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June 17, 2008

The Sad State of Our Republic

By Carlos T Mock

Five years of war combined with the worst tax policies turned a 200 billion surplus inherited from the Clinton administration into a trillion dollar deficit. In the process, Mr. Bush, helped by his choice of Fed Chairman, has created the worst economic crisis since the 1929 depression.

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Seven more months left in the Bush presidency and I can’t but pray he causes no more harm.

Truth is, the Republic has never been in worst shape.

After presiding over the largest attack to American soil ever, Mr. Bush has managed to turn the sympathy and respect of the entire world population into disdain and hate for our country.

After setting to capture the perpetrator of the destruction caused by Osama Bin Laden in Afghanistan Mr. Bush— haunted by past insecurities and pushed by oil executives and Cheney's Haliburton—started an unprovoked war against Iraq.  In the fall of 2003, a few months after Saddam Hussein's overthrow, U.S. officials began to despair not finding stockpiles of Iraqi weapons of mass destruction. The resulting embarrassment caused a radical shift in administration rhetoric about the war in Iraq.  President Bush no longer stressed Saddam's record or the threats from the Baathist regime as reasons for going to war. Rather, from that point forward, he focused almost exclusively on the larger aim of promoting democracy. This new focus compounded the damage to the president's credibility that had already been caused by the CIA's errors on Iraqi WMD. The president was seen as distancing himself from the actual case he had made for removing the Iraqi regime from power.  

Vice President Cheney’s quotes of: “we’ll be greeted as liberators”, Defense Secretary Rumsfeld saying the war will be quick and pay for itself, and finally, Mr. Bush’s stunt landing aboard the USS Abraham Lincoln, arriving On may 2, 2003 declaring under a “Mission Accomplished” banner that the aggression in the war was over proved to be the biggest blunder in American history.

Five years later, over four thousand brave American lives lost, with thousands of lives ruined by combat injuries on our side—sixty thousand Iraqis’ deaths and four million exiles on the Iraqi side—we are facing the biggest conundrum in the Middle East: what next?  Fortunately for Mr. Bush, he will leave office before the final decision on Iraq is made.  Unfortunately, for all the harm he has caused, he will never be tried as a war criminal—all the while Bin Laden is still free and America is not any safer.  Hopefully the next White House occupant will change course.

Five years of war combined with the worst tax policies turned a 200 billion surplus inherited from the Clinton administration into a trillion dollar deficit.  In the process, Mr. Bush, helped by his choice of Fed Chairman, has created the worst economic crisis since the 1929 depression.  

The unproven Bernanke, overreacted to the Bush economic policies—tax cuts for the rich, the largest expansion of the federal government since the 1965 Social Security Act, subprime crises—and started an aggressive interest rate cut.  He gave the blessing to the Bear Stearns demise and takeover.  He started printing money to cover the credit crunch—all of which has devaluated the dollar to a point where commodities like food and petroleum have risen to unprecedented levels creating inflation.  Unfortunately now we are in a vicious cycle.

Ever since the Fed began its rapid interest rate cuts last September, the danger has been that it would lose its inflation-fighting credibility. One expression of that would be investors dumping the dollar in order to protect the purchasing power of their money. That has been largely avoided, but the weak dollar has contributed to inflation, not least through the oil price. The employment report was the second blow for the dollar this week. On Thursday, the European Central Bank strongly indicated it would raise rates this summer owing to inflation worries, triggering fresh dollar selling and higher oil prices.

The employment data is of particular significance at present. Personal savings are almost exhausted in the US and credit availability is much reduced with the result that consumers, and the broader economy, are more dependent than ever on their pay checks.

James Knightley, at ING, said: “This is bad news for the household sector which is already having to cope with negative real wage growth, falling house prices and more expensive borrowing. This will continue to depress consumer spending and will keep activity depressed for longer than financial markets are currently discounting.”

“I’ve been convinced that the unemployment rate was headed toward 6 per cent but I didn’t expect to get half way there in one day,” said Jay Mueller, economist at Wells Fargo. “The Fed does not tighten when the unemployment rate is rising. A 2 per cent Fed Funds rate may prevail for quite some time.”

Despite their sugarcoating of our economy at the beginning of the year, both Bernanke and Bush have finally conceded that the nation could wallow in a recession for much of the year.  I suggest that we are beyond recession and going straight to stagflation.

Yes, Stagflation.

Stagflation is a combination of stagnation and inflation, and is a term in general use within modern macroeconomics to describe a period of out-of-control price inflation combined with slow-to-no output growth, rising unemployment, and eventually recession. The term stagflation is generally attributed to United Kingdom Chancellor of the Exchequer, Iain MacLeod in a speech to parliament in 1965.

Stagflation becomes a dilemma for monetary policy when policies usually used to increase economic growth will further increase runaway inflation while policies used to fight inflation will further the decline of an already-declining economy. For example, the Central Banks of the world have been printing money to the tune of billions of dollars to ease the credit crunch of local banks—a move that causes inflation in itself—to try to prevent lowering the lending rates. Unfortunately today’s weak jobs data, the weak dollar, the trade and budgetary deficits, and the subprime crisis are so out of control that the Fed has become ineffective.  

Stagflation will become a problem because lowering the interest rates will cause more marginal harm than marginal good, when used. The central bank’s power to either stimulate the economy or attempt to rein it in through the mechanism of adjusting the domestic interest rate has become ineffective. Americans are cash-strapped consumers. Americans bought fewer gifts while paying more for necessities. From Thanksgiving to Christmas, spending rose only 3.6 percent over the same period last year, the weakest performance in at least four years, according to early tallies from MasterCard Advisors, a unit of the credit card company. One-third of that increase was for gas purchases. U.S. food prices have risen this year at more than twice the rate of 2006, and at a pace not seen since 1990. The outlook isn't any better. Many economists say in 2008 the estimated price increase of about 5 percent could be part of a trend that threatens to ratchet up food costs for years. U.S. personal bankruptcy filings jumped 40 percent in 2007 because of rising mortgage payments, job losses, and other financial pressures.

Regarding the housing market crisis, mortgage rates are on the way up in spite of the fed cuts.  This is because the credit crunch has banks afraid of lending and only Fanny May and Freddy Mac are writing loans.

A choice can be implemented that tends to improve growth, but does it ignite systemic inflation? A choice can be implemented that tends to fight inflation, but how badly does it impinge growth?

I predict that we’ll see stagflation in 2008. In modern times, it will be only after the central bank has used all possible tools to meet both goals, using the best quantitative measures it has at its disposal, for stagflation to occur. Major economic conditions of unusual proportion have already created near-crises on both fronts.

Stagflation will occur because the central bank has rendered itself powerless to fix either inflation or stagnation.


Authors Website: www.carlostmock.com

Authors Bio:
Travel website: The Pink Agenda. Several Blogs. Weekly newsletter, available upon request. Publications - Fiction: Borrowing Time: A Latino Sexual Odyssey - Floricanto Press 2003. Poetry: The Refined Savage Poetry Review - Refined Savage Editions; Unfinished Works - AIDS Services Foundation – Orange County December 2005; Fingernails Across the Chalkboard Gwendolyn Brooks Center December 2006
Non-Fiction: "Queer History viewed through the eyes of Literature and my favorite books as I live my Latino Odyssey" Universidad Pedagógica Nacional. May, 2006. Unfinished Works Published by AIDS Services Foundation "HIV From the Puerto Rican Perspective"– Orange County December 2005. Watch for his forthcoming book - "Mosaic Virus"

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