Bad Money

Obama? McCain? It won't matter, according to Kevin Phillips, author of the new book Bad Money. The wheels are already in motion, and there is little the next President can do to prevent the coming train wreck. "This books," writes Phillips in his preface, "is about the insecurity of America's future as the leading world economic power, given a debt-gorged and negligent financial sector, and the vulnerability caused by the nation's expensive dependence on imported oil." To make sure you get the point, Phillips adds an ominous subtitle--Reckless Finance, Failed Politics, and the Global Crisis of American Capitalism.

It is tempting to blame it all on the Bush II Administration, but let's be clear. These problems have been building for two decades, and simply escorting Dubya into retirement will not solve them. Since Alan Greenspan was appointed Chairman of the Federal Reserve Board in 1987, total debt in the U.S. has quadrupled to more than $40 trillion. That debt overhang is three times the country's annual Gross Domestic Product, a multiple surpassing the prior record set following the stock market crash of 1929.

Much is made of the Dubya Deficits, but government borrowing (federal, state, and local obligations added together) is less than one-third of the total private-sector issuance (financial, corporate, and mortgage). "In reality, public debt wasn't the big ballooner," points out Phillips, "private debt was." The risk to any society, as debt metastasizes, is that resources are allocated away from production and toward the useless pursuit of paper profits. Financial services in the U.S. now account for more than 20% of GDP, while manufacturing has shrunk to 12% (it was almost 30% the year I was born). The hollowing out of American manufacturing will make it that much harder to work off our debt.

"Money is 'bad,'" writes Phillips," when a leading world economic power passing its zenith...lets itself luxuriate in finance at the expense of harvesting, manufacturing, or transporting things." Phillips makes no predictions about how severe or prolonged the looming downturn will be, but he is pretty sure that down is where we are headed. For a reality check, let's check some headlines. How about this morning's? Citigroup Inc. today will begin laying off 10% of its investment banking staff, bringing its total headcount reduction for 2008 to over 15,000. And the American Federation of State, County and Municipal Employees, a public employees union, says about 45,000 government layoffs have been announced this year due to budget shortfalls.

And it's only Monday.