Friday, February 13, 2009

The Elephant and the Donkey in the Room

The vast sums committed by our government to fiscal stimulus and banking bailout in the past few months boggle the mind.  Prior to the Panic of 2008, many people thought we were already too much in debt, but courtesy of Clusterstock, drawing on documents from Credit Suisse, here's a view into the denial taking place at high levels regarding U.S. debt-to-GDP ratios.  What is amazing is that the folks at Credit Suisse present the chart below and assert that on its basis, our debt-to-GDP ratio is not problematic (note that their ratio differs from ours presented previously drawn from authoritative sources, but let’s play along):


Now, casual empiricism is a game anyone can play.  The geniuses at Credit Suisse see no problem with recent private debt ratios, but I see them shooting up to levels above 1929’s, into territory associated with crashes and depressions.

The denial is not limited to Credit Suisse.  The economists on the liberal side such as Paul Krugman demanding greater stimulus than our government is already providing seem to forget that in 1929 the United States was a “huge creditor nation” not dependent on a huge developing nation ATM to finance its twin trade and fiscal deficits.  When we were living beyond our means before the panic, why should we try to return to that level?

Let me make my position clear:  I am a bleeding heart classical liberal.  The United States is a rich nation that can afford to provide health insurance and a poverty level dole to people who lose their jobs because some greedy financial tricksters fleeced the nation and tanked the economy.  Americans are hard-working people; few will stay on a dole if they can get a job.  Such a program also happens to be the most effective fiscal stimulus, because it will be spent.  Similarly, the deficits of the states, which must run in balance overall, should be made up during the slump.

So what do we get?  The flint-hearted Republicans would never support anything so compassionate as national health insurance or a dole (nor, of course, any Democratic stimulus bill).  The Democratic economists, proudly riding astride their “Depression economics” hobbyhorses (this is a debt-deflation, but it isn’t a depression yet) are going to get their wish to incur more debt.  The non-partisan CBO estimates the bill will not increase output at all over ten years, although it might increase jobs slightly in the short run.

And the financial tricksters on Wall Street see their opening with our industry-captive Treasury Secretary, and the new shell game he seems to want to play with the zombie banks’ bad assets.  Count on the Wall Street geniuses to blind us all with science again, if we let them.  Even Forbes is now saying we need to nationalize the zombie banks and write down the bad debt (recognizing that Noriel Roubini might actually be right about something, an unusual demonstration of independence of thought from an outfit that has told us for a decade that trade deficits don’t matter).

What is really going on?  We’re still reading from the old script, the now stretched-to-the-limit plutocratic social contract that is currently failing.  We’ll add more debt; there will be, in a few years, another round of debt-deflation as the likely banking non-solution fails.  The stimulus bill will benefit the upper-middle class, and one might guess, contractors of a Democratic stripe.  The Bush tax cuts on the very wealthy are being left in place “for now” (for-ever?).

And of course we’re beefing up our troops in Afghanistan, throwing another $70 billion on for that, even though every invading army that has tried to tame Afghanistan in the past 2000 years has failed.  Apparently there’s a pipeline involved.  I don’t know whether someone threatened the President’s life, or whether it’s just the water in D.C., but he sure looks like more of the same.  Unless he acts now, the crisis the Republicans engineered will preclude any of his major initiatives, like national health care. 

So what’s beneath it all?  The military-industrial complex that’s been calling the shots in America for the past 60 years is looking forward to the next war.  When the greenback fails, as it must when we begin to inflate (we’re not as big as we once were, relatively, and getting smaller), we’ll call in the cavalry to go get our oil.  Let’s create a really big crisis, because we’re still biggest and we can win, appears to be the thought process--whether conscious or unconscious.  Or as George Friedman says, we don’t need to win our little foreign wars, we just need to keep the enemy off guard—and by spreading chaos abroad, keep the greenback the reserve currency.  This is how the American empire might destroy itself.  Go for broke!

We Americans must come up with a new social contract (see previous post), one that’s fair and that permits us to live decently, at peace with our global neighbors, within our national means.  It will require our government to commit to both more economic equality and more institutional responsibility than they do now.  I believe the history of the world over the past few centuries shows that improvement is possible; see for example Steven Pinker’s talk on the myth of violence.

We’ll see how bad the banking bill turns out to be.  But for those of us who supported Obama and thought that we were beating the system by sending in our money over the Web, his first month in office has been a big disappointment.

I can’t comprehend the amount of debt we’re taking on.  The reputable puts the amount of new spending since December 2007 (including the stimulus) at over $3 trillion, with another $7 trillion of potential authorized spending, against a current dollar GDP of $14.3 trillion.  This is a blow-out.

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