. With 70% of the American economy running on consumer spending and not even enough money to buy cheap foreign goods, you can see why big department sales are running Christmas sales at the beginning of November. In normal times, the fed would cut the interest rate and stimulate the economy, but we’ve already been doing that for years to artificially fuel the economy and it is down to .3 percent, there isn’t anything left to cut.
We are now in a downward spiral where stock prices are falling, profit and assets are vanishing from the books, layoffs are becoming the norm and that will undermine the debt given to consumers who were credit worthy at the time of their loans. This will result in further falling stock prices, failed financial instruments and companies and more layoffs. Where the bottom is no one knows. Until the ratio of debt to assets is actually reasonable and determined, this situation will only get worse.
Those who in normal times would look to deficit spending and more national debt as did Franklin Delano Roosevelt to fund our way out of this are going to be disappointed. With a federal deficit this year of $311 billion for a total that exceeds $10 trillion, unfunded Medicare and Social Security obligations at $47 trillion, and confidence in the American dollar will decline. This will make it less likely that countries with reserves will buy more treasury bills, more likely they will dump them.
Money flowed into this scheme because the low interest paid on the increased sale of treasury bonds to print money produced a much lower return. While China was content to take these low interest yields as a hedge against a future downturn, our investment houses invested in the bogus debt based bonds with higher and more immediate returns. As long as China was willing to buy our treasury bonds and allow us to increase our national debt the fed kept on selling them, pushing more dollars into the system. This huge transfer of wealth kept their export economy growing and pushed our stock prices to artificially inflate.
Don’t expect China to help now; their internal stability is much more important to their leader’s survival then that of the world economy. China has watched their own stock market drop 60% and over 65,000 factories stop production throwing millions out of work. The instability that brings gives Chinese leaders nightmares.
Their solution, invest $586 billion dollars in the next two years to overhaul their infrastructure, put people to work and keep their national economy from disintegrating. The most likely way to fund this is from selling some of the $541 billion in U.S. Treasury bonds they are holding. Any hope that China will fund this from its annual $300 billion dollar trade surplus is not likely given that recession has already caused rapid descent of its exports to the world markets, a condition that is sure to worsen.
No one knows how little the dollar will be worth if they start dumping treasury notes on the market. The Mid-East, forget it, falling oil prices will force them to defer from buying dollars and improve the lot of their vast poor to prevent being overthrown. The potential for severe deflation followed by hyper-inflation is very real.
Investing in the past won’t work.Paulson’s recent change from buying toxic debt to direct investment may well indicate there is just too much of it for the government to handle. Direct investment into the financial sector, auto sector and other major players gives the confidence of federal backing without exposing how much debt is really out there. Unfortunately it’s like investing in a buggy factory the day before Henry Ford publically introduced the Model A. The invisible hand the conservatives like so well will find the real value eventually.
There is a way to avoid complete catastrophe, but it is doubtful politicians will make it happen. The real answers are so radical as to disorient the average American and provoke the fiercest resistance against government by big business that can be imagined. Overhaul America.
The global climate catastrophe we are facing is the moral equivalent of World War II.
Conversion from a fossil fueled economy to a sustainable one will require massive green infrastructure rebuilding, tremendous retraining of manpower and all of the research and development that we can muster. It means including all costs in a product not public costs and private profits. It means doing away with inefficiencies in our current economic system that create profits rather than wealth. What are some of those?
1. End the empire of foreign military adventures - The best chance the world has is the redirection of our half trillion dollar military budget (some say the real cost with black box programs is actually a trillion) to develop sustainable energy infrastructure. Putting much more in direct development aid and an expanded peace corps would have a wider and more sustainable impact on world stability.
We have successfully turned from a wealth building civilian economy to a wealth destroying military economy for too long (since WWII). A machine created to create products or other machines creates much more wealth than the creation of machine to make something blow up. Just as after WWII millions of veterans returned to build the national infrastructure, current military and returning veterans have the organizational and other technical skills to rebuild our nation as civilians.
2. Healthcare – With government employees, military and veteran, Medicare, Medicaid, state, county and municipal workers already receiving government paid healthcare (well over 40% of the U.S. population) it is time to go to a single payer system. The difference in administrative costs and overlapping programs would allow us to give everyone in the country health insurance for no more than we are paying as a nation now. It would eliminate the bizarre labyrinth of access and result in lower costs from earlier treatment and preventive care. I’d rather have a government bureaucrat deciding my healthcare then an insurance flunky whose bonus depends on denying care.
3. Education produces wealth – our antiquated, overburdened education system should be completely retooled, free from preschool through trade school or college. Can anyone tell me why we still have summers off except for pressure from the tourist industry looking for cheap labor?
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