This is the way the world ends/Not with a bang but a whimper.
T.S.Eliot, The Hollow Men
Merrill Lynch published this chart last night of the U.S. Short term Treasury obligations of $742 Billion. Note that 2/3rds of this debt is held by the central banks of about 8 countries including China, Russia, Saudia Arabia, and Japan. Let’s assume the dollar keeps falling because the Fed is afraid to raise interest rates in an election year. At what point do we encounter a “buyers strike” from these Central Banks at a Treasury Bill auction, which forces rates much higher in order to keep paying for the War In Iraq? What happens then? According to Merrill, this is what happens.
The US consumer is ultimately forced to violently adjust its impaired balance sheet. An insatiable appetite for debt comes against the constraint of reduced global credit availability.
There are only two ways to “violently adjust” a balance sheet: forced asset sales or bankruptcy. Either one leads to financial panic. Someday when the history of the decline of the American Empire is told, we will look at this chart on the left, and see that it was when Ronald Reagan came to office that we started going into debt to the rest of the world. And we will know that the idealogical stupidity of the conservative revolution lead us to this Day of Reckoning.
The task of rebuilding America as a producing/saving economy as opposed to a consumption/debt economy will be left to the Democrats. It will be painful and the supply side economist idealogues that brought this plague upon our nation will retreat to their think tanks like Heritage and AEI and pretend it wasn’t their fault.
Our Puritan forefathers would have locked them in the Pillory stocks for public shaming.
The Wall Street Journal this morning is enough to send you back to bed. Oil prices are spiking on low supply, consumer confidence is at the lowest level since the 70′s, Home prices have fallen 11% in the last year, the Clear Channel buyout is crashing and worst of all–we have just lived through a decade where the stock market has not made any gains. The Journal is kind enough to point out that we have been through this nightmare before from 1929-1942 and 1966-1982, but this is cold comfort.
Supply-side economists like Larry Kudlow will say they have just the solution, cut capital gains taxes on the rich and they will work harder and produce more wealth for the society. But I know a lot of very well off people and I never saw them go on strike when taxes were higher in the 90′s. Louis Uchitelle shows the big lie of the Supply-siders, who claim that if you just cut taxes on the rich, tax revenues will grow because the benighted billionaires will work much harder. Continue reading →
Bob Herbert in this morning’s New YorkTimes op-ed praises both Clinton and Obama, but asks why we are not hearing transformational ideas from their campaigns. I think there is a simple explanation and it is one that the Obama campaign is trying to address. We are afraid to dream big. The period in U.S. history from 1945-1975 (which I will call The Revolution) was filled with big dreams in which the Federal Government, often working through the states sought to transform the country into the world industrial leader by investing in infrastructure and scientific R & D which would provide the basis for the productivity revolution that followed. The passage of the National Interstate and Defense Highways Act of 1956 which financed the vast network of 46,000 miles of Interstates directly led to the mobility and efficiency that distinguished our country in the 50′s and 60′s. In 1958, following the Soviet Sputnik launch, the Congress authorized the Advanced Research Projects Agency (ARPA). Although much of ARPA’s early work was focused on satellite technology, by 1963 they began funding Project MAC (MIT Project on Mathematics And Computation) which led directly to the first computer network (ARPANET); the basis of the Internet we use today. The basis for both of these grand projects was a sort of distributed knowledge, in which the Federal Government would fund local agencies to actually do the design, research and implementation.
The Counter-Revolution started in 1975 and lasted up until 2005. The Counter-Revolution’s roots were in an obscure memo known as The Powell Memorandum, written in 1971, just before Lewis Powell was appointed to the Supreme Court by Richard Nixon. The memo written to the Director of the U.S. Chamber of Commerce Continue reading →
Someone should tell Larry Kudlow to stick a sock in it. This is a guy who holds himself out to be an economic genius. Let’s assume you took Larry’s advice last September that the credit crisis was over. Then you put your money in the stock of one of the less exposed banks (Bank Of America), figuring old “supply side Larry” knew what he was talking about. You would be one pissed off investor:
Without new capital to finance new businesses, job creation and consumers will lag further and further behind. It must pay, after-tax, to take risks and invest. New capital is essential for technology and productivity. This is the source of real wage gains. And this is why tax penalties on capital should be eliminated.
This is just patent nonsense. In fact up until a couple of months ago, smart economists like the Fed’s Bernanke were worried about a “global savings glut”. Slate’s Daniel Gross explains Bernanke’s reasoning:
Bernanke identified two main sources. First, there are the rich industrialized countries with graying populations and slow growth, where people need to save more for retirement and yet can’t find attractive domestic investment opportunities (think Old Europe and Japan). A bigger and more powerful source of excess savings, however, is found in newly industrializing countries like China. As Bernanke notes, in the past decade the developing world has metamorphosed “from a net user to a net supplier of funds to international capital markets.”