SBR: Trillion Dollar Meltdown
Since I think I’ll be a bit distracted on Tuesday night, I’m posting this week’s book review tonight. The book is The Trillion Dollar Meltdown: Easy Money, High Rollers, and the Great Credit Crash, Charles R. Morris.
Morris wins a huge amount of credit for having written this book last winter, before everyone and her brother was talking about credit derivative swaps. That said, his crystal ball wasn’t perfect — he spends a fair amount of time worrying about what will happen if other countries decide not to invest in the dollar anymore, while what seems to have happened is that everyone seems to have decided that the US Treasury is the one safe place to put your money in a world gone mad.
I definitely learned some useful things reading this book. Nothing else I’ve read on the current economic collapse points out that there was a previous crash of collaterized mortgage obligations crash in 1994 when the Fed raised rate by 1/2 a percent. But even more interesting than reading what Morris thought in February would happen in September would be to find out what he now thinks will be happening next March.
In the rush to get a full-length book out in a matter of months, the editing also suffered a bit. Morris has some great lines: "That is the Greenspan Put: No matter what goes wrong, the Fed will rescue you by creating enough cheap money to buy you out of your troubles." But at other times, he falls into a bit of jargon: "Similarly, the notional value of a derivative refers not to the derivative but to the size of the portfolio it is referencing."
Planet Money remains my pick for translating economist-speak into English.
November 3rd, 2008 at 2:35 am
Elizabeth, the rush to invest in dollars will happen only so long as investors believe the dollars will be worth something when they get them back. If you run the printing presses night & day, as we are currently doing, you eat away at that conviction. As the inflation rate heads north, and as the feds fiddle more with definitions of “inflation” to slow it down, investors, foreign and domestic, require a higher and higher interest rate to compensate. We can’t go very far down that road without squashing the domestic economy.
We are digging ourselves (have dug, really, but we’re making it worse) a very serious hole, and there’s potential for making it much worse in a hurry. We had a money supply (M3) of something like $13T in January; we’re inventing money at $100B to $1T a pop these days. A serious bank run could require another $5T. You cannot devalue the currency like that without real consequences, and you can bet that investors will look for a more stable currency (as they have done for years, incidentally; the dollar is still weaker than it was 20 years ago). The alternatives are to borrow it — but from whom? The Saudis? The Chinese? Europe’s banks are in substantial trouble themselves — or to let the banks go bust and see people bankrupted and destitute. We have not, I might note, gotten to the tremendous, unfunded social obligations staring us in the face. Those are not sustainable either. I wonder how many 55-year-old Americans understand that we are bound to renege on the deal, no matter who is president.
We have total public & private debt of around 5x GDP. This is enormous by any reckoning, but I don’t think it’s insurmountable. With a few decades of real miserliness (say goodbye to HHS and SSA) and hard work I bet we could get it under control. I don’t think people will go for it, though, or that elected officials will have the stones to vote it. The alternatives, I’m afraid, are reneging on all manner of contracts in a disorganized fashion that does even more damage to trust in the federal government, or serious inflation, maybe even hyperinflation.
At the bottom of this whole mess, as I’ve noted before, is the fact that the US chronically spends much more than it makes. Not only are we not competitive, but I bet that if you looked at private industry growth over the last 15 years, a good percentage would actually be quasi-public: government contractors. Unless we fix this, we’re up a smelly creek. None of this, however, is Paulson & Bernanke’s department. All they can do is try to keep the money pressure up, which is a game you can’t play for very long in the absence of sales.
There are people who think we’re pretty well strapped in and going for a ride to hyperinflation. I haven’t been convinced that’s true. But I think that if we want to avoid that we’ll have to snap the purse shut, and that’d suck on a scale none of us have ever known. I bet it’d still suck less than currency collapse, though, especially when there’s no stable reserve currency in the world.
Incidentally, NSF hasn’t been in the internet-infrastructure business for maybe a decade now; it’s held together keystone-arch-style by a handful of private companies. I wonder what happens if one or two of them goes bust and the others can’t raise the scratch to buy the assets. (Aha! More money, invented fresh daily.)
I don’t know about you, but I don’t think all this was worth a houseful of crap from China, air conditioning, masters’ degrees, multiple cars per family, cell phones, online shopping, a vastly stupid war or six, band trips to Europe, heroic end-of-life measures, group therapy for kindergarteners, disposable everything, $40 cakes, and other things that used to be reserved for genuinely rich people. Do you?
November 3rd, 2008 at 9:32 am
Amy, there was funny money on the China side of the deal, too:
http://www.latimes.com/business/la-fi-factory3-2008nov03,0,7768849.story
November 3rd, 2008 at 1:26 pm
I’m not helping myself, here, but last night I started watching _Wall Street_ for the first time (it came out after the party it chronicled was over, and it sounded kind of ersatz, & not as good as, say, _Liar’s Poker_) I was surprised by its gentleness — it’s a real Spielberg treatment. Everything’s slow, the punches land soft. (The first act of _Angels in America_ feels a lot truer.) One thing I was reminded of, though, was the glamor of money. It was glamorous back then, though no less borrowed.
The lack of fun in the boom just ended, if you want to call it a boom, is something that’s bothered me since the mid-90s, but I hadn’t thought of it before as a lack of glamor. Even I got in on the glamor in the mid-80s, and I was a college kid. But I had the millionaire boyfriend who took me for a walk down 5th Ave and steered me into a jewelry store, and there were all the doormen & elevator men, and the drunken hilarity over trying to get the grand piano in through the 26th-floor window. There was speed, there was sport, there was a Soviet grave to dance on. King of the effing world. This time around, there were granite countertops and online shopping. Whoop-de-do. There’s really no glamor in money when every shlub in the world has $20K in his pocket.
Which reminds me, another credit card came in the mail yesterday, one I hadn’t asked for, with a 5-digit limit. Ain’t they heard?