Obama Has Missed His Moment

Barack Obama has squandered his
presidency. He had a fleeting moment to challenge the casino capitalism
and financial recklessness of our economic and political elite. He
could have orchestrated a state socialism that would have provided a
safety net for tens of millions of Americans faced with dislocation and
misery. The sums he has doled out to Wall Street could have been used
to force companies to keep workers on the job or create new banks to
open up credit. But he lacked the foresight and the courage to
challenge entrenched power. And now we are headed down one of two
frightening roads-massive deflation or hyperinflation. Neither will be

Hyman Minsky-an
economist largely ignored during his lifetime and now held up as
something of a prophet-argued that speculative bubbles, and the
financial collapses that follow them, are an inevitable consequence of
unregulated capitalism. Minsky, an economics professor at Washington
University in St. Louis who died in 1996, warned: "The normal
functioning of our economy leads to financial trauma and crises,
inflation, currency depreciations, unemployment and poverty in the
middle of what could be virtually universal affluence-in short ...
financially complex capitalism is inherently flawed." He called for
socialized banking and stimulus packages to protect workers.

Our Minsky moment, however, has passed.
Obama did not introduce radical measures to change our financial
structures. And the outlook, even from Obama's chief financial
advisers, is very gloomy. The U.S. economy will continue to contract
"for some time to come," said Lawrence Summers, director of the White
House National Economic Council. "I expect the economy will continue to
decline," with "sharp declines in employment for quite some time this
year," Summers said Sunday on "Fox News Sunday."

The International Monetary Fund has forecast that the U.S. economy will shrink 2.8 percent this year and have no growth in 2010, with unemployment rising to 10.1 percent.

Deflation, for the moment, remains our
most immediate threat. The Labor Department reported that in March the
consumer price index fell 0.4 percent over the last year, the first
decline in over 50 years. Home values have fallen in the last year by
18 percent. Our current deflation is not the massive deflation endured
during the Great Depression, but if it continues, and it becomes
sustained, it will wreck our economy. I suspect that the few trillion
dollars thrown at an economy that may have lost as much as $40 trillion
in wealth means deflation will win out.

A sustained deflation, such as the one
that has afflicted Japan, would make it much harder for borrowers, who
would have less cash, to pay off debt. It would fuel more defaults, see
more bankruptcies and dry up credit. It would lead to a fall in wages.
Those attempting to sell houses, or any other products, would watch
helplessly as the value of what they own evaporated.

Classical economic theory states that when
you pump huge sums of money into the economy you produce inflation. And
Fed Chairman Ben Bernanke would like to trigger inflation to relieve
the heavy debts weighing on many banks and investment houses.
Inflation, because it reduces the value of the dollar, effectively
devalues debts and reduces what many owe. This push toward inflation is
why we have low interest rates. This is why we are printing and
borrowing hundreds of billions of dollars. And this is why projected
deficits are almost beyond comprehension.

The Congressional Budget Office recently released its analysis
of the Obama administration's 10-year budget proposal. The projected
deficit for fiscal year 2009 is $1.8 trillion. And the CBO projects
deficits over the next 10 years that annually are between about $650
billion and $1 trillion. The CBO also projects that the outstanding
federal debt held by the public will increase from 40.8 percent of GDP
in 2008 to 82.4 percent in 2019. This is a doubling of the national
debt over the next 10 years. These deficits are being produced to
jump-start the economy, to prevent deflation and to produce inflation.

Inflation, which may look good if you are
a Wall Street firm overloaded with bad debt, is as risky as deflation,
however. It can easily morph into hyperinflation and bring, like
deflation, political and economic instability. It can lead to runs on
banks. It can make your currency worthless. It discourages investment
and thrift. And when you borrow at the level we are borrowing at you
frequently debauch your currency. This could lead to the dollar being
abandoned as a global currency. Why would the Chinese, or anyone else,
want to keep buying our debt while we work overtime to devalue our
currency? It means, in essence, that they can never make a profit and
what they own is being reduced daily in value.

Hyperinflation is never controlled
domestically. It is created by outside forces. If China and other
buyers of our debt view the endlessly increasing American deficit
spending as a threat to the viability of the U.S. dollar they will
abandon the dollar and reduce their purchases of treasury bills.
Chinese leaders have already questioned the wisdom of keeping foreign
reserves predominantly in the form of U.S. dollar-denominated treasury
bills and bonds. And if they walk away from the dollar our currency
will become junk and hyperinflation will race through the society like
a plague.

Deflation or hyperinflation will be our
nemesis. These are the only two options left. The speculators on Wall
Street and in the White House are again rolling the dice. But be
assured that no matter what combination comes up we are going to be

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