Bad Money drives out Good Money - Gresham's law.

Kevin Philips makes several interesting points in his latest book about the United States of America. A former Republican strategist, Kevin Philips needs no introduction. 

The book is excellent and captures the angst, the restlessness that we see all around us. 

He compares the United States of today to later day Hapsburg Spain, to the waning Dutch Empire and to the declining British Empire.  The symptoms - the signals are all there he says and while the landing was harsh for Spain, Holland , a bit softer for the British - the US might have it much softer than others. Again, the countries eventually emerged ever more prosperous in due course. 

There are six major  areas covered in the book - its easy enough for a lay man to follow along but its not as illustrative as one would like it to be.

(1) Finance as a sector of the economy has overtaken almost every other sector in the US economy. Moving money around is far more productive occupation than say agriculture or manufacturing. This sector is very volatile though as witness the bail outs. ( Bail outs by the Government have been a rather routine feature in the US - Citicorp , Chrysler and more recently Bear Stearns). 

Such were conditions in the declining empires as well.

(2) Private Debt has ballooned considerably. 

By bundling debt - market value of which is not easy to quantify - the worthiness of which is dubious - there are liquidity mills running which have built this vast money pyramid without parallel in history & the underpinings of this are not all too solid. 

(3) Mortgage meltdown and the role of the Fed. In the author's opinion the FOMC has been a serial "bubbler". It was the tech stocks in 1990s , the housing in 2000. He predicts that the securitization of the real estate will be DEADLY. Housing now seems to lead the nation into a recession whch impacts the common man in ways that no other recession before has. A significant % of the population was lead into real estate with "teaser" rates, jumbo mortgages, interest only loans. Those who already owned their homes got mixed into it by refinancing and taking out home equity lines of credit ( HLEC) - which the homeowners further used to spend on consumer goods or invested in risky investments ( perhaps hedge funds tied to the securitization). Homeowners now face rising gas prices, a slowing economy and falling home values while simultaneously their mortgage rates are resetting higher. The most succinct point he makes is the lenders now have Neutron loans - they destroy the people like a neutron bomb but leave the homes standing.

(4) Unreliable economic data : The numbers coming out of the various government organizations are seriously flawed. Most often the negatives are glossed over and the positives - growth for instance is accentuated. Inflation figures in particular have been unreliable - the basket of goods has been adjusted and readjusted to make it unreliable for any comparison. In particular, the publishing of M3 data was recently banned.

(5)Peak Oil :  The previous empires were based on some form of energy supremacy - the Hapsburgs & the Dutch had wind power, the British had their coal and later oil. For the better part of the twentieth century, the US was the world's largest oil producer. US oil production seemed to have peaked in 1974. World oil production is already past / near its peak. However, the demand is growing from all corners of the world in particular from China and India. A substantial production capacity is in the hands of nationalized companies. This means the era of the rising oil prices is here to stay.

(6) Oil - $ peg :A particularly ominous sub text to this story is the fact that oil was pegged to the dollar for a long time. Most oil trade happened in dollars and a strong dollar helped the mid east.  The oil helped keep demand for dollar strong - it was a great marriage of conveniences.Oil prices rose on account of demand pressure in turn putting more stress on the dollar which has eroded considerably in real terms as well as against other currencies ( Euro, Pound, Canadian Dollar). A very real possibility is the dollar based trade shifting to other currencies. ( Iran trades oil in Euro but perhaps for other reasons.) Countries using the dollar find themselves at a disadvantage because of the dollar slipping - it escalates prices further.

Again, the dollar is now much more beholden to the sovereign wealth funds.

The US political system as well is  under a lot of stress, atleast a million citizens have left and a significant number of creation - able ( educated, bright young minds) are planning to leave.

Philips strains to find a silver lining, Spain declined to replaced by the Dutch, a Dutch prince ( William of Orange) became King of England leading the transition from the Dutch to the English and World War I & II saw Britain decline to a rising US. A new force does not seem to be emerging from within the English speaking world and the coming times accord for Asia to be emergent power ( think China / India).  He ends on a rather sombre but more pleasant note that over a period the erstwhile empires emerged more prosperous than ever and that America's landing may be softened by her large resource base, population and continental supremacy but this not without blighted cities and conflict over immigration. 

Interested folks can find more here :

http://www.amazon.com/Bad-Money-Reckless-Politics-Capitalism/dp/0670019070