In our "Apertifs" section we have been a link to a video presentation by Kevin Phillips titled Bad Money: the Global Crisis of American Capitalism.
Its recommended viewing.
The cost of soaring public and private debt levels
Commentary: Examining Kevin Phillips' theories
By Peter Brimelow & Edwin S. Rubenstein
May 29, 2008
NEW YORK (MarketWatch) -- Is Kevin Phillips right that something funny is going on in the economy? Yes, although just how funny is less clear.
The numbers do suggest he's correct about one thing at least: public and private debt has indeed reached unprecedented levels.
Recently, we described Phillips' thesis, in his new book "Bad Money: Reckless Finance, Failed Politics, and the Global Finance of American Capital" that the U.S. economy has been run by a Washington-Wall Street mercantilist alliance for the benefit of the finance sector. See Column Here
Phillips doesn't flat-out predict that the resulting distortions will result in a crash. He says it's too early to say. But he meaningfully quotes a number of authorities, such as Yale economist Robert Shiller, to the effect that it will.
Phillips relies heavily on charts, which we like.
In this column, we look at one that is at the heart of his book: public and private debt as a fraction of Gross Domestic Product.
It looks like a barbell, with peak debt of 299% in 1933 falling to below 150% from the 1950-1980s, spiking again to a recent 353%. We've checked the numbers -- updating them to 2007 -- and he's right.
Phillips calls this "The Great American Debt Bubble". He says, somewhat melodramatically, that the financial media haven't been running it recently "Analogies to the 1920s would have been too disturbing."
This hurts our feelings. Early this year, we ran a chart of the unprecedented level of foreign holdings of federal debt, which is one part of America's dubious debt development, and is equally disturbing, especially because it suggests the dollar is very vulnerable. See Column Here
Phillips is also right that that the finance sector has been involved in this leveraging up more than any other sector -- because of securitization, derivatives and highly leveraged hedge funds.
He traces this finance sector debt expansion to easy money and to a series of bailouts orchestrated by the Federal Reserve, going back to the Arab rescue of Citibank in 1981.
Phillips also takes at face value colorful reports that the President's Working Group on Financial Markets, a public sector-private sector consultation group formed after the 1987 Crash, amounts to a "Plunge Protection Team" that has orchestrated systematic grooming of markets.
The objective: getting the system to swallow more debt and produce a bubble in the interests of Wall Street.
Much as we love charts, however, you have to be careful about them.
For example, the debt peak in 1933 was four years after the stock market crash. It may have been a symptom rather than a cause, reflecting the sharply contracting economy in the Depression.
In contrast, the economy has been growing as debt levels rose for most of this decade.
Conversely, credit controls and regulation may have artificially depressed debt levels during World War II and throughout the middle of the last century.
Is there a better way to look at America's debt dilemma? We prefer charting the interest burden rather than gross debt.
To see what we find, stay tuned for our next column
