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Stimulating the U.S. Government to Bankruptcy

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Stimulating the U.S. Government to Bankruptcy
By Dan Lieberman
Alternative Insight

Secretary of the Treasury Henry Paulson stumbles forward, throws money where he can, and hopes the green paper will resolve the United States' economic problems. If printing money is a viable solution to an economic mess, why doesn't the U.S. Treasury just pay corporations for all goods that Americans want and need? One trillion dollars can purchase 50 million cars, 5 years supply. Voila, Detroit is saved. Why even work? However, Paulson's plans rather than directly stimulating the economy are only continuing previous methods for sustaining the economy. Left out of the equation is that all the innovations that sustained the quasi free enterprise system have been exhausted. Is Paulson fighting windmills? Has he ignored economic history, lost credibility and possibly brought his nation on a road to bankruptcy?

Since 1980, in response to the economic challenges posed by global competition, the U.S. has shown the following trends for sustaining its economy:

 Lower interest rates to promote borrowings, which have supported the service industry, consumer industry and mortgages for home construction.
 Escalated government deficits, except for a few years during the Clinton administration, which have pumped the economy.
 Excessive military spending, which also pumped the economy, and tied to military adventures, tried to assure a continuous and inexpensive supply of natural resources.

After 1999, added massages to the economy have been:
 Easy credit to capture the last segments of the populace that had little debt.
 Encouraging foreign purchase of US debt to support a trade deficit and enable imports that enrich multinational firms and maintain lower inflation.
These galvanizing methods were finally followed by:
 Dollar weakening to increase exports, despite insufficient revitalizing of domestic industry to support increased exports.
 After the excessive sustenance for the economy peaked and no new stratagem came forward, economic fall rapidly accelerated. Paulson's thrust supports financial systems in order to reinvigorate credit, but his plan can only provide a short term solution. The most this contrived process can accomplish is to return the economy to a stage of the previous 1-2 years. After the newly available credit is exhausted, and without industry revitalized to a point above its previous "prosperity" level, the credit crunch will restart with added vengeance. Why bother?
All the bag of tricks for supporting the economy have been exhausted, except one, which Paulson is now trying - massive printing of money. And what will the result be? Artificially increased money supply leads to a weakened dollar which leads to higher interest rates.The higher interest rates lower investment and consumption. Lower investment and less consumption means lower tax revenues. Lower tax revenues means higher deficits. Increased deficits mean a still weaker dollar, etc., etc., etc., until eventual bankruptcy.

A news article tells the story.
LONDON, Nov 27 (Reuters) - The spread or risk premium on U.S. Treasury credit default swaps, essentially the price investors are paying to insure against the U.S. government defaulting on its debt, hit record highs on Thursday. On Thursday ten-year U.S. Treasury CDS widened to 60 basis points from Wednesday's close of 57.3 basis points, according to credit data company CMA DataVision.
 That marks an increase of 10 basis points in only two days and an almost threefold increase since Lehman Brothers collapsed in mid-September.
 An increase in exports, due to a lower dollar, can counterbalance the spiraling currency fall.This positive result has contradictions: (1) US export industries are not the problem, exports are high; it's the domestic industries that need salvation and (2) foreign nations in the global economy will have their exports shrink, face recession problems and retaliate to augment their own exports.

Secretary of the Treasury Paulson's contradictory and not too easily decipherable plans are doomed to either provoke a huge depression or bankrupt the US treasury. President elect Barack Obama's proposals for stimulating the economy by massive government investments in infrastructure and job creation also leads to huge government deficits, but promises to increase the tax base and tax revenue so that the deficits don't regenerate. Nevertheless, if the president-elect polices are similar to President Roosevelt's policies for attacking the Great Depression, the US can still expect trouble. Roosevelt's policies provided a short term recovery of several years and eventually proved insufficient for correcting a failed system. 

Let's hope that war is not the eventual answer to this economic decline.
Dan Lieberman is editor of">Alternative Insight, a monthly web based newsletter. Dan's many articles on the Middle East conflicts have circulated on websites and media throughout the world. He can be reached at: 

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Dan Lieberman is the editor of Alternative Insight, a monthly web based newsletter. His website articles have been read in more than 150 nations, while articles written for other websites have appeared in online journals throughout the world(B 92, (more...)
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