dice A couple of months ago, I reported on a scheme from economist Richard Douthwaite on how to end US military aggression by forcing down the inflated value of the US dollar. Since then, the dollar has been in precipitous decline, and even the Bush regime is admitting that its deficit spending will impose a crushing burden on future generations. But that assumes the global economic system will allow the US to continue in its economy folly that long. Here’s Douthwaite on how the US economy sits on a house of cards, written before the dollar’s decline and Congress’ approval of the insane Bush tax cuts for the rich:

The US economy has been subsidized for many years by the rest of the world. The subsidy has come about because the rest of the world has allowed the US to import very much more than it has exported since 1982. In that period, countries receiving dollars for the goods and services they have supplied have only spent a small proportion of them on imports from the US. Most of the remainder has been loaned back to America, typically by being used for the purchase of US Treasury bills or shares in companies quoted on the US stock exchange. $2,500 bn, roughly half the rest of the world’s total savings, has been invested and lent in this way.

Amazingly, this huge inflow of funds has cost America nothing – so far. True, interest has been paid on the loans and dividends on the shares but both payments have been in dollars that have simply been added to the outstanding debt. The US has not had to supply anything that cost it real resources to make for the use of this massive amount of capital. Moreover, the bigger its trade deficit has been, the more dollars foreigners have had to invest and the higher they have pushed Treasury Bond prices and the Dow Jones share price index, making investment in America seem very attractive. Even more foreigners have consequently been keen to get hold of dollars to put their savings there. At the moment, the US trade deficit is running at much higher levels and America is having to borrow around $1.25bn every single day.

Now take a look at this report, from CNN yesterday:

The Treasury Department Thursday denied a report that the White House suppressed a paper estimating the United States is facing at least a $44.2 trillion [debt] due to future health care and pension obligations [because the news would have jeopardized the Iraq war effort and the Bush tax cut]. London’s [conservative] Financial Times said in its Thursday edition that the Bush administration “shelved” the report “commissioned by then-Treasury Secretary Paul O’Neill” and written by former Treasury official Kent Smetters and former Treasury consultant Jagdessh Gokhale.

According to the Financial Times, the report shows the U.S. government is threatened with being overwhelmed by the future health care and retirement costs of the “baby boomer” generation. The study concludes, according to the report, that sharp and permanent tax increases or massive spending cuts — or a combination of both — are unavoidable if the United States is to meet the health care and retirement benefits promised to future generations.

The Treasury Department does not deny the numbers, they just deny that they suppressed the report. I’m not an economist, but when you put the facts of these two articles together, the undeniable conclusion is that Bush is playing a terrifying game of brinksmanship dice with the global economy. A debt of $44 trillion, with additional borrowings and deficits of $500 billion per year. Who is this monstrous debt owed to? American citizens, who invest in government securities, directly and to a greater extent indirectly through the insurance companies and corporations they invest in, who in turn invest in government securities. And foreign governments and foreign investors who hedge the massive US trade deficit, denominated in US dollars, by buying equally massive amounts of US dollar-denominated shares and treasury bills.

We’ve seen what happens to governments like Argentina’s, that borrow too much or spend too recklessly. The IMF turns off the tap or raises the interest rates on borrowings to reflect the unacceptable risk, the foreign lenders call in their loans, and the economy collapses. The consequences of that are massive currency devaluation, stock market collapse, massive layoffs, and severe austerity (huge tax increases and huge cuts to government services and payrolls).

But what if the recklessly overspending country isn’t a Latin American third-world country, but the world’s only political and economic superpower? We don’t know — it’s never happened. Bush the gambler is counting on the fact that the IMF and the lending countries (including, ironically, many Arab oil states) won’t dare force the US into bankruptcy, because then the whole global house of cards collapses. To use a simple analogy, Bush is the high roller in the casino who is losing big-time, and keeps borrowing more and more on credit, and tossing most of the chips he’s borrowed to his rich friends, to the point where the casino knows full well that he can’t pay it back. He’s just got to keep playing until his luck turns around. The problem with the analogy is that when it comes time to cash in and pay the banker, Bush will be long gone. It’s the citizens of America and the world, and our children, who will have to pay for his monumental folly.

Canadian Prime Minister ChrÈtien this week became the first leader to publicly worry that US spending is out of control, and predictably the neocons, led by the soon-to-flow-the-coop Ari Fleischer, railed against him, predictably blaming it all on terrorism. ChrÈtien is scheduled to present the global economic report at the upcoming G8 summit meeting in France. Today, Bush announced he’ll leave the summit early. Guess he has to get back to the craps table.

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  1. Vivion says:

    Last night on National Public Radio, a news program interviewed an expert on the topic (sorry — missed his name) who said that the only way for the US to ultimately handle the upcoming financial crisis will be to either raise taxes 60%, or cut ALL social services, with the exception of social security and medicare. I’ve been hearing scattered reports that, in fact, huge deficit spending was becoming a tacit goal among certain Republicans, because it would force this exact situation. I had dismissed these reports as paranoid, but the fact remains that we will ultimately be facing this situation, anyway.Although, I did wonder why no one thought we could cut the military… Silly me.

  2. Dave Pollard says:

    The world’s upside down. The liberals want to conserve, and the conservatives want to spend more than they take in.

  3. Doug Alder says:

    The euro is now at an all time high of $1 = 0.85 Euros. Look shortly for European and Asian countries to slowly (so as to not trigger a rush) start puuting their reserves in Euros rather than dollars,. Ultimately as you can tell from those articles this will destroy the US economy.I have contended for some time now that this was the real reason for the Iraq war. Iraq, in this case being a stepping stone to Iran, pulling out from Saudi Arabia then having to come to SA’s rescue later and ultimately control of all the major middle east oil fields. The reason? Not to supply cheap oil to the US – that’s merely a side benefit. No the reason is that Western Europe and Asia get the vast majority of their oil from the middle east and by physically controlling that oil supply the US has a weapon that can be used to control the economies of those areas. (the neocons like to point out that control over the oil could be done through regular business agreements – that’s a pile of BS – agreements can be broken – Bush is an expert at it. Only physical control ensures actual control)

  4. Doug Alder says:

    btw: I’m really proud of Chretien for taking the stance he has been lately – hard to say that as I really don’t like the guy very much, but he sure has my respect these days – even if he’s only doing it to leave a difficult situation for Paul Martin to take over next year :-) – it’s just damned good to see a Canadian politician that has the guts to stand up to the US.

  5. Dave Pollard says:

    Yep — I’ve become a closet Chrétien fan too, with his Kyoto support and campaign finance reform and loosening the marijuana laws. Monday should be interesting — the G8 agenda focuses on currency exchange rates — I think everyone knows the $US is in trouble and something needs to be done. Wonder what will happen if ROW (rest of the world) tells Bush to abandon his tax cuts, reduce defence spending and/or devalue his currency, if he hopes to avoid a panic switch away from $US to Euro in the next few months.

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