| The Tough Times Have Only Begun 
By Paul Craig Roberts
“The
prospects of a government rescue for the foundering American automakers
dwindled Thursday as Democratic Congressional leaders conceded that they would
face potentially insurmountable Republican opposition,” reported The New York Times
last Friday. Wow!
The entire country is steamed up over the Republicans bailing out a bunch of
financial crooks who have paid themselves fortunes in bonuses for destroying America’s
pensions. Why do Democrats want to protect Republicans from further ignominy by
not giving them the opportunity to vote down a bailout for workers?
Quick, someone enroll the Democratic Party in Politics 101.
GM’s
divisions in Canada and Germany are
asking those governments for help. It will be something if Canada and Germany come through for the
American automaker and the American government doesn’t.
Conservative
talking heads are saying GM is a “failed business model” unworthy of a $25
billion bailout. These are the same talking heads who favored pouring
$700 billion into a failed financial model.
The
head of the FDIC is trying to get $25 billion--a measly 3.5 percent of the $700
billion for the banksters--with which to refinance the mortgages of 2 million
of the banksters’ victims, and Bush’s Secretary of the Treasury Paulson says
no. Why aren’t the Democrats all over this, too?
Apparently,
the Democrats still think they are the minority party or else their aim is to
supplant the Republicans as the party of the rich.
Any
bailout has its downsides. But if America loses its auto industry, it
will lose the suppliers as well and will cease to have a manufacturing sector.
For years no-think economists have been writing off America’s manufacturing jobs, while
deluding themselves and the public with propaganda about a New Economy based on
finance.
A
country that doesn’t make anything doesn’t need a financial sector as there is
nothing to finance.
The
financial crisis has had one good effect. It has cured Democratic
economists like Robert Reich and Paul Krugman of their fear of budget
deficits. During the Reagan years these two economists saw doom in the
“Reagan deficits” despite the fact that OECD data showed that the US at
that time had one of the lowest ratios of general government debt to GDP in the
industrialized world.
Today
Reich and Krugman are unfazed by their recommendations of budget deficits that
are many multiples of Reagan’s. Moreover, neither economist has given the
slightest thought as to how the massive budget deficit that they recommend can
be financed.
Both
recommend large public spending programs. Krugman puts a price tag of
$600 billion on his program. If it takes $700 billion to save the banks
and only $600 billion to save the economy, it sounds like a good deal.
But this $600 billion is on top of the $700 billion for the banks, the $200
billion for Fannie Mae and Freddie Mac, and the $85 billion for AIG.
These figures add to one trillion five hundred eighty-five billion dollars, a
sum that must be added to the budget deficit due to war and recession (or worse).
What
we are talking about here is a minimum budget deficit of $2 trillion. The
US
has never had to finance a deficit of this magnitude. Where is the money
coming from?
The
US Treasury doesn’t have any money, and neither do Americans, who have lost up
to half of their savings and retirement funds and are up to their eyeballs in
mortgage and consumer debt. And unemployment is rising.
There
are only two sources of financing: foreign creditors and the printing press.
I
doubt that foreigners have $2 trillion to lend to the US.
Thanks to the toxic US
financial instruments, they have their own bailouts to finance and economies to
stimulate. Moreover, I doubt that foreigners think the US can service
a public debt that suddenly jumps by $2 trillion. At 5 percent interest,
the additional debt would add $100 billion to the annual budget deficit.
In order to pay interest to creditors, the US would have to borrow more money
from them.
Economists
and policy-makers are not thinking. This enormous financing need comes
not to a well-managed economy that can take the additional debt in its stride.
Instead, it comes to an economy so badly managed that there are no
reserves.
Massive
US
trade deficits have been financed by giving up US assets to foreigners, who now
own the income flows as well. Budget deficits from 6 years of pointless
wars and from unsustainable levels of military spending have helped to flood
the world with dollars and to drive down the dollar’s exchange value. Consumers
themselves are drowning in debt and can provide no lift to the economy.
Millions of the best jobs have been moved offshore, and research, design, and
innovation have followed them. Considering America’s dependency on imports,
part of any stimulus package that reaches the consumer will bleed off to
foreign countries.
Generally,
when countries acquire more debt than they can service, they inflate away the
debt. If foreign creditors do not save the Obama administration, the Treasury
will print bonds and give them to the Federal Reserve, which will issue
money.
The
inflation will be severe, particularly as Americans will not be able to pay for
the imports of manufactured goods from abroad on which they have become
dependent. The exchange value of the dollar will decline with the
domestic inflation. Once inflation is off and running, the printing press
dollars will only have goods made in America to chase after. The real
crisis has not yet begun.
Paulson
should rethink the automakers’ and FDIC’s proposals. A bank produces
nothing but paper. Automakers produce real things that can be sold.
Occupied homes are worth more then empty ones.
Paulson’s
inability to see this is the logical outcome of Wall Street thinking that
highly values deals made over pieces of paper at the expense of the real
economy.
Paul Craig Roberts was Assistant Secretary
of the Treasury in the Reagan administration. He was Associate Editor of the
Wall Street Journal editorial page and Contributing Editor of National Review. Roberts
can be contacted at [email protected].
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