Once Upon a Time, from Craig Mee

September 25, 2011 |

Once upon a time there was a western economy that had minimal government and built up its middle class. This middle class then did good things, like work. Then came big government and political correctness and lots of handouts. The big government needed to get employed on big money, so they kept the punters happy, big and small, and kept delivering to those who did no work, but hey, it won votes and indirectly money was reinvested and taxes were payed by those who made a buck out of it.

Then leverage kicked off, and for a dollar you could invest 10 and drive prices through the roof, since then interest rates went down as that bubble popped to create the next leveraged bubble. China then kicked in with cheap labour manufacturing, and you could have 10 pairs of timberlands, and 20 jet skis.

Then as jobs disappeared and governments sensed 2 minute noodles for themselves, they invested the punters own money in a fully soaked consumer's market , and as a result they failed to buy. Banks, because of the tight spreads, failed to lend growth, then went 0 and stayed there for years and years.

I suppose the question is, has any country in history been involved in this sort of leveraged economy and overheated housing market, with an over ripe middle class, and come back and won the day…quickly? Or do we work out what emerging market has the working tenacity and inner strength, to build from here?

Stefan Jovanovich replies:

The short answer is "yes". With the end of the War of 1812 the United States entered into a transportation boom. The Erie Canal was surveyed and completed, and cities erupted like mushrooms along all the major waterways. The shipping cost for a ton of freight from Buffalo to New York City dropped 90% and express passenger service reduced the time of travel from the Great Lakes to the Atlantic from months to 4 days. (Look up James Sogi's posts on this subject from a few years ago for a detailed explanation.) That was the buildup of the first "middle class" in American history - if you define middle class as people who have enough money savings to afford the snobberies of consumption that Veblen hated so much. The boom lasted as long as the one from 1990 to our present troubles. It had its Tech bubble and crash (the Panic of 1819) but that did not end the leveraging up of middle class balance sheets. If you exclude the 2 largest asset classes - land and slaves - from any calculations of national wealth and look only at the money economy (excluding the subsistence farmers who still made up 80% of the population and had literally no money savings), the government was as big or bigger than it is now, when everyone except the homeless, deals not only in cash but also in credit. Trade with China booms, but the balance of payments remained completely in the Chinese favor, even with the British efforts to substitute opium for sliver as a medium of exchange.

Then we have the end, with Jackson, Biddle and the nationwide collapse of the property market, both specie and credit growth go well below zero as the Carolina mint runs out of ore, and, just as Craig describes, and the banking system becomes a mummy. Enterprise continues but the middle class can no longer afford its luxuries, and Mr. Astor is shrewd enough to abandon furs and take out his cane to buy all the dirt in Manhattan that will become brownstones within another generation.


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