Excerpts from Democracy Now!, May 6, 2008.
[Kevin Phillips, author of “Bad Money: Reckless Finance, Failed Politics, and the Global Crisis of American Capitalism”, surveys the economic crisis facing U.S.-dominated global capitalism – including peak oil, the collapse of the Dollar, rising food costs, and the growing dominance of the banking and credit industries. This is fairly radical stuff coming from a former GOP strategist.]
AMY GOODMAN: What do you think is one of the most serious signs of this overall global crisis of American capitalism?
KEVIN PHILLIPS: Well, not to single out just one, I have an approach I use to say that normally when a country is—United States is—heading into a recession, there are one or two, sometimes three, factors that you worry about. But at this point in time, the American economy, you can think of it as being kind of in a shark tank, and there are like six or seven sharks, and you don’t usually see anything like that number.
And just to skim the list quickly, we have a financialized economy in which we don’t make much anymore, and finance is up to 20 to 21 percent of the US GDP, and manufacturing down to 12. Finance dominates the US economy.
The second problem is that we have massive debt, both public and private. It’s gone up about 700 percent since the early 1980s, staggering numbers where there—we basically have $50 trillion worth of credit market debt, which is tradable debt. And people just have no idea of this. It’s not government debts that’s the problem, it’s private sector debt, both financial and corporate and then in the consumer sector with credit cards and then mortgage debt. We just have this extraordinary level of it. 340 percent of the gross domestic product, that’s how big debt is. And the last time something was close to this—and it was less—was in the late 1920s and early 1930s. So it’s enormously a vulnerable, dangerous thing.
Third shark in the tank is the collapse of home prices. They continue to follow the scary trajectory that has people predicting that there’s going to be a 15 to 20 percent decline in home prices, which would be the sharpest since the Great Depression.
Then you can go to shark number four, that’s global commodity inflation. Oil and food, people are as worried now about the price of milk as they are about the price of a gallon of gasoline. That’s a global problem, but it makes a mockery of the administration’s pretense that there’s no inflation.
Now, the next shark in the tank is obviously the price of oil. And it’s not just global commodity inflation, it’s the problem that we see of oil production peaking in the world sometime in the next ten to twenty years. And the advance signs of this are scarcity in peaking in certain countries. And the prediction just came out of Goldman Sachs a couple of days ago that within a fairly short period of time, probably this year, you’re going to see $150 or $200 oil.
And that’s because, partly at least, of the scarcity, but the US dollar has been tied historically since the 1970s to oil, because of a deal worked out when OPEC wanted a price increase. Henry Kissinger and others were involved in getting OPEC to commit that they would sell and buy oil only in dollars and that they would invest their petrodollars in the US, in Treasury debt. So we have a currency that’s profited from the connection to oil, which sustained it in many ways. But now oil has boomeranged on the United States.
We have to spend $400 billion a year to import the oil we need. We don’t have the basis for controlling oil anymore, after the idiocy in Iraq, which was partly put in motion to solve the oil problem, and instead you’ve got oil prices going up 500 percent in five years. So the dollar is on the ropes, and that’s the other shark in the tank.
There has never been a period in anybody’s memory, except very old people who remember the late ’20s and ’30s, where you had so many things converging. And that’s what makes it frightening. And every time the administration says it looks like it’s under control or it’s half-over, you start to get evidence that, no, it’s not under control, and maybe it’s not even a third over.
AMY GOODMAN: Our guest is Kevin Phillips, his latest book, Bad Money: Reckless Finance, Failed Politics, and the Global Crisis of American Capitalism. I want to ask you about how commodity speculation has affected world food prices. We’re seeing food riots now around the world.
KEVIN PHILLIPS: Well, there’s a degree of commodity speculation going on, because a lot of the hedge funds in the United States have a major allocation to commodities, and they see commodities as a particularly attractive play with some of the major currencies losing their respect. And that’s particularly true of the dollar. American hedge funds think it may make more sense to be in commodities than to be in dollars or in American stocks.
But I would not say that the principal driver of global food prices is speculation. A lot of it has to do with climate change. Some of it has to do with energy. Grains that used to be used for food are now possible sources of energy. So is sugar in Brazil. So you’re getting an overlap of what’s food and what’s energy, and the whole commodity sector is being pushed up by that, especially as more and more people move into the lower middle class or middle class in China, in India, in Brazil, and the demand for food and for energy keeps climbing. So this is more than speculation, but they do play a role.
AMY GOODMAN: Kevin Phillips, you also write about peak oil. What do you mean? And how does this fit into the global crisis of American capitalism?
KEVIN PHILLIPS: Well, it’s a very unfortunate circumstance. The United States used to be the big oil power. We had the big oil resources in the twentieth century, and oil powered our success in two world wars, it made our industry the strongest in the world, and it built our transportation and residential infrastructure, which is now something of a threat because it consumes so much oil. But the United States at this point only produces a third of the oil it needs.
The peak oil question has to do with whether or not global production isn’t either about to peak within the next five, ten, fifteen years—some people believe that it’s peaked already. And if that’s the case, you can expect that, given the demand for oil that can’t be replaced by other things too quickly, certainly not in five to ten years, you’re going to see oil prices just keep climbing. And if people can assume they keep climbing, then they become a speculative vehicle, if you want to get your money out of dollars, which then makes oil prices rising or a huge negative for the dollar, which means that we have this currency which is weakening in ways that raise all kinds of other questions.
So peak oil is one of those things you just won’t see on the front pages of the newspapers, but I wish they would deal with it, because there are lots of things going wrong with the economy that the media, as well as the politicians, really don’t want to put on page one, and page one is where they ought to be. This is serious stuff.
AMY GOODMAN: Kevin Phillips, what could you see as the global crisis at its worst?
KEVIN PHILLIPS: Well, the global crisis has several dimensions. One of the dimensions, obviously, is that if the economy goes sour and if we have a run on the dollar and the value of American dollars declines in a severe way, you’re going to have foreigners buying up a lot more of our industry, and people would want to sell it to them. America’s role as a global debtor would just mushroom. We’d be at the beck and call of other countries. The dollar would be subject to being abandoned by the oil producers. You can have a major league recession in the United States, which of course then would be compounded by all this huge amount of debt beginning to fall in.
But I think there’s another dimension that people tend to forget here. If you have the rise of finance, as we’ve seen it in this country, to be the largest part of the private economy, you have on one hand the growth of the Federal Reserve Board in regulating more and more of the American economy, and they’re partly controlled by the banking sector. They’re not elected by anybody. So you’re missing a democratic ingredient in that respect.
It’s also very true that the growth of finance has involved the growth of a debt and credit industry. And part of what finance has brought as it grows is that more and more people are in more and more debt, and the amount of debt that individuals have and that they have to service is increasingly a burden. And people get into debt to maintain either a living standard they can’t afford or one that’s been nurtured by consumerism and advertising to get people to spend money they don’t have. So you’ve got an element that the public is losing control of its own economic future when you have an economy that’s full of debt and credit industries, which are a mainstay of finance.
The implications of all of this for who controls what within the United States are huge, and that will be especially true if a lot of the debt we’ve built up starts imploding because of higher inflation and higher interest rates.
Video available at Democracy Now!