“AMERICA’S tendency to borrow from the future is a core ethnic of American society” says R Christopher Whalen, in his recent book Inflated: How Money and Debt Built the American Dream. Whalen, a hands-on financial analyst remarks that “By virtue of the sacrifices of the past, Americans believe that we are somehow exempted from the laws of gravity as regards finance and economics.” The book traces America’s economic history right from its formation to the recent times. It attempts “to tell the unique American story of money and debt from a layman’s perspective.”
Quoting the studies and books by several economists, Whalen recounts how living by debt and beyond means became the norm in America. Consumer credit became from a period of “growth and stigmatisation” to a situation of “growth and legitimisation.” One of the reasons for this, Nauriel Roubini (an economics Professor and among the few who warned that the real estate boom was a bubble) says in his introduction to the book is the “rising inequality.” (It) “is the root cause of the American household tendency to spend beyond its means that Chris correctly bemoans in this book. Indeed, this inequality led to alternative policy responses in the Anglo-Saxon countries versus the social welfare countries of continental Europe.”
Whalen cites the General Motors as the “most prominent example” of new age consumer finance. GM founded the General Motors Acceptance Corporation to help finance consumers to buy their car. Over the years, it grew into insurance, mortgages, online banking and commercial finance. Because of the offer of ready finance, people who could not afford cars went in for cars. Multiply this with all the consumer durables one can buy based on future income and we arrive at a debt per head that is beyond the repaying capacity of that individual. The real estate bubble broke like this in America, bringing down financial giants who had advanced unsecure loans and further sold mortgages on these loans, building a huge chain of bad economics.
Abraham Lincoln was the first to introduce fiat paper currency in America, to support the military effort. It changed the “basic relationship between the federal government and money, changes which greatly diminished individual property rights and increased the power of Washington over the American economy.” “Lincoln not only disregarded established custom and tradition regarding money, he also established a precedent for Congress to use debt and the emission of paper currency to finance government and thereby avoid raising taxes” says Whalen. Here begins the story of American debts and taxes.
In a strident criticism of the fiscal policy of the US, Whalen says, “The great unspoken secret in American life is the refusal to maintain anything like fiscal balance in the national government. The refusal of successive governments in Washington to ask taxpayers to truly pay their way is a key thread in the modern part of the story of the American dream. As with gold rush and the silverites, modern-day Americans want and feel entitled to a certain living standard, but in the twentieth century we have shown a growing unwillingness to pay for it…. Half a century on, the end result of America’s fiscal lack of discipline is growing government debt and an underlying level of inflation far higher than official statistics suggest. The steady erosion in the real value of the dollar has eaten away the purchasing power of American consumers and reduced real long-term growth and employment opportunities.”
The comparative scene in India is almost opposite. While the consumer, the common man is deprived of the basic needs of development, the government spending is going on burgeoning, administration becoming costlier, with fewer results. The taxes have gone on increasing, in keeping with the increase in the expenditure bill of the government on itself, while the outgo from the government towards infrastructure and core development issues like education and health has been stagnant if not shrinking.
America’s history is a story of its economics too. And hence, Whalen’s account discusses the various Presidents and their economic policies. Paul Adolph Volcker, a renowned American economist and chairman of the Federal Reserve under Jimmy Carter and Ronald Reagan is referred to here. He is credited with ending the high levels of inflation seen in the United States in the 1970s and early 1980s. He was the Chairman of the Economic Recovery Advisory Board under President Barack Obama for less than a year from February 2009 until January 2011.
America has just pushed its credit limit, which means that it has allowed itself to live a little more on borrowed money or future money, a money it may or may not generate. But since the dollar enjoys a position of first among equals, the other economies would take a severe beating if America fails. We have seen European nations pushed to the brink of collapse. Greece is selling its islands to pay wages. People who have been fed on false hopes and comforts are refusing to see the truth and are unwilling to bring their living standards down by a few notches. With the results that the European nations are borrowing or literally selling their gold for a good meal, one of the worst possible economic decisions ever. The current politicians are pushing the problems for the successor. China has downgraded America in the investment chart. It is beginning to question the supremacy of dollar as a ruling currency.
As suggested by Barry Eichengreen in Exorbitant Privilege: The Rise and Fall of the Dollar, it is high time the world moved towards multiple currencies.
Christopher Whalen does not discuss the present scenario in detail. It is only a passing mention in the end. But he leads the reader up to it, leaving the reader to draw his/her own logical conclusions. Americans have enjoyed the privileges for far too long without the commensurate responsibilities. Its time they learnt the truth about their position. And Whalen does exactly that – a slideshow of the American economy. Whalen is an investment banker and writer with over three decades of experience. A highly readable book especially to all those who dabble in fiscal policies and economics.
(John Wiley & Sons, 111, River Street, Hoboken, New Jersey, 07030)