A Dark Forecast
Kevin Phillips, Bad Money: Reckless Finance, Failed Politics, and the Global Crisis of American Capitalism (Viking, 2008)
Questioning a random person in the street about the current state of the economy will likely elicit some sort of comment on the hemorrhaging mortgage and credit markets; ask the same person for their opinions on how, say, collateralized debt obligations have contributed to this situation, and you’ll likely be met with a blank stare. Kevin Phillips notes this in his latest book, Bad Money: Reckless Finance, Failed Politics, and the Global Crisis of American Capitalism, by quoting from the Wall Street Journal observation that “after a decade of frantic growth in mortgage-backed securities and other complex instruments traded off exchanges…large parts of American financial markets have become a hall of mirrors.”
Phillips illuminates this concept at several points in the book, at one point noting that a century ago, uneducated rural voters would—and could—frequently meet on the prairies of middle America to discuss the ramifications of national economic policy such as, say, the Sherman Silver Purchase Act, so that they might vote in accordance with their best interests. This contrast effectively demonstrates Phillips’ main concern in this book—namely, that the underpinnings of the current American financial system are based on intangible and increasingly heavily massaged and manipulated numbers in order to keep the economy afloat and the general populace placated.
Phillips concentrates on two impending crises facing the American economy. The first lies purely within the financial sector. Phillips analyzes the history of finance over the last 30 years from many angles: how the financial sector has overtaken the manufacturing in percentage of GDP; the way governmental economic metrics have been stripped of any true measure of cost of living increases; the processes by which Reagan’s Working Group on Financial Markets (a.k.a., the Plunge Protection Team) has insured that our market has been anything but free; and the way in which years of deregulation and dynastic politics have encouraged Wall Street and hedge fund managers to build our economy atop a teetering tower of debt and intricately shuffled risk. Expanding on concepts from his earlier American Theology, Phillips intriguingly postulates that all of these “adjustments” have been passively encouraged by a sense of economic manifest destiny recently instilled in this country’s Christian population; this so-called “prosperity gospel,” the idea that God will reward Christian Americans for their faith, has been espoused by leading mega-church pastors including Creflo Dollar and Kirbyjohn Caldwell and has driven sales of the massively bestselling Christian self-actualization titles The Secret and The Prayer of Jabez. The tie between faith and wealth is now deeply entrenched in our society; Phillips cites a Time poll showing that 61 percent of Christians believed that God wanted them to be wealthy. This perspective leads to a fairly inescapable conclusion: the economy is overdue for a major correction, and it will be a difficult and bitter pill for America to swallow, both fiscally and psychologically.
As dire as this seems, Phillips then moves on to the much more ominous topic of “peak oil,” an idea first advanced in the 1950s by M. King Hubbert. The driving principle behind peak oil is the fact that oil is a finite resource and that globally we will eventually reach a maximum rate of oil production. After the peak, rates of production will slow and demand will begin to vastly outpace the dwindling supply. Considering our dependence on cheap oil as a prime mover of the economy, the outlook post-peak is a grim one; the main issues of contention among acknowledgers of peak oil are not if, but when the peak will be reached (or has been reached already) and how disastrous its full ramifications will be both economically and geopolitically. Bad Money presents compelling evidence that we have already passed the peak, or, at the very least, reached a plateau of oil production. It also suggests that the fallout, particularly with respect to the U.S., will be enormous and potentially devastating.
In Phillips’ view, the full, harsh realities of peak oil will likely be visited upon the United States sometime between 2011 and 2015, threatening an economy already weakened by the implosion of the credit and mortgage markets. Phillips projects that this collusion of events, a “black swan” in financial lingo, will unseat the U.S. as the leading global economic power. His conclusions are not unfounded. The book details how similar swans knocked previous empires (the British, the Dutch, the Spanish and others) from their perches and how the unique relationship between the dollar and the oil market (as well as unpopular sentiment regarding the United States’ recent forays into nation building) makes the American position all the more precarious.
Bad Money is not all gloom and doom, however. Acknowledging several key mitigating factors, Phillips tempers his prognostications somewhat in the book’s conclusion. He maintains that America’s dual coasts afford it a unique geo-economic position as well as the very unlikely possibility that the international center of finance will suddenly switch to a non-English speaking nation (a non-ally). Here, Phillips suggests that the best course of action is for the populace to educate itself about its economics and to elect politicians who will act in their interest.
Phillips is, of course, too modest to suggest that Bad Money would be a good place to start if one were to take his advice, but he shouldn’t be. The book provides a very dense analysis of its subjects in a compact volume, and Phillips’ command of language and choice of graphs and tables parses the relevant information and economic “nerdspeak” into a very accessible text. Whether or not Phillips’ worst predictions will be validated remains to be seen; regardless, Bad Money provides an excellent overview of the dire issues facing our economy.