Tuesday, November 18, 2008

American's Way Of Life Turned Upside Down.

ONTARIO [California] - The residents of "Ontario Tent City," a Bushville formerly home to approximately 400 homeless people, were evicted today and their possessions bulldozed. "I have nowhere to go," and "I don't know what I'm gonna do," were the refrains heard over and over.

November 16, 2008
The Crisis Has Hardly Begun
By Paul Craig Roberts


"The prospects of a government rescue for the foundering American automakers dwindled Thursday as Democratic Congressional leaders conceded that they would face potentially insurmountable Republican opposition," reported the NY Times last Friday. [Chances Dwindle On Bailout Plan For Automakers, By David M. Herszenhorn, November 13, 2008]

Wow! The entire country is steamed up over the Republicans bailing out a bunch of financial crooks who have paid themselves fortunes in bonuses for destroying America’s pensions. Why do Democrats want to protect Republicans from further ignominy by not giving them the opportunity to vote down a bailout for workers? Quick, someone enroll the Democratic Party in Politics 101.

GM’s divisions in Canada and Germany are asking those governments for help. It will be something if Canada and Germany come through for the American automaker and the American government doesn’t.

Conservative talking heads are saying GM is a "failed business model" unworthy of a $25 billion bailout. These are the same talking heads who favored pouring $700 billion into a failed financial model.

The head of the FDIC is trying to get $25 billion--a measly 3.5 percent of the $700 billion for the banksters--with which to refinance the mortgages of 2 million of the banksters’ victims, and Bush’s Secretary of the Treasury Paulson says no. Why aren’t the Democrats all over this, too?

Apparently, the Democrats still think they are the minority party—or else their aim is to supplant the Republicans as the party of the rich.

Any bailout has its downsides. But if America loses its auto industry, it will lose the suppliers as well and will cease to have a manufacturing sector. For years no-think economists have been writing off America’s manufacturing jobs, while deluding themselves and the public with propaganda about a New Economy based on finance.

A country that doesn’t make anything doesn’t need a financial sector as there is nothing to finance.

The financial crisis has had one good effect. It has cured Democratic economists like Robert Reich and Paul Krugman of their fear of budget deficits. During the Reagan years these two economists saw doom in the "Reagan deficits" despite the fact that OECD data showed that the US at that time had one of the lowest ratios of general government debt to GDP in the industrialized world.

Today Reich and Krugman are unfazed by their recommendations of budget deficits that are many multiples of Reagan’s. Moreover, neither economist has given the slightest thought as to how the massive budget deficit that they recommend can be financed.

Both recommend large public spending programs. Krugman puts a price tag of $600 billion on his program. If it takes $700 billion to save the banks and only $600 billion to save the economy, it sounds like a good deal. But this $600 billion is on top of the $700 billion for the banks, the $200 billion for Fannie Mae and Freddie Mac, and the $85 billion for AIG. These figures add to one trillion five hundred eighty-five billion dollars, a sum that must be added to the budget deficit due to war and recession (or worse).

What we are talking about here is a minimum budget deficit of $2 trillion. The US has never had to finance a deficit of this magnitude. Where is the money coming from?

The US Treasury doesn’t have any money, and neither do Americans, who have lost up to half of their savings and retirement funds and are up to their eyeballs in mortgage and consumer debt. And unemployment is rising.

There are only two sources of financing: foreign creditors and the printing press.

I doubt that foreigners have $2 trillion to lend to the US. Thanks to the toxic US financial instruments, they have their own bailouts to finance and economies to stimulate. Moreover, I doubt that foreigners think the US can service a public debt that suddenly jumps by $2 trillion. At 5 percent interest, the additional debt would add $100 billion to the annual budget deficit. In order to pay interest to creditors, the US would have to borrow more money from them.

Economists and policy-makers are not thinking. This enormous financing need comes not to a well-managed economy that can take the additional debt in its stride. Instead, it comes to an economy so badly managed that there are no reserves.

Massive US trade deficits have been financed by giving up US assets to foreigners, who now own the income flows as well. Budget deficits from 6 years of pointless wars and from unsustainable levels of military spending have helped to flood the world with dollars and to drive down the dollar’s exchange value. Consumers themselves are drowning in debt and can provide no lift to the economy. Millions of the best jobs have been moved offshore, and research, design, and innovation have followed them. Considering America’s dependency on imports, part of any stimulus package that reaches the consumer will bleed off to foreign countries.

Generally, when countries acquire more debt than they can service, they inflate away the debt. If foreign creditors do not save the Obama administration, the Treasury will print bonds and give them to the Federal Reserve, which will issue money.

The inflation will be severe, particularly as Americans will not be able to pay for the imports of manufactured goods from abroad on which they have become dependent. The exchange value of the dollar will decline with the domestic inflation. Once inflation is off and running, the printing press dollars will only have goods made in America to chase after. The real crisis has not yet begun.

Paulson should rethink the automakers’ and FDIC’s proposals. A bank produces nothing but paper. Automakers produce real things that can be sold. Occupied homes are worth more than empty ones.

Paulson’s inability to see this is the logical outcome of Wall Street thinking that highly values deals made over pieces of paper at the expense of the real economy.

Paul Craig Roberts was Assistant Secretary of the Treasury during President Reagan’s first term.

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