The humbling of America

My youngest brother who lives in the United States regularly sends me pictures of his growing family.  Lately, these photos have been accompanied by links to articles dealing with the sorry state of the American economy.  He’s been trying hard, he says, to figure out for himself, where this complex economy seems to be going, and what he and his wife, who’s also working, must do to ensure the future of their two kids who are still in grade school.

Their worries are typical of nearly every household in the US today.  Sudden shifts in the financial markets and policy decisions made in Washington, over which they have no say, have forced families like them to make momentous adjustments that do little to ease their insecurity. The first thing my brother and his wife decided, after he accepted a cut in compensation to keep his job, was to leave the home they had bought on credit, forfeiting all the equity and improvements they had put into it. They moved into an apartment where rental was much lower than the amortization they had been paying.  They were back to zero, as it were.

They have given up their credit cards, a move that is perhaps akin to tearing up your college diploma in a society where your credit history forms a huge chunk of your identity. They now pay cash all the time, resolutely avoiding the malls where close-out sales have become a common sight.

“It just does not make sense to buy something that one cannot, in fact, afford,” he writes. “But here in the US, we were not able to escape this way of life. It was like everyone was forced to live this way.  Our credit rating was our bank – it gave us an imaginary buying power. Superficial is probably a better description. Just like those hollow buildings in Las Vegas, worthless pillars made of plaster. Now everyone, especially the middle class, is paying for it.”

He is without debt now, he tells me proudly. “We buy what we can afford, simple.  The US might not like it, but we are just a few dots to get noticed.”  The reality is there are millions like him who have realized the perils of a credit-driven way of life and are now opting out. This economic behavior, however, which is sensible and responsible at the household level, goes against the logic of current US economic strategy.

The US government hopes to dig the economy out of the recessionary rut by infusing credit into the economy so that people may continue to buy goods that will stimulate production and create jobs. The key lies in job creation, but this is not exactly happening – at least, not on the scale needed to sustain a recovery. The credit downgrade given by Standard & Poor’s the other day, the first for the US in 70 years, can only compound this problem.

Americans think their government must set the example of responsible economic behavior by spending within its means and cutting its deficits, instead of borrowing endlessly to fund all kinds of commitments while expecting future generations to pay.  They are shocked to learn that their country’s biggest single foreign creditor is China, forgetting that long before the recession, American consumption was already being funded by Chinese savings.  They are traumatized by the thought that someday US companies would be owned and run by Chinese bosses.

There is a new sensibility that is emerging from this period of American exhaustion.  It is inward-looking and profoundly protectionist.  It is allergic to big government at home, and to the role that a strong America has been accustomed to playing abroad – as the fulcrum of the global order.  It echoes the importance of frontier values like frugality and hard work.  It is patriotic and, in its dangerous versions, xenophobic.  It feeds off the old distrust for professional politicians and big business, and calls for the invigoration of grassroots movements.  Its early impulses have been associated with the conservative Tea Party movement, but it would be a mistake to think that it does not have a wider social base.

This view of America as a great nation that has been betrayed and undermined by Washington and Wall Street fuels a recklessness of the kind that nearly caused the US government recently to default on its federal debts.  At no other time has the country’s political class seemed more powerless to deploy the policy tools needed to avert an economic disaster.  The debate over the debt ceiling exposed the inability of political parties to control their ranks.  It illustrated in the worst possible way the pernicious outcomes of political gridlock, a phenomenon that used to be synonymous with Third World political systems.

But Americans can take comfort in the fact that these unsettling developments are not unique to their country. They are fast becoming the norm too in the euro zone economies, where similar credit bubbles conjured the illusion of an economic prosperity. The painful realization comes only after a period of profligate spending has already sunk the economy in debt.  Greece was the first to go.  Next in line are Spain, Ireland, Portugal and now, possibly, Italy.  Their economic troubles show in no uncertain terms the powerlessness of governments to steer their national economies in a globalized world.

Last Thursday, close to a trillion dollars in stock market value evaporated in the United States and Europe in one day of trading. This debacle could not be traced to any single event that happened in the past few days. No one knows exactly where it is coming from or where it is going.  But there is a vague sense that this could be the onset of depression on a global scale, after it was narrowly averted a year after the US financial crisis of 2008.