- The United States is running out of time to get its budget
and trade deficits under control. Despite the urgency of the situation,
2010 has been wasted in hype about a nonexistent recovery. As recently
as August 2 Treasury Secretary Timothy F. Geithner penned a New York
Times column, "Welcome to the Recovery."
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- As John Williams (<http://shadowstats.com/>shadowstats.com)
has made clear on many occasions, an appearance of recovery was created
by over-counting employment and undercounting inflation. Warnings by Williams,
Gerald Celente, and myself have gone unheeded, but our warnings recently
had echoes from Boston University professor Laurence Kotlikoff and from
David Stockman, who excoriated the Republican Party for becoming big-spending
Democrats.
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- It is encouraging to see some realization that, this
time, Washington cannot spend the economy out of recession. The deficits
are already too large for the dollar to survive as reserve currency, and
deficit spending cannot put Americans back to work in jobs that have been
moved offshore.
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- However, the solutions offered by those who are beginning
to recognize that there is a problem are discouraging. Kotlikoff thinks
the solution is savage Social Security and Medicare cuts or equally savage
tax increases or hyperinflation to destroy the vast debts.
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- Perhaps economists lack imagination, or perhaps they
don't want to be cut off from Wall Street and corporate subsidies, but
Social Security and Medicare are insufficient at their present levels,
especially considering the erosion of private pensions by the dot-com,
derivative and real estate bubbles. Cuts in Social Security and Medicare,
for which people have paid 15 per cent of their earnings all their lives,
would result in starvation and deaths from curable diseases.
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- Tax increases make even less sense. It is widely acknowledged
that the majority of households cannot survive on one job. Both husband
and wife work and often one of the partners has two jobs in order to make
ends meet. Raising taxes makes it harder to make ends meet -- thus more
foreclosures, more food stamps, more homelessness. What kind of economist
or humane person thinks this is a solution?
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- Ah, but we will tax the rich. The rich have enough money.
They will simply stop earning.
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- Let's get real. Here is what the government is likely
to do. Once Washington realizes that the dollar is at risk and that they
can no longer finance their wars by borrowing abroad, the government will
either levy a tax on private pensions on the grounds that the pensions
have accumulated tax-deferred, or the government will require pension fund
managers to purchase Treasury debt with our pensions. This will buy the
government a bit more time while pension accounts are loaded up with worthless
paper.
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- The last Bush budget deficit (2008) was in the $400-500
billion range, about the size of the Chinese, Japanese, and OPEC trade
surpluses with the US. Traditionally, these trade surpluses have been recycled
to the US and finance the federal budget deficit. In 2009 and 2010 the
federal deficit jumped to $1,400 billion, a back-to-back trillion dollar
increase. There are not sufficient trade surpluses to finance a deficit
this large. From where comes the money?
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- The answer is from individuals fleeing the stock market
into "safe" Treasury bonds and from the bankster bailout, not
so much the TARP money as the Federal Reserve's exchange of bank reserves
for questionable financial paper such as subprime derivatives. The banks
used their excess reserves to purchase Treasury debt.
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- These financing maneuvers are one-time tricks. Once people
have fled stocks, that movement into Treasuries is over. The opposition
to the bankster bailout likely precludes another. So where does the money
come from the next time?
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- The Treasury was able to unload a lot of debt thanks
to "the Greek crisis," which the New York banksters and hedge
funds multiplied into "the euro crisis." The financial press
served as a financing arm for the US Treasury by creating panic about European
debt and the euro. Central banks and individuals who had taken refuge from
the dollar in euros were panicked out of their euros, and they rushed into
dollars by purchasing US Treasury debt.
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- This movement from euros to dollars weakened the alternative
reserve currency to the dollar, halted the dollar's decline, and financed
the US budget deficit a while longer.
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- Possibly the game can be replayed with Spanish debt,
Irish debt, and whatever unlucky country is swept in by the thoughtless
expansion of the European Union.
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- But when no countries remain that can be destabilized
by Wall Street investment banksters and hedge funds, what then finances
the US budget deficit?
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- The only remaining financier is the Federal Reserve.
When Treasury bonds brought to auction do not sell, the Federal Reserve
must purchase them. The Federal Reserve purchases the bonds by creating
new demand deposits, or checking accounts, for the Treasury. As the Treasury
spends the proceeds of the new debt sales, the US money supply expands
by the amount of the Federal Reserve's purchase of Treasury debt.
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- Do goods and services expand by the same amount? Imports
will increase as US jobs have been offshored and given to foreigners, thus
worsening the trade deficit. When the Federal Reserve purchases the Treasury's
new debt issues, the money supply will increase by more than the supply
of domestically produced goods and services. Prices are likely to rise.
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- How high will they rise? The longer money is created
in order that government can pay its bills, the more likely hyperinflation
will be the result.
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- The economy has not recovered. By the end of this year,
it will be obvious that the collapsing economy means a larger than $1.4
trillion budget deficit to finance. Will it be $2 trillion? Higher?
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- Whatever the size, the rest of the world will see that
the dollar is being printed in such quantities that it cannot serve as
reserve currency. At that point, wholesale dumping of dollars will result
as foreign central banks try to unload a worthless currency.
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- The collapse of the dollar will drive up the prices of
imports and offshored goods on which Americans are dependent. Walmart shoppers
will think they have mistakenly gone into Neiman Marcus.
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- Domestic prices will also explode as a growing money
supply chases the supply of goods and services still made in America by
Americans.
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- The dollar as reserve currency cannot survive the conflagration.
When the dollar goes, the US cannot finance its trade deficit. Therefore,
imports will fall sharply, thus adding to domestic inflation and, as the
US is energy import-dependent, there will be transportation disruptions
that will disrupt work and grocery store deliveries.
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- Panic will be the order of the day.
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- Will farms be raided? Will those trapped in cities resort
to riots and looting?
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- Is this the likely future that "our" government
and "our patriotic" corporations have created for us?
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- To borrow from Lenin, "What can be done?"
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- Here is what can be done. The wars, which benefit no
one but the military-security complex and Israel's territorial expansion,
can be immediately ended. This would reduce the US budget deficit by hundreds
of billions of dollars per year. More hundreds of billions of dollars could
be saved by cutting the rest of the military budget which, in its present
size, exceeds the budgets of all the serious military powers on earth combined.
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- US military spending reflects the unaffordable and unattainable
crazed neoconservative goal of US Empire and world hegemony. What fool
in Washington thinks that China is going to finance US hegemony over China?
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- The only way that the US will again have an economy is
by bringing back the offshored jobs. The loss of these jobs impoverished
Americans while producing oversized gains for Wall Street, shareholders,
and corporate executives. These jobs can be brought home where they belong
by taxing corporations according to where value is added to their product.
If value is added to their goods and services in China, corporations would
have a high tax rate. If value is added to their goods and services in
the US, corporations would have a low tax rate.
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- This change in corporate taxation would offset the cheap
foreign labor that has sucked jobs out of America, and it would rebuild
the ladders of upward mobility that made America an opportunity society.
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- If the wars are not immediately stopped and the jobs
brought back to America, the US is relegated to the trash bin of history.
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- Obviously, the corporations and Wall Street would use
their financial power and campaign contributions to block any legislation
that would reduce short-term earnings and bonuses by bringing jobs back
to America. Americans have no greater enemies than Wall Street and the
corporations and their prostitutes in Congress and the White House.
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- The neocons allied with Israel, who control both parties
and much of the media, are strung out on the ecstasy of Empire.
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- The United States and the welfare of its 300 million
people cannot be restored unless the neocons, Wall Street, the corporations,
and their servile slaves in Congress and the White House can be defeated.
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- Without a revolution, Americans are history.
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- Paul Craig Roberts was an editor of the Wall Street
Journal and an Assistant Secretary of the U.S. Treasury.
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