Give Me Some Credit

Here’s a little historical question for you…

What caused the Great Depression?

Oh, I’m not asking for all the usual high school textbook answers: stock market crashes, trade protectionism, drought, indebted farmers. I’m asking about this from another angle. My question is more fundamental: How did a rich nation, in fact the world’s richest nation, grind to a halt?

Nothing real had disappeared. Everything tangible was still there. The workers were still available, the factories still stood, the banks and the farms hadn’t gone anywhere (excepting those that had been carried by a dust storm into the next state).

And then it all stopped.

What happened? Did America suddenly stop being rich? Did the factories disappear? Did the workers lose their skills? Did the resources run out? No. All those things were still there, just as they had been before. The Depression started for lots of reasons, but one simple and single factor links them all: the money stopped flowing, by which I mean that the credit dried up. No one would lend anyone any money anymore.

We say that America is rich. We are very rich. But rich matters a whole lot less than you think it does. A man with vast property is rich by definition, but that doesn’t necessarily mean that he can pay his bills. Wealth means little without income, and in the modern world, all income really depends on credit.

Credit is much maligned, and much misunderstood. While indebtedness is usually bad, credit is usually very, very good. Wonderful, actually, as it literally makes the whole system work. Using credit is not necessarily the same as going into debt. Think about your own household purchasing. Unless you use cash for literally everything, you are using credit all the time. If you use a check or card, even the supermarket “lends” you groceries until they get your money a few minutes, hours, or a couple days later. And absolutely all of the most expensive things you ever buy are bought with credit. Without credit, it might be years before you bought a house or a car, if ever.

Even the most successful business runs on credit, even if it doesn’t have any actual long-term debt. A business buys expensive capital equipment on credit, which is what makes it possible to make goods and services in the first place. It uses credit to stabilize its cash flow over time, so that it can meet day to day expenses. Without that credit, it is absolutely impossible to run a modern business, because an advanced economy requiring large capital investments and cash flows simply can’t depend on people physically carrying around cash. All of the things that are used to make everything else, the capital, labor, and resources, all are useless without credit.

The same is true for nations. They run on credit. America has a lot of physical capital, a lot of human capital, and a lot of resources. But none of those matter much without credit.

Some people say that America should do this or that important, ambitious, noble, or generous thing because we are rich. But rich doesn’t matter, credit matters. For one to borrow, another must lend. For another to lend to you, he must have confidence in your future. A lender is not interested in how rich you are, he is interested in whether or not you can pay him back. And he gets to make that decision, not you. You may think that everything is fine, but what matters is if he thinks everything is fine.

We spend a lot of time telling ourselves that everything is fine because we are rich. It is true that we own a lot of things, and it is also true that we do have a lot of money. But let me extend what I said above about "being" rich to the subject of "having" money. We have less money that you think, and what we do have matters less than you think it does.

I'll illustrate it this way. Do you remember the cartoons of Scrooge McDuck? He kept a big vault of money, and swam in it for pleasure. If Scrooge never made another dime in his duck life, he could have kept spending that money for a very long time before it would all be gone. Our money isn’t quite like that. Most Americans don’t have any money saved at all. If we tried to swim in our money like Scrooge McDuck, we would be painfully jumping into a big pile of consumer goods and/or the disposable packaging they came in, because that is what we spent all our money on. Actually, scratch that. We would be jumping into empty air, because half of that stuff we own hasn’t even been paid for with real money yet, it is getting paid for with future money that we expect someone else to give us right before we are due to pay the bill on the credit card we bought the stuff with.

Americans don’t actually have money, so much as we have a lots of movement of money. What comes around goes around, and no sooner do we get money then do we pass it along to the next guy. When it comes to our buying habits, we don’t really have the money today, we just always assume that we will have money tomorrow.

In an advanced economy, everyone is doing this, including individuals, businesses, and the government itself. Most, if not all, of our long term plans are actually based on tomorrow’s money. Therefore, all our projections are meaningless if the money doesn’t keep flowing, and once again, that all comes back to credit. Once upon a time, the credit necessary to run the U.S. government came from the savings of Americans, who used those savings to buy U.S. treasury bonds. We don’t do that much anymore. Instead, we mostly let the Japanese and the Chinese do it. They will keep giving us credit only so long as they believe in our future ability to pay. The moment they lose confidence, they don’t lend.

And when that moment comes, everything stops. It doesn't stop in that future year that we showed on our charts and spreadsheets. It stops at that moment. Then it no longer matters what factories, stores, infrastructure, human skills, or resources we have. The economy stops.

For the time being, we are still okay. The Japanese and Chinese haven’t lost confidence in our economy just yet. Luckily for us, they don’t really have too many other places to put their savings anyway. But ask yourself this question. Would you buy U.S. debt if you had other options?

Let’s look at just a few items from America’s balance sheet.

Social Security is supposedly going to run out in some year or other at some point in the future. I think I remember the exact year, but I’m not even going to bother to look it up. Last year’s biggest-in-American history “stimulus package” which was spent on virtually everything under the sun except those things that are generally considered to actually “stimulate” an economy, involved a specific amount that is supposed to be repaid by a certain time. I think I remember those numbers too, but I’m not going to bother to look those up either. I’m not being lazy, I’m making a point. Would it really matter if I told you the numbers anyway? They are already so big that we can't even visualize them as abstractions. They have no frame of reference. How do you describe a trillion, anyway? Do all those analogies about how deep the ocean is, or how many times around the equator, or how far away the moon is, really tell you anything? They might as well be imaginary numbers.

Actually, they pretty much are imaginary numbers. They change all the time, as they are purely based on predictions. Do you remember all that talk of surpluses when the Clinton administration ended? What happened to it? If you are inclined to be partisan and blame Bush for losing it (okay, fair enough, I'm also inclined to blame Bush for losing it), just think of it like this: If Bush lost our money, then Obama has found it and gone to Vegas.

But of course, in reality, there was no money to lose. That surplus wasn't cash in a Scrooge McDuck vault, it was only a prognostication for the future. And just like in those time travel science fiction movies, the future is always changing. Just today, news came out that as of this year, the government is paying out more for social security benefits than it is taking in from social security taxes. That wasn't supposed to happen until 2016.

And now comes our latest and greatest must-do-it-because-we-are-rich spending scheme, Obamacare. This bankruptcy in the making has been promoted with numbers that are worse than imaginary. This time, they are flat-out lies. They are based on the next ten years of tax collection, but only on a six year period of expenses that doesn’t even start for another four years. And for that matter, the promised cost "savings" over those ten years literally equals only about half of what the U.S. Federal government spent last month!

So forget all the numbers. Let's get back to credit. None of the numbers matter one bit unless the credit keeps flowing. And for that, we’ve got to keep selling government debt, and people have to keep believing that it is safe to buy it.

Is it still safe to buy it? Last week, it was announced that Moody’s Investment Services, is warning that the U.S. bond rating may be downgraded from AAA status. In fact, as far as the free market is concerned, it already has been downgraded, because it is now considered safer to invest in several private companies than it is to buy short term U.S. treasury bonds!

That is unprecedented. U.S. Treasury bonds have traditionally been the safest investment in the world, and now people trust them less than bonds from Berkshire Hathaway, Procter & Gamble, Johnson & Johnson, Lowe’s Home Improvement Warehouses, Abbot Laboratories, and the Royal Bank of Canada.

Investors now trust U.S. treasury bonds less than those of four major corporations, one more that you've never heard of, and a Canadian Bank. I wonder how investors got that idea?

Right now, foreign investors are still buying our debt and giving us credit. They still have confidence. Pray that they don’t lose it, because when and if they do, we will all find out very, very, quickly that being the “richest” country doesn’t really matter all that much.

-AzA

America's drift (now plunge) to social democracy, and the price of it

This is an eloquent and moving speech from researcher Charles Murray, about the consequences of the American temptation to European-style social democracy. It isn't possible to say it better than he has said it, so I will simply encourage you to read it.

-AzA

The Beasts of the Forest

On very rare occasions, one has a conversation that sticks in the mind for life. I had one a few years ago that I’ve been thinking about a lot lately.

I was talking to a French friend as we drove down a highway somewhere outside of Paris. It was winter, and that got us talking about the cold. That turned into talking about the heat. That reminded me of hot summer days in France, where few homes have air conditioning. Granted, air conditioning figures disproportionately in the consciousness of those of us from Arizona, but I still remember being quite uncomfortable on the rare, truly hot French summer day. And that memory led me to make a comment about the great European heat wave of 2003. I wasn’t there, of course, but if you remember, there was quite the public scandal when nearly 15,000 elderly French men and women died in their homes from heat exhaustion, stroke, and dehydration.

At that moment, my friend, who had until then always been a gregarious speaker, turned silent. I was worried that I had deeply offended him. It had been several years since I had had a real chance to speak French for an extended conversation, and I thought that in my enthusiasm I overstepped my bounds. I started to apologize, but my friend cut me off. Then, through a clenched jaw and with palpable bitterness, he said:

“The French abandon their old to live like beasts in the forest!”

He elaborated at some length, but the gist of his words had already been distilled in the first phrase, so I won’t retell it here. I thought of that conversation repeatedly in the following weeks, and it led me to reflect on a far older personal experience, one that I hadn’t given any thought to in several years.

Over two decades ago, I was a Mormon missionary in France. The land of post-Christian secularism is hardly the most fruitful place to proselytize, and if you are inclined to ask me why the French need missionaries, well, at least a hundred Frenchmen already beat you to the question. Not many people wanted to talk to us, and I remember spending a lot of time just knocking on doors and trying to be sociable; and in that, I saw a side of France that few others have ever seen, including no doubt most French people.

Many tourists have seen the famous side of France. Monuments and museums, tree lined streets, and cozy cafes, stylish women, and noisy little cars. Those that venture from the tourist corridors might see a bit of the rougher side of France, but those were hardly exceptional, as every city in every nation has similar neighborhoods.

But within those streets are hidden something else. In every neighborhood, there are long dark hallways of small apartments, each holding a single, frail old man or woman. I met and talked to them day after day. They were desperately lonely, and yet many of them had barely left their apartments in years. They were often terrified, and refused to open their doors. But sometimes they did. I have very specific memories of some of them. A delirious old man wearing no pants; A frightened old woman who asked if we would buy her groceries; Another who hadn’t had a hot meal in months and asked if I would fix her stove. Typically, they hadn’t heard from their family, including their own children, in years. Sometimes they told us stories. Some had fought in the First World War. One old woman told us of carrying messages in her shoes for the French Resistance in the Second World War.

These were people like you and me, and they had been abandoned.

Even today, I’m not willing to turn my experiences and observations into a larger condemnation of the French. In fact, my French friend’s judgment of his countrymen was much harsher than my own. The French have always been good to me. The problem, as I see it, is not that the French are heartless. Rather, it is that they, like all of us, tend to ignore whatever we are given the opportunity to ignore. And if they truly do ignore their old, it is only because the state promised that it would take care of them, back when it socialized medicine over sixty years ago.

Like everything else in life, socialized medicine offers a choice. We will sacrifice some things in order to gain others. The basic exchange is simple: we will give taxes, and gain security. However, implicit in this bargain are a number of additional, intangible costs. The first and foremost is a dramatic increase in the power of the state. Citizens simply cannot cede such a large segment of the economy to a government without losing some of their individual economic independence. The decline of economic freedom erodes every other kind of freedom, both because the new government authority expands, and because the door has already been opened to more and more intrusion into daily life. After all, every possible event or condition effects our health in one way or another, and therefore virtually anything is now under the purview of the state. Additionally, socialized medicine breeds resentment and contempt for others, because their health problems are now our taxes. Preventable health problems are no longer seen as private consequences of an individual’s free choices, but as a theft of your money. But there is more. It fosters a sense of dependency in citizens. It weakens the bonds of obligation within family and community. And finally, in the end, its unsustainable costs will bankrupt nations.

But enough of that, everyone knows those arguments, and most people seem to have already taken up sides. For those who support socialized medicine, there is one final argument that trumps all others: That argument is that socialized medicine is compassionate. It’s a powerful moral argument. After all, should we not care for the weak and sick among us? Arguments for socialized medicine are always framed in such terms. We must be compassionate, and therefore the state must care for the citizens.

However, that sentiment also has an inverse. If socialized medicine can on the one hand be seen as our using the resources of the state to show our caring for others, it can just as easily been seen as license not to care about others, because the state will do it for us.

After many years of observation, I am very much convinced that, among advocates of socialized healthcare, that latter sentiment is the far more widespread motivation. Some of the individuals I have listened to argue for it the most forcefully have been among the most angry, alienated, and resentful persons that I have ever known. In their contempt for others, they have not desired to care for others, but rather to be absolved of the need for caring.

“Socialized” anything is in fact a cruel oxymoron. It is distinctly anti-social as it actively discourages caring. Only weeks ago, a man I know who is an outspoken advocate of “social democracy” rejected out of hand the suggestion that he participate in a local charity program for migrant Chinese workers. “That should be the government’s job, not ours!” he said. That sentiment may not be universal among the citizens of the enlightened welfare states, but it is common, and much more common than it is among Americans. It is an uncomfortable truth for some people that Americans give much more time and money to private charity than do western Europeans. This is especially true of social conservatives, that same Neanderthal class that so adamantly opposes socialized medicine.

I am, for the record, not in any way a defender of the status quo of the U.S. medical system. I have been a critic for many years, and was so long before I gradually became a conservative by default. I'm not even opposed to government welfare programs, so long as they are carefully targeted in their purposes, and limited enough in scope that they don't foster permanent dependency. I want Americans to have good affordable health care, that they can choose and control for themselves. Free citizens don’t need "free" health care, they need free choices, and the dignity and self-respect that come with self-reliance. Compassion cannot be compelled. However, these are arguments that have been made eloquently by others elsewhere, and if you haven’t read them, I will fail in convincing you otherwise here.

I'll conclude with the story I began with. I recently retold it just as I did above to a person from a nation with socialized medicine. The response was that “no doubt the same thing went on in America”. Maybe. I doubt it though. I've never read anything anywhere that suggests a similar phenomena exists in the U.S., and until several thousand geriatric Americans die in a single heat wave, I’m going to remain skeptical. In any case, what consolation would that be? The entire promise of socialized medicine was supposed to be that things like that wouldn’t happen in the first place.

Socialized medicine promises that others will take care of us, while at the same time promising that we need not concern ourselves with others. These are incompatible promises, but they do offer each of us the comfort of ignorance…. an ignorance that, for many, may persist right up to the moment that all the promises fail, and they themselves join the beasts in the forest.

-- AzA

Changes are in Store

I have really lacked my old blogging motivation lately. I'm going to get back to it, but in the meantime I've made a momentous (for my dozen or so readers) decision to rework this blog to a different purpose.

For some time, I've wanted to write a few more general essays on cultural, philosophical, and political topics. Several times, I've been on the brink of starting a new blog for that purpose. One of the things that has held me back is the lack of a blog name.

Finally, I realized that the name I actually wanted to write under was the one I already had. I like this name, and it is appropriate to the tone and perspective from which I wish to write.

All of my previous, family-adventures-in-China posts have been transferred to a new blog. It is not confidential, but at the same time, I don't really wish for my two blogging worlds to mix. Therefore, I have provided no link. If you actually know me, please email me and ask for the new link. And if you don't actually know me, then convince me in the comments that I should divulge the new link.

Happy Trails.

AzA