5 million jobs created since August. About 250,000 went to people 60 to 64 years old, and about the same number to people 65 and up.

Posted by: Bernhard | Jul 18 2004 12:08 utc | 18

So Bernhard…
I just may be asking the obvious here (ie. no expertise here), but…..
1) What happens to the economy with all that leveraging if interest rates go up , say, five percentage points?
2) Can that be prevented by allowing the US dollar to sink?
3) Would the latter see all the oil producers switch to Euros?

Posted by: RossK | Jul 18 2004 17:02 utc | 19

@rossK
1. Everybody leveraged would have very high losses. The financial entities like 10,000 unregulated Hedge Fonds, the big banks that insure others against interest rate changes via derivatives, the manufactures who have turned into consumer credit banks, like all the big car producers. Everybody did borrow short term for very low rates and did buy long term issues (bonds, houses) with higher returns, the so called carry trade. As rate goes up, the short term refinancing will be more expensive, and the value of the long term items will sink. ARM rates will increase, house values will sink. Expect some big hedge funds to crash and many consumers to default while everybody will rushes to the door at the same time.
2. Maybe – the dollar would have to sink some 30% to get the debt down to a sustainable rate. If this happens suddenly, no foreigner will buy dollar assets and interest rates will have to increase massivly to attract enough foreign money to finance the deficits.
The trick is now to do everything in very slow steps. Litte increases in interest rates, little devaluation of the dollar over some years. But any unforseen event could disrupt this process. Without massive spending cuts and tax increases, this will not work anyhow.
3. Not nessesarily – too dangerous for the producers. The price for the barrel will just increase to something like US$ 60-80 a barrel.
I do not expect rates to rise in the near future. The US economy is alredy again in a slowdown and Greenspan will do what he always does when he sees problems. Print more money. This will be highly inflationary but may not be seen directly in interest rates, but in commodity prices, consumer inflation and a faster sinking dollar. Stagflation like in the seventies – a stagnating economy plus inflation, but in a much worse economical setting than in the seventies.
The US consumer has consumed more than he produces over some years now. This may possibly be sustainable by robbing other people of their money (imperialism) for a few more years, but eventually will have to be corrected by underconsumption.
I do expect hyperinflation and a following depression, i.e. the Weimar Republic scenario, within the next ten years.

Posted by: Bernhard | Jul 18 2004 17:47 utc | 20

Thanks Bernhard,
That last sentence is really scary.

Posted by: RossK | Jul 18 2004 19:19 utc | 21

Quote:
The poor getting more poor and the rich more rich. LA Times OpEd How the Left Lost Its Heart – Now, the working class has no true champion and there is not party that is willing to take up their case.
This will not end pretty but in serious riots, though still some years
***
I keep saying this to some youngsters here that did not learn history properly…
They (rich) just can’t have enough body guards when things deteriorate enough…I used to believe they learned this lesson long ago but I was wrong…Greed is much stronger then logic…

Posted by: vbo | Jul 19 2004 3:31 utc | 22

@vbo
Do you have a link on that LAT thing?

Posted by: RossK | Jul 19 2004 4:03 utc | 23

Amid the cuts there’s one growth industry
…In a sign of times, the National Cemetery Administration that runs government-owned burial places and where many soldiers killed in Iraq and Afghanistan are being laid to rest received a six-million-dollar boost, bringing its 2005 budget to 149 million dollars….
Space programs out, cemeteries in as war-time US budget ax falls

Posted by: Nemo | Jul 21 2004 6:21 utc | 24

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