Levitating a Lead Balloon

I don't think the defeat of the $700 billion bailout signals a watershed event in American history, economic or otherwise.  The House vote was political theater, of course; the Republicans in the House are staring at the abyss of losing another 30 seats or so to the Democrats, and they're desperate to create daylight between themselves and one of the most unpopular Presidents in history.  So, with no avenue of corruption looking any better, they actually listened to their outraged constituents and voted down the bill.  Will they hold to the "principled" position? It depends on the reaction of the stock market.  Today it's up, and there is no news currently of another major financial institution going down.  I half suspected yesterday that the Plunge Protection Team, that shadowy cabal of financial players who manipulate the market at the behest of the Treasury Department and operate out of some bunker in the Executive Branch, might have thrown their machinations into reverse yesterday to make the blood redder than it might otherwise have been.  I haven't read that anywhere; just a suspicion of my own, since I don't trust this government any farther than I can throw it, and as bloated as it is, that's not very far.

My own perception is that the bailout might operate for a while to levitate the lead balloon of the American economy, but the long-term prospects would be unchanged.  America is "deleveraging" as the price of overinflated assets sinks to a natural level sustainable by actual American earnings and productivity.  These are actually early days as far as the deflation of the real estate bubble is concerned.  Very cheap credit made possible the delusion that millions of people could afford houses costing half a million dollars, simply because the cheap introductory rates created a misunderstanding that an unrealistically low rental value at the front end translated into long-term viability.  It doesn't.  Add to that bitter realization that housing prices do not, in fact, go forever upward and you understand all you need to know about how America's "prosperity," financed entirely on debt, vanished in a twinkling.  Thus, the effort to add another trillion or so to the national debt in a futile effort to get back what we've lost, to bring the good times home again, is not sensible, although that's probably exactly what Congress will do anyway, because they don't really work for you and me.  They con us into voting for either the Center Right or the Right Wing Party representing Big Finance and Big Business in general through various insincere gestures in the direction of "Main Street," but they don't mean it.

Yet it doesn't matter, in the long run, whether they mean it or not.  

By: emptywheel Monday September 29, 2008 1:09 pm

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January 19, 2001: 10,587.59
September 29, 2008: 10,365.45

NASDAQ Jan 19, 2001 = 2770.38
NASDAQ September 29, 2008 = 1983.73

CPI, January 19, 2001: 175
CPI, September 29, 2008: 219

Dollar exchange with Euro, January 19, 2001: 1.068
Dollar exchange with Euro, September 29, 2008: .695

Thanks to Marcy Wheeler at emptywheel, you can see the entire trajectory of the Bush Boom, from inauguration through yesterday. The Dow is lower than when Bush started; NASDAQ, our technical sector, has been hammered; the cost of living has increased dramatically; and we've lost heavy-duty ground against foreign currencies, i.e., the dollar is weak.  That is the trajectory of a bubble inflated by cheap credit from abroad, created when America indulged its final halcyon period as a consumer society and massively bought imports, and foreign sovereign wealth funds reliably recycled dollars to America at rates, after factoring in currency fluctuations, that were less than zero.  That's not going to happen again.  It is pointless to attempt to "restore" American prosperity based on the same principles when the necessary preconditions are gone.

That much maligned body politic, the American people (hell, I malign them myself) seemed to know instinctively that the "pitchfork moment" had arrived when Henry Paulson, who used to sell mortgage-backed securities when he was chairman of Goldman Sachs, proposed bailing out his friends, colleagues, and future partners from the consequences of their own systematic fraud, in which "Hank" himself was so deeply immersed his sclera turned brown.  That rebellion or "uprising" by the gentle folk of these here United States won't last, of course.  No one is interested enough in the long-term welfare of the United States to sustain their attention for the period sufficient to bring about real change.  The corrupt federal government counts on that desultory, half-assed engagement to use the Treasury for what they see as its real purpose, personal aggrandizement and enrichment of themselves and close business benefactors.  

So the system is so utterly broken that the reasonable, rational working-out of America's economic future won't happen as we might idealize it.  It will gradually settle back to a level consistent with year 2000 house valuations and employment earnings, but with 2008 consumer prices and inflation.  That is to say, in a significantly diminished state.  There will be paroxysms and discontinuities in the glide path toward poverty, and many of these will be caused by useless attempts at intervention by the federal government.  The net effect of "bailouts" will be to increase the stress of interest payments on debts to Treasury bill holders, foreign and domestic.

I saw a CNBC analyst this morning prognosticate that the Dow might fall to the 9,600 level. That is not so far from my prediction, long ago, that the Dow would fall to 9,100, which seemed fantastic at the time.  I would consider the 9,100 level the "essential floor," and then the market's value would go up or down from there depending on our ability to adjust to our new penurious state.  The USA needs to face one essential fact: the easy dominance we have enjoyed since the end of World War II is over.  Cyclical predictions of boom and bust were based on this anomalous period.  There is nothing automatic about future prosperity.  It will require adaptation and retooling, and the current political structure is simply in the way of this. Thus, it will be necessary for this particular regime to fall apart entirely, Democrats and Republicans alike.  That is what the pitchfork-wielding American commoner dimly perceived in his rebellion.  If the fat cats in Congress lose their paymasters, they are one step removed from extinction, and their extinction is what we need more than anything.