We're going to veer a little into markets, finance and economics today, but this is important stuff for those of you wanting to understand what is going on in our cities. The failures of our financial systems are causing monumentous distress at the local level. There is a tendency when we are not fully informed to simply blame "the man" - that opaque conspiracy that is masterminded from some dark room, a plot that is taking from us hard-working people and giving to the elite. The truth is much less sexy, but a lot more shameful. And we're collectively bigger participants than we think.
A coherent narrative of our cities has to start with an understanding that the American pattern of development - a massive, post WW II experiment that you will not find repeated on this scale anytime, anywhere in human history - cannot survive multiple life cycles because it costs more to sustain than it creates in excess capital.
We're roughly two life cycles into this pattern and, having fully leveraged ourselves to keep this thing going, are now left with few options. The entire financial metldown, and the orgy of finance that preceeded it, are simply the last great push of a living arrangement that is coming to and end. How we deal with this reality will be the defining act of our era. Unfortunately, we are not doing a great job so far.
There was a report that was written about and received a lot of play yesterday, that being an IMF statement that indicated that the Chinese economy would surpass the U.S. economy by 2016. The "end of the American era" was the pujorative statement from the IMF that roused our collective bravado, but what is really startling to many is how quickly this change is happening. In 2001, the U.S, economy was three times larger than China's. Think that statistic is startling, ponder the implications of this quote from the article:
Of course, as MarketWatch’s Arends noted, sudden changes or unforeseen events could alter the future economic outlook significantly. If, for example, China were to suddenly dump all or even some of its estimated $3 trillion in U.S. dollar holdings, both countries would suffer huge losses. But while the American economy and the U.S. dollar could be damaged beyond repair, a Chinese recovery could, theoretically at least, rely more on its domestic market and other countries.
Unfortunately, instead of introspection, this is manifesting itself as a fear and loathing of the Chinese, who have done nothing in the preceeding decade but finance our development pattern with cheap loans made possible by the hard work of their people, hundreds of billions of which live in absolute poverty. I suppose we'll claim their predatory lending practices induced us to take on more debt than we can repay and then we'll stiff them by repaying in a devalued currency. That may feel good until we realize that a trip to the grocery store would then cost us $1,000; that is, if we even have the $400 to fill our car up with gas. We can hurt them, sure, if we shoot ourselves in the head. Is that really a coherent response to our current predicament?
There is some interesting theatre that is going to happen at 1:15 today. I will be participating in a Curbside Chat and so will not be able to watch the Federal Reserve Chairman, Ben Bernanke, hold a news conference where he takes questions from the near-mortals that claim to speak for us, that being the national press. I'm fascinated to see and hear all this all goes down. I wonder if you will hear any of the following questions asked:
- Mr. Chairman, the Tresury Secretary indicated last week that the low interest rates for U.S. debt reflect a strong global demand for Dollars. Do you agree and, if so, why is the Fed spending hundreds of billions on quantitative easing to lower interest rates?
- Mr. Chairman, why, in your estimation, is the Dollar dropping against the Euro when Euro-zone countries are having such large financial problems?
- Mr. Chairman, what role did the Federal Reserve play in creating the housing bubble and do you consider this type of asset inflation outside of the Fed's mandate?
- Mr. Chairman, you indicated in 2008, prior to the Lehman Brothers bankruptcy and the market collapse, that our financial system was strong. Is our system fragile today and, if not, what has been done since 2008 to systematically change it?
- Mr. Chairman, do you prefer boxers or briefs?
While I threw in that last question as a laugh, unfortunately it is more likely to be asked than any of the others I offer. And if all five were asked, the boxer/brief question would certainly be the headline answer our society would focus on.
For the record, you'll know the end is nearing for us financially when the President, the Treasury Secretary and/or the Chair of the Fed denounce the "bond vigilantes" and other speculators that are "damaging" the dollar. This is not likely to happen today, but keep that little insight in the back of your mind because it may take place soon.
Of course, it would also be interesting to know what prompted the Federal Reserve to make a $200 million loan to a shell company run by the wives of two Morgan Stanley executives. That is a truly ridiculous story as reported by Rolling Stone's Matt Taibbi, but realize that it is all made possible by the immense power we have given all of these institutions in the name of keeping this whole ship afloat. I bet that question is also not asked, although it should be the first one.
Anyway, watch the press conference and share your thoughts here if you care too. I'll watch it myself Wednesday night and join in the discussion.
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