or, Atlas Shrugged Again
Hey y’all, I just read an amazingly interesting piece of news trivia. It’s an article with one of those lurid yellow-press byline titles: “Debt-Gorged British Start to Worry That the Party is Ending.” New York Times no less. All the puzzle-pieces finally fall into place.
Some backgrounders: Reading a book called “China’s New Consumers”–where you find out that by comparison to the West, there really aren’t any–I was totally intrigued to discover that not only the Americans, but also the Australians and yes, the Brits, fulfill the role of “consumers of last resort” on the world market, eagerly ingurgitating the floods of goods pouring out of Guangzhou Province and seemingly everywhere else on the Chinese seabord. Naive and incorrigible culturalist that I am, I just thought “Hmmm, no doubt those rich Anglophone countries are particularly exposed to the fantastic publicity machines built up during the Fordist period to make national populations consume their own production, and so now they are pursuing that role in the world society.” Never for a moment did I make the slightest inquiry into where the money comes from.
But now I discover the enlightening news that the British population as a whole is even more in debt than the Americans! Those weary Brit consumers are “£1.4 trillion in debt ($2.8 trillion) — more than the country’s gross domestic product,” and apparently it’s a world record. So when you read below about Alexis Hall and her 50 pairs of designer shoes and handbags (most of which undoubtedly also come from Shenzhen, by the way), remember the miracles of the banking system that made such splurging possible.
This has been a phenomenon of the expansive financialized economy of the last decade, which caused people at the epicenters of funny-money growth to give up any worries about anything, not only because the neighbors were moving out to a new mansion in some upscale London borough due to a killing in futures and options, but also because the local banker, credit-card hawk or buy-now-pay-later plan was basically offering you a romp through the shopping mall where fantasy becomes reality even without the windfall profits. Now I don’t wanna moralize about the consumers and I truly hope that everyone has enjoyed, seduced, partied, traveled and generally made whatever extravagant jouissance that is possible in life feel particularly deep-down good on the back of all that free money. What’s interesting today is how integrated world capitalism works and what the consequences will be from it.
It’s not surprising to learn in the same article that the American banks Citicorp and CapitalOne kicked off the lending spree in a deregulated British credit market where the principle of competition forced all the other banks to follow. Well, forced is maybe not the best word, because aren’t we finally beginning to understand what lending actually means when there is no longer any difference between transnational investment banks and bread-and-butter savings-and-loans? What it means is that the banks, rather than having a debit on their balance sheet (the outstanding loan) instead have a new asset to sell to investors, namely, the loans bundled into fancy securities which can be sold to all kinds of pension funds around the world (or more precisely, to other international bankers who in their turn sell them to pension funds). And of course, those same somewhat risky securities plus the insurance policies that go with them and theoretically render them risk-free can also be sliced, diced and resold again by any of the partners in any of the deals, because structured finance is what makes the money-world go round. So with all the income-streams that generates, the banks can go on lending forever from the underlying pool of (not just Western, but also Asian) retirement funds, multiplied by a million dodgy resale operations–that is, they can go on lending forever, IF they can find enough income-earning borrowers as a basis for their pyramid schemes. So that means that you, dear Anglo-Saxon consumer, are the Atlas of the global economy. How does it feel to have the world on your shoulders?
Though I read it long ago, I have never forgotten the discussion of how credit-based consumption began in the US, in Daniel Bell’s book on “The Cultural Contradictions of Capitalism.” If I remember it right, he shows how difficult it was to get a population of petty merchants and small-town farmers to actually take the money offered by the banks, and how extensive consumer borrowing, which was precieved as eminently desirable by industrial interests from the period of the Great Slump in the late nineteenth century onwards, only just started to get into gear in the 1920s. An entire culture, that of the Protestant work-ethic, had to be changed to get industrial production really rolling. The rest is obviously history, because the world growth model of hyperconsumption and overdevelopment has increasingly been fueled by credit-based purchasing since that time. After the war there was a first Great Leap Forward based on new consumer durables in the expansive 50s and 60s, followed by a qualitative spatial leap into postmodern sign-consumption that began in the mid-1980s with US deregulation, then gradually extended itself wherever governments would permit, and wherever the cultural reticence to borrowing could be overcome — that is to say, pretty much nowhere in Asia, and not even much in a place like Germany, but the sky’s the limit in Merry Old England!
Now, what’s gonna happen in the mega-recession that is currently on the horizon? Not only are banks going to stop lending, and people are going to stop borrowing, because it has become basically impossible to think there will always be finer weather in the future–but even more importantly, people who start losing their jobs when the recession sets in are obviously going to have to default on their 50 designer handbags, new Bentley, McMansion or whatever it is they borrowed for. And so who’s gonna hold up the world in the future?
Now that Atlas has shrugged again (call it the subprime moment) it’s abundantly clear that to keep the fractally expanding pyramid-schemes from crashing with a tremendous world-shattering bang, the biggest and most stable pyramids of all are going to have to step in, namely the national states. And if you have not yet observed how both the American and British central banks are effectively nationalizing relatively large percentages of their private banking systems (somewhere over 10 percent already in the US), well, check it out, because it looks like the beginning of trend. A trend that will inevitably have consequences.
What are nationalized Western economies with no more financial frenzy on the horizon gonna do with their disappointed, unemployed and bankrupted citizens? Enigmatic and troubling question! We saw some answers in the 1930s but the new ones will probably be different. And here’s yet another enigma: how are the consumptive Western countries going to persuade the productive Asian ones to keep funneling their goods across the oceans, even when there is no more illusory hot-money payback? Well, Japan was persuaded to do exactly that from the 1990s onward, when it became clear there would be no substantial payback for all the money they ship out (and that’s still the biggest single capital inflow to the US, mostly from private Japanese banks, not the state). But Japan, mind you, is a small, aging country where everyone is already more or less in their stable place, without any roiling social change on the horizon. If you like the excitement of unruly future events, keep your eyes peeled on the Chinese jugernaut! Will they succeed in reorienting their economy so that their citizens actually begin to consume what they produce? Or will the whole export-driven growth model collapse into some new period of chaos?
Personally I am not such a big better on chaos-collapse predictions anymore. Both the world economy and the national societies are so intensely managed at this point, that economic chaos and the large-scale wars that you got back in the good’ol twentieth century now appear less likely (though who knows?). The more banal and troubling question is how are people gonna come down from a ten- or even twenty-year binge of consumer ecstasy-rush, to face the changing conditions of a world that has globalized its way into ecological crisis, compounded by the political difficulties of a fully transnational economy?
What’s ultimately determinant is how the members of societies, and not only politicians, find ways to deal with such changes. Not for nothing did Bell’s book speak of the “cultural contradictions” of capitalism. One can see in retrospect why the post-68 Leftist culture that hoped to gain ground from that contradiction actually lost all purchase, as easy money killed the ideology market and set people to chasing all those facile and lovely dreams that a credit card can offer. Those old stories about labor and solidarity were just a joke to the hyperconsumers! As for the new ones about desire and expression and the imagination in power, wasn’t that what was happening all around us? Why fuck around with a molecular revolution when the bank itself is offering 50 pairs of everything for everyone?
But now in these changing times, when those same people–and that’s us, hypocritical reader, my brother/my sister–now when we have to look for some unlikely thread to guide us through the social labyrinth, what will it be? Millennarian religion? Instrumentalized nationalism? Corporate lifeboat? Transnational empire? Job opportunities in a new hyperindividualized and hypersurveilled bureaucratic police state? Or is there any slim chance, I wonder, to begin collectively thinking again about a new expansion and metamorphosis of that ancient and marvelous political chimera called equality?
How ’bout we meet outside the pawnshop for a little discussion group!
In the meantime, best from the heartland,
[see further below for a follow-up argument]
March 22, 2008
Debt-Gorged British Start to Worry That the Party Is Ending
By JULIA WERDIGIER
LONDON — At one point, Alexis Hall had more than 50 pairs of designer shoes and handbags. It never occurred to the 39-year-old media relations executive from Glasgow that her £31,500 in debt ($63,000) would be a problem.
“It was so easy to get the loans and the credit that you almost think the goods are a gift from the shop,” she said. “You don’t fully realize that it’s real money you are spending until you actually sit down and consolidate your bills and then it’s a shock.”
As the United States economy weakens, many Americans are being overwhelmed by personal debt, but Britons are even more profligate. For most of the last decade, consumers here went on a debt-financed spending spree that made them the most indebted rich nation in the world, racking up a record £1.4 trillion in debt ($2.8 trillion) — more than the country’s gross domestic product.
By comparison, personal debt in the United States is $13.8 trillion, including mortgage debt, slightly less than the country’s $14 trillion G.D.P.
And while the Federal Reserve in Washington has cut interest rates, in an effort to loosen lenders’ grip on credit, the Bank of England’s interest rate increases last year are trickling through to mortgages at the very time home values are dropping and banks are becoming more reluctant to lend.
Until now, debt has mostly been a good thing for Britain. In the hands of free-spending consumers, it fueled economic growth. The government borrowed heavily in recent years to invest in infrastructure, health and education, creating a virtuous cycle: government spending led to job creation, which led to greater consumer confidence and more spending, which, in turn, stimulated growth.
Economists say Britain’s relationship to debt is complex, but at its core is a phenomenon more akin to recent American history than European trends. As in the United States, a decade-long housing boom and strong economic growth bolstered consumer confidence, creating a perception of wealth almost unknown in countries like Germany and Italy.
“Culturally, maybe also because of the defeat in the war, Germans remain reluctant to borrow and banks are often state-owned, pushing less for profits from lending,” said Alistair Milne, a professor at Cass Business School in London.
Since many younger Britons have never lived through a period of slow growth, few now see the need to hold back on borrowing, not to mention saving.
“The general mantra is spend now, think later,” said Jason Butler, an adviser at Bloomsbury Financial Planning. “It’s easier to get a loan or a credit card these days than to get a savings product.”
The average British adult has 2.8 credit or debit cards, more than any other country in Europe. A growing number are borrowing to pay for vacations, furniture, even plastic surgery. As a result, Britons are spending more than they earn, racking up a household debt-to-income ratio of 1.62 compared with 1.42 in the United States and 1.09 in Germany.
To her parent’s generation, Ms. Hall said, owing money beyond a mortgage was “shameful,” an admission of living beyond one’s means. Debt was also more difficult to get.
That changed in the late 1990s when American lenders, including Citigroup and CapitalOne, pushed into the British market with a panoply of new lending products. Fierce competition among banks meant potential borrowers were suddenly bombarded with advertising and offers for low- or no-interest loans and credit cards.
While Britain’s financial regulators watched the explosion of retail lending from the sidelines, their counterparts in Germany and France were more restrictive. As a result, the British market became the largest and most sophisticated in Europe.
The growth was also fueled by soaring demand for debt on the back of rising real estate prices and relatively low interest rates in the late 1990s and early 2000s. Those who did not own a house rushed to join the homeowners watching their property triple in value.
The trend on the Continent was the opposite. Home prices in most European countries barely moved, mainly because markets were more regulated, there was more housing stock and renting was more popular.
Liz Bingham, head of restructuring at Ernst & Young in London, blames the obsession with homeownership on Britain’s “island mentality”: land is seen as a finite good and a valuable asset.
“The housing boom automatically made people feel richer than they actually were and people went on to use the equity locked up in their property almost as a bank account they can dip into every time they want to buy a new car,” Ms. Bingham said.
As the perception of wealth grew, the social stigma around debt disappeared. Borrowing became such an accepted part of life that today one in five teenagers does not consider being in debt to be a bad thing, a survey by Nationwide Building Society showed.
Debt levels increased further as it became easier to get loans, and retailers, like computer chain PC World, offered both goods and the loans to buy them. Consumers happily accepted, thinking that as long as they were deemed creditworthy, they were not in danger of defaulting.
Andy Davie is a case in point. Even after he had racked up £70,000 in personal debt trying to keep his fruit and vegetable business afloat, credit card issuers kept increasing his credit limits.
“You tend to use credit to pay for credit and as far as the banks are concerned you are fine,” said Mr. Davie, 41.
He was finally forced to declare bankruptcy. Though still painful, the process made the prospect of defaulting slightly less daunting.
“Rather than showing up at court you just fill in an online form and speak to someone on the phone,” said Mark Sands, director of personal insolvency at KPMG in London.
The ease of the bankruptcy process, the availability of debt, the property boom and strong economic growth, lulled consumers into a “false sense of security that is now coming to haunt us,” said James Falla, a debt adviser at London-based Thomas Charles.
“It’s all good as long as the economy is doing well, but if that changes people will really get caught short,” he added.
And things are changing. Growth has already started to slow this year, and the government lowered its 2008 forecast to 1.75 percent to 2.25 percent, after 3.1 percent growth last year.
Home prices are falling, despite a dearth of housing and an influx of wealthy Middle Easteners and Russians, especially in London. Last year, housing foreclosures reached the highest level since 1999 and are expected to rise still further this year.
And more than one million homeowners have adjustable-rate mortgages that are expected to reset in the next 12 months — to significantly higher rates.
The prospect of rising costs has already prompted some consumers to change their spending habits. The camera retailer Jessops and the fashion store French Connection are among retailers feeling the squeeze and reporting lower sales since the end of 2007.
But changing spending habits will not be enough to solve the problem of rising debt levels, said Mr. Butler, the debt adviser. Consumers will also have to learn to save.
According to a survey for the Office of National Statistics, less than half the population saves regularly, and more than 39 percent said they would rather enjoy a good standard of living today than save for retirement. Ms. Hall said she was among that 39 percent. She recently took out new loans, planning to repay her existing debt. But she ended up spending the money on more luxury goods instead.
This year, she published a book about her experiences. She said she did not expect the book’s proceeds to repay her debts, but it may help the growing number of people in similar positions cope with theirs.
THERE WERE SOME GOOD REACTIONS TO “Brits in Hock” ON THE NETTIME LIST, INCLUDING THE FOLLOWING FROM FELIX STALDER:
Apparently, it’s not just because China is, overall, still a poor country that there are so few consumers, but a result of government policy, at least according to a great article which appeared in the Atlantic Monthly earlier this year. Below is a quote, but the whole article is worth reading.
“And the government doesn’t want to increase domestic spending dramatically, because it fears that improving average living conditions could paradoxically intensify the rich-poor tensions that are China’s major social problem. The country is already covered with bulldozers, wrecking balls, and construction cranes, all to keep the manufacturing machine steaming ahead. Trying to build anything more at the moment–sewage-treatment plants, for a start, which would mean a better life for its own people, or smokestack scrubbers and related ‘clean’ technology, which would start to address the world pollution for which China is increasingly held responsible–would likely just drive prices up, intensifying inflation and thus reducing the already minimal purchasing power of most workers. Food prices have been rising so fast that they have led to riots. In November, a large Carrefour grocery in Chongqing offered a limited-time sale of vegetable oil, at 20 percent (11 RMB, or $1.48] off the normal price per bottle. Three people were killed and 31 injured in a stampede toward the shelves.
“This is the bargain China has made–rather, the one its leaders have imposed on its people. They’ll keep creating new factory jobs, and thus reduce China’s own social tensions and create opportunities for its rural poor. The Chinese will live better year by year, though not as well as they could. And they’ll be protected from the risk of potentially catastrophic hyperinflation, which might undo what the nation’s decades of growth have built. In exchange, the government will hold much of the nation’s wealth in paper assets in the United States, thereby preventing a run on the dollar, shoring up relations between China and America, and sluicing enough cash back into Americans’ hands to let the spending go on.
“The Chinese public is beginning to be aware that its government is sitting on a lot of money–money not being spent to help China directly, money not doing so well in Blackstone-style foreign investments, money invested in the ever-falling U.S. dollar. Chinese bloggers and press commentators have begun making a connection between the billions of dollars the country is sending away and the domestic needs the country has not addressed. There is more and more pressure to show that the return on foreign investments is worth China’s sacrifice–and more and more potential backlash against bets that don’t pay off. (While the Chinese government need not stand for popular election, it generally tries to reduce sources of popular discontent when it can.) The public is beginning to behave like the demanding client of an investment adviser: it wants better returns, with fewer risks.” [END OF jAMES FALLOWS QUOTE]
MY REPLY TO FELIX STALDER:
Thanks for prolonging the conversation, Felix. I’m now gonna rephrase my tongue-in-cheek argument about the Brits, with the greater respect due to more distant neighbors: the Asians, and particularly, the Chinese.
For the the last thirty years — and even more intensely, for the last ten — the enigma of global economics has been this: Why do the Asians pay, through financial flows, for the English-speaking countries to consume the very things that are produced in Asia? Why do they pay for the right to work for low pay? And the same question can be put in even more general terms: Why, throughout a decade-long financial boom, has the underlying economic picture been one of falling prices, i.e. deflation?
The general form of the answer has been twofold. First, only the increasingly debt-financed markets of the Anglo-Saxon countries have been able to absorb the vast outflow of goods created by the combination of the world’s most modern technology and the world’s cheapest labor — especially since East Asian internal markets collapsed in the wake of the 1997-98 financial crisis. So it has been in the direct interest of the producers to sustain those markets, especially the American one, through the purchase of Treasury Bonds in particular. And second, concerning the US dollar in which payment for exports is tpically made, the very size of the East Asian stake has long been so great that if any of the countries were to pull out of the dollar (and I mean even Korea, let alone Japan or China) the US currency would begin to fall precipitously, and in the course of a few days the resulting run on the dollar would obliterate the value of all dollar-denominated holdings, ushering in a period of economic chaos with unpredictable consequences. So everyone prefers to stay in! And that includes the Gulf states with their petrodollars, by the way. The result has been what some call “Bretton Woods II”: a new international agreement to maintain the hegemony of the US currency after the collapse of the postwar deal in 1971-73, but this time, according to the kind of tacit, informal terms that are typical of such arrangments in East Asia. The New Left Review has a quite good article on all this, focusing on the biggest lender to the US, namely Japan. Check it out, they are serendipitously offering this one for free:
However, the specific case of China is so important and so unique that it can’t just be subsumed under the regional equation. The situation that now exists in China is, to my mind, an awesome and tragic outcome of the general case of raw insanity called integrated world capitalism. This is what I tried to describe in my text, “One World One Dream.”
China has been partially modernized over the last thirty years through a tremendous influx of direct foreign investment. For this to occur, however, the country had to continually demonstrate one thing: that its rock-bottom labor costs could consistently produce the highest possible return on investment, in the concrete form of the most cheaply manufactured goods on earth, which could be resold abroad at great profit. For development to continue, what had to be maintained was the China Price, i.e. the lowest price on the planet for any category of basic manufactured goods. This in turn meant that the wealth generated by China’s modernization could not be evenly divided: for if it was, how could labor remain so cheap? What has resulted, and what I tried to describe in my text, is the maintenance of the rural/urban divide, whose legal expression remains to this day the hukou household registration system: an outmoded imperial system of territorial governance, which helps to maintain the subordinated status of the country dwellers even when they come to do the dirty work of the industrial cities.
China’s impoverished migrant laborers have been the motive force, not only of the country’s explosive growth, but also of the progressive deflation of prices for manufactured goods over the past decade, since 1997-89 when the Asian Crisis broke the backs of the regional economies and forced them to engage in a downward spiral of competitive price wars. At this time they moved even more completely into an export-oriented system that has effectively exported the deflation of their economies to the Western consumer “paradises,” where jobs and entire industries disappeared beneath the onslaught of cheap imports, while the only thing that grew — as we’re realizing today — were the inflated values of stocks till 2001, and thereafter, the structured finance of home-equity debt, which seems to have been the final refuge of the so-called “wealth effect,” the consumer manna from financial heaven. So these two things, deflated goods and inflated finance, were the extremely dubious foundations on which China’s development burgeoned.
One of the tragic aspects of this whole process is that China has been modernized to produce shlock: i.e. vast quantities of throwaway goods at bargain-basement prices which depend on the most humanly and ecologically destructive manufacturing processes imaginable. And though the factories are often light, almost throwaway affairs themselves, the heavy infrastructures of these production processes are fixed into the landscape for generations, through capital investment in things like innumerable scrubberless coal-fired power plants or the immense Three Gorges hydroelectric dam. In short, China’s modernization has been configured to a huge degree, both by artificially stimulated Western appetites for largely useless consumer “goods,” and by the capitalist rules under which those commodities can undercut the prices of other Asian producers, such as Thailand, Vietnam, Indonesia and India. China today is largely the result of those fickle appetites and those iron-clad rules.
All of this matters tremendously, when the question of inflation and its dangers for China comes on the table. And this, by the way, is exactly what I was not able to write into my text One World One Dream, it’s the reason for the fairly obvious hole at the end, because I have only understood the full dimensions of the enigma through the mental acceleration brought by a crisis — namely, the one that’s happening right before our eyes. So let’s finally get to the nitty-gritty.
James Fallows was entirely right when he said that Chinese officials are worried about the inflation that could result from a reinvestment of export earnings back into the national economy. But are they really only worried about hungry people stampeding in super markets whenever cheap cooking oil is offered for sale? That is, are they worried about the prices of consumer goods on their internal markets? Or rather, are they not worried about what inflation would do to the China Price, and with it, the country’s ability to continue expanding economically — and, by that same token, the country’s ability to employ the migrants streaming into the cities from the countryside?
Felix, if you look again I guess you will see from the argumentative weakness of precisely the paragraph you quoted that Fallows, too, was unable to think the full equation to end. The point is, inflation is not just the price of goods. It is above all the price of salaries. Low salaries are the key to the China Price. And salaries just around the corner, in Thailand, Vietnam and Indonesia, are very very low indeed, almost as low as in China. Not to mention labor prices in India, again dramatically low. At the slightest inflation, China’s privileged position in the world market could decay — too soon, too soon, cry the government officials! Their idea has been to extend the export-driven boom to the entire country of 1.3 trillion people. But the irony is that the very motor of economic expansion makes equal participation in its fruits impossible. Not only must someone get rich first, as Deng so famously said — but the newly rich must keep somebody poor, or another pyramid crumbles. Deflated prices are both the key to prosperity and the lock on the gate between the city and the countryside. They are the new name of the gaping class divide that marks the global division of labor.
No don’t get me wrong at this point: If there is one thing China’s leaders truly want, it is development for the people. Not least because this is their only hope to hang onto power. For an unemployment crisis in socially volatile China could all-too easily lead — in the calculations of the Communist Party — to an explosive situation. Some 800 million people are inceasingly aware that they are not part of their country’s rise to economic power on the world stage. The countryside looks with envy and anger on the glittering dream of the coastal cities. Eventually, the government thinks, China must consume what it produces, eventually, its 1.3 trillion people must become its own largest market, prosperity must be shared and harmony must be achieved. But when? When? When?
So far, the very mode of China’s development has pushed the answer into an uncertain future. That future holds the key to the awesome and yet potentially tragic destiny of a country that has followed the development path of integrated world capitalism. And the amazing thing is, that future could literally come tomorrow. Because today, not only are the pyramid-schemes of debt-financed consumption collapsing — leading inevitably to a sharp reduction in the export-markets on which all of Asia and particualarly China depends — but also, we have never been so close to a run on the dollar. The rules of the game could change tomorrow. This is what I mean when I say, Atlas shrugged again. In the context of the current crisis, it is as though the Western consumer populations, replete with all the supposed artistic, scientific and financial genius that Ayn Rand famously ascribed to them, had involuntarily “gone on strike,” not against the bureaucratic, talent-squandering communism that Rand decried, but against the very capitalism that propped up their illusions and then suddenly pulled out the rug beneath their feet. Finance, the ultimate “creative industry,” is about to let the burden of consumption slip from Western shoulders — and in consequence, it seems as though the global economy might really go adrift.
If this seemingly imminent collapse of the Western consumer markets does finally lead to a run on the dollar, the results could be chaos, that’s for sure. Everyone capable of imagining these things looks into the crystal ball with fear and trembling. But could this reversal of fortunes not also be a moment of tremendous opportunity? Could this not be the time for the Asian societies to begin developing _for themselves_, and no longer in the image of the Western consumer dream? What if Arrighi and his colleagues were ultimately right: Could this be the moment of the long-awaited shift of hegemony to East Asia? And if so, could this transformation of integrated world capitalism as we know it not finally be the time to reconsider the contemporary mode of development? Isn’t a deep, long-running crisis the only chance we have to awaken from the one-world dream and put an ecologically sustainable mode of development on the economic agenda? Isn’t this the turning point, the possible bifurcation that so many people have been waiting for?
These are the things I wonder, with an excess of passion and still a minimum of hope, on Thursday March 21, 2008, at 6 pm in the tranquil afternoon.