|Cheap consumer goods and credit created a 'debt house of cards' [GALLO/GETTY]
As Americans come to realise the full scope of the now global economic crisis, the instability it causes is being seen as a bigger security threat than terrorism.
Every sector of the US economy has been negatively impacted and layoffs are being announced almost daily.
The roots of this crisis can be traced back to the economic policies of the 1980s.
For a generation the growth of the US economy has been disproportionately driven by the availability of cheap consumer goods and investment credit.
This system, which peaked with the rise of the securitisation of highly risky sub-prime mortgages in the last few years, enabled an investment system to emerge in which the debt to equity ratio was an outstanding, and totally unsustainable, 100 to one.
As Nouriel Roubini, a New York University economist who was among the first to predict the collapse we are now experiencing, explains it, the largely unregulated debt system created a "credit chain".
This debt-to-equity ratio was so unstable that even a one per cent fall in the price of the final investment at the end of the chain "wipes out the initial capital and creates a chain of margin calls that unravel this debt house of cards".
The world economy similarly depended on a growth formula based on a debt-equity ratio of five to one.
This means that in order for countries to maintain real GDP growth of two to three per cent, available credit would have to expand by 10 to 15 per cent.
This massively unbalanced mechanism was not only rooted in the financial sector but the manufacturing and service industries as well.
Richard Wolff, a University of Massachusetts economist, says the crisis "grows out of the relation of wages to profits across the economy. It has profound social roots in America's households and families and political roots in government policies".
Since the 1820s, the US economy has experienced steady gains in productivity.
This led not only to steadily increasing profits for corporations but also to rising working class wages and, with it, consumption levels.
As wages and consumption rose, the "Protestant ethic" that had helped to generate capitalism's unprecedented economic power was discarded in favour of an ethic of commodity consumption.
People's identities were now increasingly defined by what they consumed rather than their religious beliefs or social actions.
The size of one's home, car and flat-screen TV, or the price of one's clothes, mobile phones and holidays became of paramount importance.
This economic ideology - based on the possibility, and desirability, of limitless growth - created an ethos of rampant materialism and individualism.
The economic dynamics that supported this ideology changed radically in the 1970s when neo-liberal globalisation introduced structural changes to existing financial systems.
Rapid development in computer, communications and transportation technologies fuelled an economic productivity which led to unprecedented growth in corporate profits.
Meanwhile, this process weakened the ability of workers to maintain wage growth at a rate comparable to productivity and profits.
In fact, around 1970 real wages for most non-management workers stopped increasing, and have stayed flat, and even declined, since then.
Wolff explains that rather than fight against the erosion of their incomes, working and middle class Americans began to work even longer hours, and then take on second and even third jobs, in order to continue to consume apace with the upper classes.
In comparison, less consumption-obsessed workers in Western Europe now work 20 per cent less than they did in the 1970s.
By the 2000s this strategy no longer generated enough extra income to sustain the levels of consumption Americans - and the rest of the world - were being told should define their identities and sense of self, and even communal, worth.
So Americans went on what Wolff rightly calls the "greatest binge of borrowing in the history of any working class in any country at any time".
It is not insignificant that the day after the September 11 attacks, George Bush, the then US president, advised Americans to "go shopping".
In the early 1900s, Henry Ford, the founder of the Ford Motor Company, realised that the best way for his company to make steady profits was to pay his employees enough so that they could afford to buy his cars.
|Low wages and increased consumerism led to a reliance on credit [GALLO/GETTY]
Today, what I term the "Walmartisation" of the US and global economies has produced a situation where Wal-mart, a giant retail store chain, pays its workers so little that they can only afford to shop at its, and other similar, stores.
Essentially, corporate America realised that it could keep wages flat, even as productivity rose and lend workers the money - at highly profitable interest rates - to continue consuming beyond their means or needs.
To sustain such a scheme, credit would have to remain cheap and plentiful.
The scheme would also necessitate a rise in equity, at least on paper, against which Americans could continue borrowing - whether for conspicuous consumption or, increasingly, for necessities such as health care and college tuition.
That is where the rise in house prices and the "bubble" it created became so important to the continued sustainability of the system.
The online journal Dollars & Sense succinctly described the early 2000s as "distinguished by massive investments in dud or plainly unproductive assets".
Once these investments could no longer grow, at least on paper, or produce even the minimal returns needed to sustain the system, economic collapse became inevitable.
Way of life
Of course, the same decade has also been marked by the global "war on terror", which has carried a price tag approaching the US annual GDP.
The militarisation of the US and larger global economies (and as important, cultures), and the largely unchecked damage done to the environment at the very moment when drastic action was needed to stem global warming, manifested themselves during the last eight years.
Both have helped to create the current global economic and employment crisis.
So far, the Obama administration has sought to inject enough money into the US economy to ease up the restrictions on credit and stimulate the economy through tax breaks and infrastructure programmes.
What few Americans, politicians and ordinary citizens alike, have thought to consider is whether the financial system that the new administration is trying to rescue - essentially, the "American way of Life" - should even be saved.
After all, a long-term drop in global consumption is one of the few conceivable ways to stop the slide toward the tipping point of global warming and environmental degradation, not to mention the increasingly violent resource wars and global poverty, that are the inevitable outcome of a world economic system premised on limitless growth and consumption.
Obama's biggest challenge, then, will be to figure out how to create millions of jobs while steering the US economy away from the economically and environmentally unsustainable model of growth that helped generate the present crisis.
To do this will require more than spending hundreds of billions of dollars on rebuilding crumbling infrastructure and encouraging "green" technologies.
It will require designing an architecture for a 21st century economy that much more equitably distributes limited resources among an expanding population than has the debt/consumption system that is now collapsing globally.
It is hard to imagine how such a system could be devised, and put in place with public approval in time to stop the projected loss of tens of millions of jobs globally that now seems the likely, if not inevitable, outcome of the current recession.
Mark LeVine is a professor of Middle East history at the University of California, Irvine, and is the author of Heavy Metal Islam: Rock, Resistance, and the Struggle for the Soul of Islam and the soon to be published An Impossible Peace: Israel/Palestine since 1989.
The views expressed by the author are not necessarily those of Al Jazeera.
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Source: Al Jazeera