These large deficits are financed by foreigners, and foreign unease has resulted in a decline in the US dollar's value compared to other tradable currencies, precious metals, and oil.
The US Treasury does not have $700 billion on hand with which to buy the troubled assets from the troubled institutions. The Treasury will have to borrow the $700 billion from abroad.
The dependency of Treasury Secretary Paulson's bailout scheme on foreign willingness to absorb more Treasury paper in order that the Treasury has the money to bail out the troubled institutions is heavy proof that the US is in a financially dependent position that is inconsistent with that of America's "superpower" status.
The US is not a superpower. The US is a financially dependent country that foreign lenders can close down at its will.
Washington still hasn't learned this. American hubris can lead the administration and Congress into a bailout solution that the rest of the world, which has to finance it, might not accept.
Currently, the fight between the administration and Congress over the bailout is whether the bailout will include the Democrats' poor constituencies as well as the Republicans' rich ones. The Republicans, for the most part, and their media shills are doing their best to exclude the ordinary American from the rescue plan.
A less appreciated feature of Paulson's bailout plan is his demand for freedom from accountability. Congress balked at Paulson's demand that the executive branch's conduct of the bailout be non-reviewable by Congress or the courts: "Decisions by the Secretary pursuant to the authority of this Act are non-reviewable and committed to agency discretion." However, Congress substituted for its own authority a "board" that possibly will consist of the bailed out parties, by which I mean Republican and Democratic constituencies. The control over the financial system that the bailout would give to the executive branch would mean, in effect, state capitalism or fascism.
If we add state capitalism to the Bush administration's success in eroding both the US Constitution and the power of Congress, we may be witnessing the final death of accountable constitutional government.
The US might also be on the verge of a decision by foreign lenders to cease financing a country that claims to be a hegemonic power with the right and the virtue to impose its will on the rest of the world. The US is able to be at war in Iraq and Afghanistan and is able to pick fights with Iran, Pakistan and Russia, because the Chinese, the Japanese and the sovereign wealth funds of the oil kingdoms finance America's wars and military budgets. Aside from nuclear weapons, which are also in the hands of other countries, the US has no assets of its own with which to pursue its control over the world.
The US cannot be a hegemonic power without foreign financing. All indications are that the rest of the world is tiring of US arrogance.
If the US Treasury's assumption of bailout responsibilities becomes excessive, the US dollar will lose its reserve currency role. The minute that occurs, foreign financing of America's twin deficits will cease, as will the bailout. The US government would have to turn to the printing of paper money as did Weimar Germany.
For now this pending problem is hidden from view, because in times of panic, the tradition is to flee into "safety," that is, into US Treasury debt obligations. The safety of Treasuries will be revealed by the extent of the bailout.
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