Save The Economy, Dismantle The Empire

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A Grand Global Bargain? Save the Economy,

Dismantle the Empire
March 15, 2008
By Michael
Counterpunch
Todays deepening financial and economic crisis cannot be alleviated without addressing a number of
problems that the public does not really want to hear about. Even to cite them raises a wall of cognitive
dissonance.
For starters, todays debt problem is not marginal, but has become structural and structural problems
cannot be solved with merely marginal palliatives. What Alan Greenspan called wealth creation
turned out to be asset-price inflation bidding up property values and the stock market on credit. The
Bubble Economy loaded down households, real estate and entire companies with debt, while the Bush tax
cuts for the higher tax brackets forced federal, state and local budgets much more deeply into debt.
This policy could continue as long as debt inflated property prices at a faster rate than the interest rate that
had to be paid. But paying interest and amortization charges diverted consumer and business spending
away from consumption and production. This is what the term debt deflation means. The financial and
property sectors received the income formerly spent on goods and services. Debt service is not available to
be spent on consumer goods (for homeowners) or for capital investment (for debt-leveraged companies).
The effect is to slow sales and business income, and hence the commercial rental and real estate market.
By 2006 a point was reached where debt service grew to exceed operating income or the ability of many
homeowners to carry especially when interest rates jumped. The Feds bailout idea is to lend debtors
enough to pay their bankers and other creditors, subsidizing their insolvency with enough to keep current
on obligations they cannot otherwise afford. The alternative is negative equity: the sale of homes, office
buildings and companies pledged as collateral and sold at prices below the mortgage or loan value. Such
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subsidy merely buys time for the debt problem to become even more deeply engrained.
The reality is that the existing level of debts cannot be paid. The problem is by no means confined to the
bottom of the economic pyramid, but is concentrated at the top. The U.S. Government itself turns out to
be the worlds largest subprime debtor. Its $2.5 trillion debt to foreign central banks and even larger
private-sector debt to other foreigners cannot be paid, given the nations heavy military and trade deficits.
Recognition of this political fact at the core of the international financial system has led foreign
governments and investors to dump dollar-denominated bonds and stock. This has driven down the
dollars exchange rate, raising dollarized prices for oil and other raw materials.
The larger the U.S. trade deficits and foreign military spending grow, the more of these dollars are turned
over to foreign central banks by foreign exporters and other recipients of U.S. funds. Central banks then
find themselves with little to spend their money on, except to buy U.S. Treasury securities. They have
bought so many that Americans have not had to bear the cost the U.S. federal budget deficit by buying the
bonds to finance it. Foreigners have bought them. In effect they have loaned the U.S. Government the
dollars and foreign exchange to wage its war in the Near East a war that most foreign voters do not
support. To fund the U.S. payments deficit and federal budget deficit is to subsidize this war.
In the last few years, foreign governments have sought some alternative to buying U.S. Treasury bills. But
when the Chinese sought to buy Union Oil assets, Congress vetoed the deal, accusing government
ownership of leading down the road to serfdom. For China to buy into U.S. privatizations, it would have to
believe that the U.S. Congress would let it raise road tolls and other infrastructure access fees by enough to
compensate it for the dollars decline. The more likely response would be new complaints against the
Yellow Peril. So foreign governments are finding themselves stuck with dollars they cannot use to buy real
U.S. assets, and also cannot spend on U.S. exports now that the country is de-industrializing. All they can
do is lend money to the U.S. Government.
This is the road that drove the Medici bankers bankrupt a few centuries ago. By 1776, Adam Smith was led
to conclude that no government ever had repaid its foreign debt. No private sector has reduced its debt
level for long either except through bankruptcy, moratorium and repudiation. These are the options that
face us today. But they are not politically acceptable for public discussion. The last time the economics
profession addressed the global debt problem was in the 1920s, in response to the unpayably high level of
German reparations and Inter-Ally arms debts to the United States. Since that time there has been much
talk of monetary theory, but little attention to measuring the ability of economies to carry their domestic
and foreign debt overhead.
This week the Fed tried to reverse the plunge in asset prices by flooding the banking system with $200
billion of credit. Banks were allowed to turn their bad mortgage loans and other loans over to the Federal
Reserve at par value (rather at just 20% mark to market prices). The Feds cover story is that this infusion
will enable the banks to resume lending to get the economy moving again. But the banks are using the
money to bet against the dollar. They are borrowing from the Fed at a low interest rate, and buying foreign
euro-denominated bonds yielding a higher interest rate and in the process, making a currency gain as the
euro rises against dollar-denominated assets. The Fed thus is subsidizing capital flight, exacerbating
inflation by making the price of imports (headed by oil and other raw materials) more expensive. These
commodities are not more expensive to European buyers, but only to buyers paying in depreciated dollars.
(This also squeezes Latin America and other countries in the dollar area.)
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The Feds behavior (not only under Alan Greenspan) raises the question of whether central banks really
are necessary. Their idea always has been to sponsor creditor-oriented rules, financial deregulation, and to
bail out to the financial sector at public expense, painting the economy into a debt corner. But having done
so, the Federal Reserve cannot solve the problems it has created under the Greenspan regime. Its
role and indeed, that of central banks in general is to pursue precisely the kind of policies that have
created todays financial quandary.
Ever since the Bank of England was founded in 1694, central banks throughout the world have
represented the interests of the commercial banking system. Unfortunately, the financial time frame always
has been short-term. Banks make money by finding more and more clients to borrow funds, while
investment bankers and brokerage houses take their commissions and run. Their interest is in promoting a
Bubble Economy that will induce real estate buyers and corporate raiders to borrow so as to ride the wave
of asset-price inflation. This borrowing seems at first to be self-sustaining as borrowers bid up prices for
property, stocks and bonds. These assets then can be pledged as collateral for even larger loans as prices
and debts rise together.
This is the kind of wealth creation for which Mr. Greenspan sought to take credit. But alas, it is not a
process that provides stability for the economy at large. As the financial sectors interests have come to be
opposed to those of the real economy of consumers and producers, Federal Reserve policy seeks to solve
the debt problem with yet more debt, in the form of bailouts to banks that have made bad loans. The
bailout is designed to enable banks to lend money to support asset prices and preserve the market price of
collateral pledged to back their mortgage loans and lending to highly leveraged companies and hedge
funds. In bailing out banks to increase their loans to achieve these ends, the Fed has become an active
player in a financial war to indebt real estate, labor and industry all the more.
The result is an unprecedented intrusion of Big Government, not in a socialist manner but one that uses the
public purse to protect finance and property at the top of the economic pyramid. This is done by leading
down a uniquely financial road to serfdom, by promoting a regime of debt peonage. Via the Federal
Reserve system, the government is solving the ending of the Bubble Economy by providing enough loans
to indebt industry and agriculture, labor and tangible capital as it borrows the money to pay debt service
on loans that otherwise would fall into default.
But as noted above, the most problematic debt is foreign debt, and the major subprime international
debtor is the U.S. Government. It is now indebted to foreign governments (via their central bank holdings
of $2.5 trillion in dollar reserves) and to private investors (another few trillion) beyond the nations ability
to pay, not to mention beyond its political willingness to do so. That is why foreigners no longer are
accepting the dollars being thrown off by U.S. consumers, U.S. investors buying foreign enterprises, and
the U.S. military extending its bases abroad.
As the dollar falls, import prices rise, headed by fuels and minerals. Something has to give. How can
homeowners and businesses pay their debts, if their operating costs for heating, electricity and transport are
absorbing their income?
The only way to stop this hemorrhaging is to negotiate a debt writeoff, starting with the U.S. Treasury
bonds held by foreign central banks. But what does the United States have to offer? To ask foreign
governments to make an economic sacrifice of this magnitude cannot be negotiated without the U.S.
Government negotiating a grand global bargain. Having little quid pro quo to offer, the most promising way
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to get foreign countries to voluntarily give up their financial claims on the U.S. economy must include the
one thing America can offer the military dimension.
There is only one way that I can see this being done. The United States would agree to dismantle all its
overseas military bases (or at least, those outside of the Western Hemisphere). This would mean
relinquishing its dream of imposing world hegemony by force of arms. This also would free it and other
countries from the post-Cold-War arms race. It would help revive the real economys production and
consumption by freeing revenue for spending on consumption and new direct investment. In the process it
would free the United States from Pentagon capitalism, that is, cost-plus production contracts that
seemingly has led American industrial engineering to be incapable of cost-minimizing production methods,
thereby losing what used to be its competitive technological advantage.
Foreign countries are coming to view the United States from the same perspective that the Bush
Administration viewed other countries: Any economic potential is by definition military in character. It
follows that what COULD be, should be stifled at the outset. The United States has become the worlds
major aggressive destabilizing force. Without dealing openly with this military elephant in the room, any
alleviation of foreign claims on the U.S. economy by foreign governments would simply permit America to
maintain and even to increase its global military presence, building yet more foreign bases and imposing a
yet larger balance-of-payments drain on the dollar. Supporting the dollar is synonymous with subsidizing
the Executive Branchs addiction to hegemonic military diplomacy.
Unfortunately, this is not a truth that the American public wants to hear.
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A Grand Global Bargain? Save the Economy, Dismantle the Empire | Mic...

A Grand Global Bargain? Save the Economy,

Ancient Near East

Australia banks Bubble &

Russia Stiglitz tax

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