- Republican hearts are all aflutter over one quarter of
strong GDP numbers. But the 8.2% third quarter growth was purchased on
credit-the $374 billion budget deficit that was the largest in the country's
history. All indications are that next year's deficit will be even larger,
exceeding half a trillion dollars.
-
- There is simply no magic to "growth" under
these conditions. Any idiot with a hand full of credit cards charged to
the next generation's children can gin up the short term illusion of prosperity.
Until, that is, the bills come due.
-
- George W. Bush inherited a $127 billion fiscal surplus
but ran through all of that and more in his first year. He has turned a
$5.6 trillion 10 year forecast surplus into a $3+ trillion forecast loss-an
almost unimaginable reversal of $9 trillion in only three years. And this,
in an economy that has grown for ten of the last twelve quarters.
-
- The result of this almost psychotic profligacy, according
to the Congressional Budget Office, will be a national debt of $14 trillion
in 10 years. Interest payments alone will approach a trillion dollars a
year and will exceed spending for all discretionary federal programs combined.
Even more surreal, a study commissioned by former Treasury Secretary Paul
O'Neil indicated that the 50 year forecast U.S. deficit would reach $44
trillion. The study was suppressed. O'Neil was fired.
-
- How does a nation deal with debts that so greatly outrun
its ability to pay? There are basically only five strategies. All are unappealing.
Most are calamitous.
-
- The most difficult strategy is, not surprisingly, the
honest one: raise taxes and pay your bills. This is what King George III
did following the Seven Years War with France in 1763. England had quadrupled
its national debt in fighting the War and needed money to pay it off. It
turned to the richest people in the realm, the Colonists, and began taxing
paper, glass, paint, lead, and, of course, tea. The result, as we know,
was the American Revolution.
-
- It was the same strategy-raising taxes on the rich-that
Louis XVI attempted in 1789. The French national debt had grown 10 fold
under the pharoic opulence of Louis's grandfather, Louis XIV. Louis called
the nobility and the clergy together and told them they would have to ante
up. They, after all, had been exempted from taxes by Louis XIV in order
to buy their complicity in his autocratic reign. Indignant, they refused
to pay, precipitating the French Revolution, the most explosive upheaval
to established government in the last thousand years.
-
- A second strategy to deal with excessive debts is simply
to print money. This is what Weimar Germany did to address the crushing
debt imposed by the vengeful Treaty of Versailles. Before it was over the
government had inflated the money supply by over a trillion times, leading
some to comment that it was a waste of ink to put it onto paper worth so
much less than the ink itself. The German middle class, whose assets were
held at fixed amounts in government pensions, was destroyed. The collapse
gave direct rise to Adolph Hitler.
-
- A third strategy for dealing with onerous national debt
is to sell off national assets. This is one of the first strategies the
IMF imposes on third world countries that have gotten behind in their payments
to western banks. Government-run industries, from telecommunications to
water systems, are "privatized" and the country's natural resources
are sold off to the highest foreign bidder. This is what Great Britain
was forced to do in the aftermath of World War II.
-
- Two world wars in only 30 years had ravaged the British
economy and the pound sterling. Facing collapse at home (and revolution
abroad), the government surrendered almost all of its colonies, from India
and Pakistan to Nigeria, South Africa, Zambia and Zimbabwe. These had been
among the greatest wealth-producing properties of modern times, the ones
that had made the British Empire what it was. Their loss left Britain a
second-rate power with only misty memories of its once imperial greatness.
-
- A fourth strategy for dealing with excessive debt is
to just repudiate it. This was used for centuries in the early days of
the modern world and was revived two years ago by Argentina which brazenly
refused to pay some $110 billion in debts it had accumulated over prior
decades. More ominously, it was this strategy that was used by the Bolsheviks
after they took power in the Russian Revolution.
-
- The new communist government refused to be bound by the
debts of the overthrown Romanovs. But the French had loaned heavily to
the Russian government for decades before World War I and now were left
in a lurch. A cascading series of defaults from one bank to another caused
a liquidity crisis on the continent, ultimately setting off the Great Depression.
-
- Finally, there is plunder. When a nation's debt load
becomes so huge it cannot plausibly reassure creditors regarding repayment,
it must seek some source of wealth, any source, to keep the borrowed money
flowing. This, naked predation, is what kept the Roman Empire alive for
the last two hundred years of its existence. It is the strategy adopted
by the Spanish Empire-silver and gold from America-and which eventually
destroyed the vitality of its own merchant and civil servant classes.
-
- Government economists are not unawares of these imperatives.
So, which of the five above strategies has the U.S. adopted to deal with
its exploding debt problem?
-
- Clearly, the Bush administration will not adopt the first
strategy, raising taxes. In fact, as a result of Bush's mammoth tax giveaways,
federal receipts as a percentage of GDP are at 16%, their lowest level
since the 1950s. Raising taxes, or even simply reversing prior tax cuts,
would betray the very purpose for which the rich installed Bush in the
first place. And just as clearly, Bush cannot cut back on his prodigious
spending-at least not yet-for that is the basis on which he has bought
the short-term illusion of prosperity mentioned above.
-
- Nor will the government resort to inflation, the second
strategy. As we know from the German experience, inflation erodes the value
of fixed income payments. The current U.S. debt, now in excess of $7 trillion,
is held primarily by the very wealthiest of the world's citizens. They
clip some $200 billion a year in coupons on this debt. If they were to
see the U.S. government beginning to inflate, they would quickly sell off
these instruments, precipitating a massive collapse. Alan Greenspan's quasi-religious
stand against inflation can be understood first as his defense of the pecuniary
prerogatives of this global investor class and second as the requisite
fix to keep the funding flowing.
-
- What about selling off assets, the third strategy? Now
the story starts to get more interesting. As the dollar declines in value
relative to foreign currencies, U.S. assets, denominated in dollars, become
relatively cheaper. It costs foreigners less and less to buy more and more
of the U.S. economy at fire sale prices. Some purchases will go into U.S.
treasuries. Some will find their way into the stock market. Some will go
into passive assets such as real estate. And some will go to buy active
ownership and management of U.S. companies.
-
- This is the dynamic that led the Japanese during the
Supply Side-inspired dollar collapse of the 1980s to buy up Rockefeller
Center, Firestone Tire, Pebble Beach, 7-Eleven, and countless other icons
of America's commercial and cultural patrimony. It has the virtue (or vice,
depending on your perspective) of appearing to be the result of "market
forces". Government borrowing is settled by foreigners redeeming dollar-based
IOUs in U.S. markets, denuding the private sphere of its productive assets
and putting them into foreign hands. This is the reason Toyota is the biggest
employer in Alabama and Honda is the second biggest employer in Indiana.
-
- The fourth strategy, repudiation of debts, is more immediate
than most American citizens realize. A significant portion of those $44
trillion future shortfalls come from under-funding of Medicare and Social
Security. The recent Medicare bill is the first step toward official privatization.
This will be accomplished by turning the program and its recipients over
to the renowned stewardship of the insurance, health care and pharmaceutical
industries and getting the liabilities off the government's books. Similarly,
if Bush is elected in 2004, one of his first priorities will be a comparable
privatization of Social Security. Not only will it prove an incalculable
boon to the securities industry, it will substantially decrease the government's
obligations to the Baby Boomers.
-
- In terms of how a nation deals with excessive debt, the
logic of these repudiation schemes is impeccable: it is far wiser for a
country to repudiate the debts it holds to its own people-especially if
they are not politically powerful-than it is to alienate its wealthy domestic
and international underwriters. But asset sales and repudiation alone will
not suffice to keep the funding flowing.
-
- Already international investors are beginning to bail
out of dollars. In 2003, the dollar was down 19% against the Euro with
the fall accelerating since November. The dollar is now at its lowest level
since the Euro was created in 1991. Even more telling is that international
capital inflows to the U.S. dropped to $5 billion in August, down from
$96 billion the year before. Nobody wants to hold dollars. But if the money
flow stops, the U.S. economy collapses.
-
- This is what happened in 1987. The massive Supply Side
deficits of Ronald Reagan required the U.S. to borrow furiously from abroad.
For a while the Japanese were our bankers, handily recycling their substantial
trade surpluses into U.S. treasuries. But the Japanese soon realized they
were being played for suckers. While they were making 5% returns on their
treasuries, they were losing 15% on dollar depreciation. They stopped buying
treasuries in October and the ensuing loss of liquidity caused the stock
market to implode, the worst collapse since the Great Depression.
-
- So what to do?
-
- Finally, then, we come to the most sensitive and incendiary
debt management strategy of all. Plunder. The purported rationale for the
U.S. invasion of Iraq-that it possessed Weapons of Mass Destruction-is
now known to have been a wholesale fiction. Not a single one of the administration's
dozens of claims of WMD possession or imminent threat have borne the scrutiny
of the most massive inspection regime in history. Of all the world's people,
only the thuggishly propagandized American people ever believed (or still
believe) this to have been the real purpose for the War. Not even Bush
himself pretends otherwise anymore.
-
- And the ex post facto rationale-that we are bringing
Democracy to Iraq-is equally fictive given Paul Bremer's statement that
the U.S. will not allow a Shi'ite government to take control there. Shi'ites,
as Bremer well knows, make up 60% of Iraq's population. And no, it's not
links to terror. And no, it's not connections to 9-11. What then? A simple
thought experiment demonstrates the real truth about the U.S. invasion:
would the U.S. have carried it out if, instead of sitting on the world's
second largest supply of oil, Iraq was the world's second largest producer
of, say, pomegranates? Or figs? Only the most pathologically Republican
of cynics can even pretend to give this question a thought.
-
- Control of oil gives the U.S. control of the industrial
world and effective control of its own strategic competitors, Europe and
China. This is the same strategy that made Alexander the Great so Great.
As he entered new territories in pursuit of conquest, the first thing Alexander
always did was capture and fortify the local water well. Within a day,
two at the most, resistance collapsed. Oil is the water of today. It is
the most widely traded commodity in the world. It is the one commodity
without which modern civilization cannot function.
-
- Control of oil allows the U.S. to extract all of the
surplus wealth created by its rivals, ensuring that they remain forever
subservient. This explains why Europe and China were so vociferous in their
denunciation of the War. It also ensures that the U.S. has a universally
desired, fungible, liquid commodity to collateralize its massive debts.
Iraqi oil is a magical two-fer: it solves the U.S.'s primary strategic
and economic challenges in a single fell swoop. But its capture can only
be justified by deceit and accomplished through plunder.
-
- The problem for most of Bush's Democratic challengers
is that they know the above situation to be true. That is why-Howard Dean
and Dennis Kucinich excepted-they went so sheepishly along with Bush's
notoriously transparent casus belli in Iraq. They are left with petty quibbling
about the adequacy of post-invasion planning. It is why they raised hardly
a peep of protest over the ramming through of the Medicare package. It
is why they bleat only procedural protests about the incivility of discourse
as the three-quarters-of-a-century legacy of the New Deal is being peremptorily
dismantled.
-
- There was a time in the late 1990s when it looked as
if the U.S. might be able to regain control of its fiscal destiny. Bill
Clinton reversed the suicidal predations of Reagan's Supply Side Economics
and produced the longest sustained economic expansion in U.S. history.
One of the byproducts of that expansion was a series of budgetary surpluses
that allowed the government to begin paying down the crippling debts run
up under Reagan and Bush I.
-
- But that halcyon era is already just a memory. Bush's
massive debts are the nation's new fiscal master. And they have been run
up solely to further enrich the already extremely wealthy the expense of
the still desperately needy. The staggering costs of servicing these debts
will drive interest rates into the stratosphere, destroying all possibilities
of rebuilding a competitive economic infrastructure. The conservative British
business magazine, The Economist, said it most presciently: "Long
after Dubya is back on his ranch, Americans will be trying to recover from
the mess he created."
-
- It is breathtaking to imagine it could have happened
so quickly but all federal policy, indeed, decisions concerning war and
the very character of the nation itself, will now be defined by the stark
new fact of our collective indenture.
-
- - Robert Freeman writes on economics and education. His
articles have appeared in The Wall Street Journal, Salon, CounterPunch,
CommonDreams, ComputerWorld, and other publications. He can be reached
at robertfreeman10@yahoo.com
-
- © Copyrighted 1997-2004
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- http://www.commondreams.org/views04/0105-08.htm
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