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.
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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.