Learn Something About Oil, and how rich financiers are eating the Middle Class

NVDL: This is a fascinating read. It shows us how our lives - the poor and middle class - have basically been put in the service of making the few, the rich, even richer. This was done by providing us with cheap debt (credit cards, mortgages, etc.) and effectively - via a Debt Bubble - allowing us to borrow against our own futures, thus impoverishing us, and securing and perpetuating the futures of rich financiers.

Jerome a Paris: In a nutshell, the debt bubble hid the class warfare waged by the rich against everybody else, conveniently trapping those that could not or would not live within their means in the system, by making their livelihood increasingly dependent on not rocking the boat.
But the debt bubble was (duh) a debt bubble, and it is now bursting, as it inevitably would. What matters is how the pain is shared, and, right now, it does not look as it will be shared the same way the loot was on the way up. The whole cycle was just a way to permanently transfer wealth from the many to the few. It was wilfully created by the combination of ultra low interest rates as set by the Fed (thus my moniker of "Bubbles" Greenspan), tax cuts for the rich (Bush's helpful but hardly invisible hand) and the permanent propaganda for liberalisation, deregulation, "reform" and "freedom."

In today's economy, the cannibalistic sector is not oil&gas, but finance. Bankers, through debt, have the ability to convert future cash-flows into immediate profits. Such immediate returns attract more capital, talent and resources (which cannot go to other sectors) and impose an iron discipline on the rest of the economy: those that provide the debt want to ensure that the future cash-flows will indeed materialize, and move in to ensure a relentless focus, in the underlying activities, on profitability at the expense of all other criteria. The immediate contribution of the financial world to measured GDP and growth makes it a popular industry, thus reinforcing its influence - and spreading out its way of thinking, focused on monetary gains and financial "efficiency." So not only the rest of the economy gets squeezed for any extra drop of profitability, but the language of financial analysts becomes the dominant one of not only economic discourse but also political discourse;

One of the more attractive features of the financial world, for its promoters, is its ability to concentrate huge fortunes in a small number of hands, and promote this as a good thing (these people are said to be creating wealth, rather than capturing it). Making money, lots of it, is the ultimate arbiter of not just success, but also morality;

Of course, the reality is that such wealth concentration is created by squeezing the rest, as is obvious in the stagnation of incomes for most in the middle and lower rungs of society. This is not so much wealth creation as wealth redistribution, from the many to the few. But what has made this unequality (the fundamental feature of the Anglo Disease) tolerable is that the financial world itself was able to provide a convenient smokescreen, in the form of cheap debt, provided in abundance to all. The wealthy used it to grab real assets in funny money, and the rest were kindly allowed to keep on spending by tapping their future income rather than their insufficient current one;

Paradoxically, the oil price increases provided an additional boost to the debt bubble: while they started biting into consumer spending, they also generated a new round of cheap liquidity, as oil producing countries suddenly found themselves with huge amounts of money, in dollars, which they could not, or chose not to, spend right away - presto, these were invested into Treasurys, ie loaned to the US. This provided the liquidity to finance consumer spending in the US (including for gas) and kept the interest rates on long term debt very low (demand for bonds pushes the price for bonds up, and thus brings the yield, is the interest rate, down). This happened at a time when the Fed had finally decided to increase its short term rates as it could no longer justify the extravagantly low rates of 2001-2004 and created what Greenspan called his "conundrum" - that apparent disconnect between short term and long term interest rates. It was just the bubble going on afterburner, thanks to oil prices.

Effectively, the liquidity created by high oil prices hid for two years the fact that the bubble was bursting.

But now, everything is aligned - in the wrong direction:

* the debt bubble is bursting, as long announced by observers not blinded by greed or ideology, with all the expected pain: the real estate crash, the banking crisis, the foreclosures, and the coming inevitable recession;
* the income capture mechanisms set up during the bubble have not been reversed, so the pain is falling disproportionately on the poorest, and the finance world (ie the rich) is being bailed out. The rescue of Bear Stearns may have inflicted pain on shareholders, but it saved bondholders, which is unprecedented and ominous. Public discourse is still largely about "reform", tax cuts and "letting the market" solve things;

More here.