Posts Tagged ‘Bad Money’

The financialization of America

May 30, 2010

The best book I’ve read on the current financial crisis was published right before the crisis occurred.  Bad Money: Reckless Finance, Failed Politics and the Global Crisis of American Capitalism, by Kevin P. Phillips, was written in 2007 and published in early 2008, and it all-but-predicted what was to happen next.

bad_moneyPhillips asserted what I’ve been saying for 20 or so years, but with greater insight and better research – that the United States cannot go on forever consuming more than we produce, borrowing more than we save and importing more than we export, and that a day of reckoning will come.

Simon Johnson and James Kwak in 13 Bankers proposed reforms to safeguard our financial system from recurrent crises. Phillips went further. He said we Americans will lose our material standard of living and our position in the world unless we find a way to recreate an economy based on production of goods and services rather than banking and finance.

Phillips worked in the Nixon White House as a political strategist. His first book was The Emerging Republican Majority in 1969, and he has written extensively since then about history, politics and economic trends.  The theme of his recent books is the shift from an economy based on production to one based on finance and debt, and why such an economy is not sustainable.

During the first half of the 20th century, the United States had the most productive industrial economy in the world and, at the end of World War Two, the world’s only important industrial economy to emerge undamaged by the war. This enabled us Americans to enjoy the world’s highest material standard of living. We came to think of this as permanent and automatic, but it isn’t.

Starting in the 1970s, the United States faced the challenge of other industrial nations – first Japan and Germany, then the east Asian “tigers” and now China and India – who were capable of matching us in productivity. The U.S. response was to hold down the wages of American workers, shift production overseas and facilitate the increase of borrowing and debt.

Wages of American workers have been stagnant for the past 30 or so years. Average Americans have resisted the lowering of their material standard of living by working longer hours and more days of the year, by sending more family members into the work force (increasing labor force participation rates) and by taking on more debt.  This process may have reached its limit.

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