Here’s the simplest way to look at what has happened over the past thirty years and just peaked. Americans wanted to live beyond their means. They wanted the good life. They wanted to consume and they wanted to have lots of rich people and they wanted to have the unearned wealth that comes from real-estate. Buy a house, wait thirty years, sell it and retire on the proceeds somewhere in the South, where it’s sunny and cheap. They didn’t want to pay taxes, they didn’t want to save and when they wanted to buy something they wanted it now, didn’t want to pay till next year and didn’t want to put any money down now.
The rest of the world was willing to go along with this. As long as the US paid, or promised it would pay, well, sure, the money spigots would stay on. So China loaned you a ton of money and you shipped your manufacturing base to it. Japan kept selling you goods with money you borrowed from them. The Indians took your service center jobs and loaned you money. The Arabs sold you gas and gave you the money back to invest in your markets.
The US ran consistent trade deficits. It couldn’t make enough stuff that the rest of the world wanted. So instead it made paper – it sold debt and equity. It said "we’ll package up the revenue streams from these houses and sell them to you." Or it sold treasuries "we’ll tax people more in the future in exchange for you lending us money now." It sold stocks in the 90′s "you can have the future revenue stream of this new industry." And so on.
What the US was doing was selling its future. In order to pay for stuff now – whether high end Japanese electronics, or lousy Chinese goods, or oil to run the cars and heat the houses—instead of paying now, it said ‘we’ll give you revenue from the future in exchange for it."
Now here’s the problem. The US has run out of future to sell. The leveraged bets that were made on top of America’s future, in various swaps and collateralized debt obligations and mortgage backed securities total more than the value of the entire world economy. The US has promised every little bit of money it will produce for a couple decades at least.
And it’s not enough.
There’s an old saying, a touchstone, that everyone should always remember both in personal life and in evaluating policy.
TANSTAAFL: There ain’t no such thing as a free lunch
This comes from the old restaurant habit of advertising a free lunch—if you bought a drink or two. Of course, the lunch’s price was included in the drink. It wasn’t free.
Americans, for years, lived on credit, not just personally, but at the government level and as a society as a whole as measured by the US’s trade deficits and balance of payments. Eventually the US savings rate, which indicates how much money there is available to build new things for the future, as opposed to just keeping your lifestyle going, dipped to less than zero.
Which leads us to the second touchstone statement I want everyone to memorize (yes, there will be a test. Your life.)
Things which can’t go on forever, don’t
For years people like me have been saying "this can’t go on forever" and for years people have been ignoring us. "Hey, why can’t we live beyond our means forever? The credit card nations will never cut us off."
You’re cut off. You owe more than you can pay. The 700 billion+ bill was just the first attempt by your creditors to get some money out of you. As I’ve noted before, it’s not an accident that that foreign banks can sell their crap to you at above market prices. That’s because you sold them that crap and they want to recoup some of their losses.
It’s not an accident that China (your number one creditor) told its banks to stop lending to American banks. China wants some of its money back. It knows it isn’t going to get most of it back, but what it can get back, it will.
There ain’t no such thing as a free lunch. Now is when the US pays for all those years of selling paper and the future for real stuff now. The US figured it’d pay later.
Later is now.
The future is here.
And the Devil wants what you promised him.