At the edge of the precipice

When the social contract is broken, anything is possible

By Edward V. Byrne for The Yucatan Times
August 23, 2011

Social contract: a theory holding that individuals voluntarily unite into political societies by a process of mutual consent, agreeing to abide by common rules and laws and to accept corresponding duties to protect themselves and one another from violence and other forms of community harm.

On a recent weekend I had the pleasure of spending a few social hours with two colleagues and their acquaintances, the latter being a married couple from the United States who have lived in Mexico for several years. I found myself becoming quick friends with the male half of the couple, though it was our first meeting. He and I were focused on exactly the same topic that evening – the horrible economic news arriving daily from the States. It seemed to be almost endless.

The Congress had arrived at an 11th hour deal earlier in the week to raise the national debt ceiling – a deal which nobody inside or outside the Washington Beltway liked. But despite the last minute debt accord, U.S. investments had just been downgraded from a pristine AAA to a slightly less than perfect AA+. It was the first time in American financial history that U.S. bonds and securities had been given less than the highest possible rating. Maybe the downgrade meant little, apart from bruised feelings and economic ego-deflation. But the lower financial rating plainly rattled investors around the world. Global markets nosedived within hours, and the New York Stock Exchange lost about $1 trillion dollars by August 8. Since then markets worldwide have been in turmoil, changing direction daily. Nobody knows when or where things will bottom out, and when (or if) a sense of investment stability will return.

My new friend and I agreed on many things during our convivial evening, made more convivial by his purchase of several rounds of drinks for everybody at the table. Maybe we agreed more than we disagreed because we are close in age (or so I suspect, although I didn’t ask him outright since he was keeping me well-lubricated on his tab). We agreed that taxes in the United States must be raised – period. Nobody wants to hear that, but as a nation the U.S. has already done a great job of running up its credit card bill, and now the friendly but firm customer service agent is on the phone wanting to know just when we will be sending in that next payment. We also agreed that unemployment in the U.S. is far higher than the officially reported 9.1%. – probably much closer to 15%+ nationally, and higher yet in some regions. Many people quit looking for work a long time ago. Other well educated or highly trained persons labor on menial jobs, trying desperately to hang on to whatever little they have left. We agreed, too, that a primary agenda of some is to remove America’s first black president from the White House at any cost – even if it means more economic woes for the country in the interim. The beliefs this gentleman and I shared were many. I didn’t protest when he spontaneously began calling me by a nickname I’ve been trying to shed since I was 12.

But on one point we didn’t agree. I ventured that the U.S. might experience, sooner or later, the same type of urban street violence brought on by economic woes which has rocked Europe several times this year. I mentioned those disturbing scenes in Athens – the world’s cradle of democratic thought – which occurred in June. I referred to the helicopter landings last spring in front of Madrid’s legislative palace – made necessary so that Spanish ministers could avoid protesters blocking the streets and arrive for their daily work. And the ugly riots which hit London two weeks ago? Whatever may be their official explanation, gross economic and social disparities in Britain, and high unemployment among the young, are factors. So why couldn’t it happen in Chicago or New York or Los Angeles? But my new friend would have none of my argument: “Not in the U.S. Impossible. Couldn’t happen.”

I hope he’s right, but I think he’s wrong. If the American sovereign debt ceiling hadn’t been raised by August 2, the U.S. would have been – to use the cold clinical language of bankruptcy law – “insolvent.” That’s right, broke, busted or whatever one wishes to call it when you can’t pay your bills as they come due. The government wouldn’t have been able to pay its ordinary obligations. It’s legally able to pay those bills now only by borrowing enormous sums of cash every month – 40 cents of each dollar it spends. Yes, the U.S. government continuously raises about 40% of all that it needs to fund current obligations by selling bonds and other debt instruments. It’s like juggling monthly bills of $5,000 on a monthly income of $3,000. You are forced to borrow the other $2,000 every 30 days from a line of credit. But suddenly the lender changes the rules – you’ve hit your limit and there’s no more cash. That’s what happened to the U.S. in the days before August 2. Only the Congress can raise the debt ceiling – the total amount the government is allowed to owe to everybody, including itself – and it did so at the very last minute, much to the relief of everyone.

Immediate financial Armageddon (followed by a economic tsunami which would have raced around the world with devastating consequences, according to some experts) was narrowly avoided by the deal. Problem solved? Hardly. Here are the troublesome details.

The national debt to GDP (Gross Domestic Product) ratio of the United States is now well over 90%, and headed straight up. You don’t have to hold a degree in economics to understand this key concept. GDP is a measure of the size and output of a nation’s economy – the total value of goods produced and services delivered in a year. Every country has a GDP (in Mexico it’s called PIB, or Producto Interno Bruto). The U.S. is a $15.2 trillion dollar economy – that’s our GDP. But our national debt is over $14.3 trillion and growing, so we’re closing in fast on the 100% ratio mark. These are not just idle stats intended for classroom discussion. Not too long ago, a couple of U.S. economics professors, both Ph.D.s and highly respected in their fields, carefully studied the economies of many nations over an eight century period – including failed and collapsed states. Their 2009 published results clearly demonstrate that once a nation‘s debt is at or above 90% of GDP, economic growth slows noticeably. When the ratio reaches 100%, the sluggishness becomes more pronounced. As it crosses the 100% “red alert” threshold, things keep getting worse until eventually the entire economic engine seizes up and most growth stops. By way of comparison, at the beginning of 2010 Mexico had a respectable debt to GDP ratio of 37%, Greece (where people rioted recently) had 143%, with Zimbabwe topping off the charts at 235%. Are you ready to invest in Greek bonds? How much confidence do you have in the Zimbabwean dollar?

It should be no surprise to anyone paying the slightest attention that the U.S. is on a direct collision course with an economic iceberg because of its enormous debt relative to GDP, and the consequent negative impact on growth. The objective symptoms of the underlying illness are overwhelming. On Monday, August 1 the U.S. government had about $15 billion in cash on hand. But the next day, Tuesday, August 2, it had to fund Social Security benefits to millions of seniors totaling about $23 billion. And that was only a fraction of the August bills awaiting payment. The government is so chronically cash-strapped that Apple Inc. had more than double the liquidity of the United States the same day – about $38 billion. The printing of money – literally – together with so-called currency supply modification techniques are being used by the Federal Reserve to keep things afloat and in theory, to “prime the economic pump.” These procedures bring risks such as inflation, and may easily backfire. Flooding a sick economy with newly printed money may also accomplish indirectly what otherwise would send people into the streets: a de facto currency devaluation. Just last week a Republican presidential candidate accused the Fed Chairman of “treasonous” activity for his monetary policies.

The human toll of our malfunctioning economy is incalculable. Only 58 of every 100 Americans over the age of 16 has a job. Twenty-six percent of returning U.S. vets – we’re talking about highly trained men and women, many with technical backgrounds – are unable to find work. Government stats released last week say that one out of every five children in the United States now officially lives in poverty (defined as an annual income of $23,500 or less for a family of four). When 20% of the kids of the world’s arguably greatest power are living below the poverty line, it’s obvious something is not working right. On any given day, 650,000 Americans are homeless against their will. No, they’re not bums or drunks or drug addicts. In Las Vegas, which has been decimated by the loss of jobs across all sectors, thousands who enjoyed middle class security only months ago are now bivouacked in cheap motel rooms. Meanwhile, U.S. corporations bailed out by the government in 2009 are sitting on an estimated $2 trillion in cash, unwilling to spend, invest or hire.

A fatal downward spiral is more than evident. On August 22, 6.3 million homeowners were reported delinquent on their mortgage payments, and as many as a million U.S. residences may face foreclosure in the next 24-36 months. The housing market is worse this year than it was in the last two. It will be five to 10 years before home values even begin to approach their pre-crash levels, and it’s quite possible they never will. U.S. manufacturing is at virtual dead stop; in the second quarter ending June 30, growth was less than half that expected in a rebounding economy. Bank of America stock has lost about 50% of its value this year – an omen of dwindling confidence in one of the nation’s most powerful financial institutions. The major stock exchanges lost all of their 2011 gains this month, and the NYSE has lost 11% in just the last three weeks. If you had $10,000 parked in your mutual fund on August 1, today you’ve got under $9,000. Even Wal-Mart U.S.A., “America’s retailer,” reported last week that it had experienced a ninth consecutive quarter of declining sales – a new record.

There is an ubiquitous Mexican proverb which begins with these words: con dinero, baila el perro. “With money, a dog will dance.” A better translation would be, “with money, anything is possible.” But the second half of the proverb is more sinister: sin dinero, tu bailas como el pero – “without money, you’ll dance as if you were the dog.” The United States stands at the edge of a fearsome economic and social precipice. Comfortable, established lifestyles have disappeared overnight. Confidence has been severely shaken in long venerated institutions and in the old order of things. Some may say, “we’ll pull through this mess just fine,” but recent surveys indicate little sense of real security. The great American middle class – the engine of the U.S. 20th century economy – is being rapidly devoured by forces in the 21st century which no one seems to be able to comprehend, much less rein in. Insatiable greed on the part of a few is perceived as responsible for the hardship and suffering experienced by many. When beliefs boil over, anything can happen.

The social contract may already have been fractured in the United States, and perhaps irreversibly so. Like a decaying, antiquated bridge which sooner or later will send unsuspecting motorists hurtling into the river below, the only question is at just what moment the silent forces of stress will snap the steel. It’s happened throughout human history. It happened in other countries – in modern, “civilized” European capitals – just this summer. Greece, Spain, England. No one anywhere is immune when the man on the street finally decides that all bets are off.

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© Edward V. Byrne 2011.  This article may be briefly quoted but not reproduced in full without express permission of the author.