One of today’s Daily Reads was a piece at the New Yorker by James Surowiecki on the changing nature of the American consumer. It’s an interesting piece, but you’ll notice he mentions taxes only in passing. The size of government as a share of the economy is considerably bigger now than at any time in the past (except for the WW2 years).

I’m sorry to keep exercising my fetish for global capital and trade flows, but the massive rise in overall indebtedness in the US since 1980 which Surowiecki mentions, correlates well with the global imbalances that started up in the mid-Seventies and have been growing ever since. When I read that the growth in indebtedness follows from a change in consumer behavior, my reaction is that he has it backwards.

Under both Bretton Woods and the so-called “Bretton Woods II” regime, countries have been able to develop by building export industries, with the US as the primary source of demand. Under BW II, we pay for imported goods by giving future claims on American assets. This has been very beneficial for US consumers (and investors too, by the way), but it implies a structural demand for dollar-denominated assets, mostly debt. To me, this explains most of what seems to be an explosive rise in American consumption patterns over the last three decades.

It also explains the shift from goods to services. The former can be imported at a much lower cost, the latter not so easily. This makes services relatively more expensive.

Where does that leave us today? Well, the global imbalances are just as large as ever, and they’re still growing. (The famous Chinese stimulus which has gotten credit for pulling the world out of recession has gone mostly to investment rather than consumption.) But since sometime in 2007, we’ve started exchanging public debt for private debt. The Chinese have stopped buying claims on US residential housing (via agency securities) and started buying claims on future US tax collections (via Treasury securities). The fact that Obama and the CBO both issued projections of fiscal deficits in the high single digits (as a percentage of GDP) for the next ten years totally reflects this structural shift.

What it means is that consumers will be buying less of what they want to buy, as government buys more of what it wants to buy. This is a permanent, secular shift, and you’ll start seeing the social changes from it as we get through the next few years. An eight-year Obama presidency will be seen by our grandchildren as the start of the “lean times.”