COOPRADIO.ORG: Economy 2010: From the Scandalous Known Past to the Uncertain Future with Prof. Rodrigue Tremblay

When: Monday Jan. 18, 2010 @ Noon - 1 PM pst
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Economy 2010: From the Scandalous Known Past to the Uncertain Future
By Rodrigue Tremblay [http://www.thenewamericanempire.com/author.html]
http://www.TheNewAmericanEmpire.com/tremblay=1120

“Homes rose markedly in value, especially in hot markets like Florida and New York City. Borrowers  believed that home purchases were no-risk ventures certain to escalade, and they went out on a limb to buy. Lenders who had once required large down payments now permitted home purchasers to combine two and three loans to buy a home. People took out what were called “buffet” loans, which were interest-only loans that buyers were told they should refinance in three years or five years. Lenders told home buyers not to worry; homes were rising so fast in value that it would always be easy to refinance into another loan. Developpers built larger houses. Why not? Borrowers wanted larger homes. They needed the space to hold all the things they were buying.”
—U. S. Housing market in 1928-29, in Kristin Downey, The Woman Behind the New Deal (Frances Perkins), 2009, p. 106, from Gail Radford, Modern Housing for America: Policy Struggles in the New Deal, 1996, pp.10-22

"I place economy (saving) among the first and most important virtues, and debt as the greatest of dangers to be feared."
Thomas Jefferson: 3rd US President (1801-09)

"America is more communist than China is right now. You can see that this is welfare of the rich, it is socialism for the rich -- it's just bailing out financial institutions. This is madness; this is insanity; they have more than doubled the American national debt in one weekend for a bunch of crooks and incompetents."
Jim Rogers, American investor


After a decade plus of unchecked greed by money-changers, of the political dismantling of financial regulation, of large “too-big-to-fail” banks made larger, of artificial easy money by the central bank, of the risky securitization of all kinds of debt instruments and of leveraged buy-outs of scores of companies with their own debts by financial operators, it was no surprise that the financial house of cards came crashing down in 2007-2008. It was like a pre-programmed financial crisis. A perfect financial storm.

What lessons can be drawn from the recent unhealthy and unpalatable past? And, what is in store for the near future, considering that hardly anything in the financial environment has changed? A crisis caused by a near total absence of financial regulation, by a too easy monetary policy and by too much debt, has been met with no additional financial regulation, by an even easier monetary policy and by even more debt. In fact, the U.S. ratio of total debt [http://mwhodges.home.att.net/nat-debt/debt-nat.htm] ($57 trillion) to the economy (GDP: $14.5 trillion in 2009) is even higher today at 3.9, then it was before the onset of the crisis in 2007-08, when it stood at 3.4.

That is why we will argue here that the problems of U.S. financial dysfunction have not been solved. On the contrary, they have been swept under the large rug of even easier money and of even larger debts, which is only postponing the day of reckoning. For sure, the large Wall Street banks' bad debts have been transferred to the public sector (the Treasury and the Fed) and to the quasi public sector (Fannie Mae and Freddie Mac), but the overall debt load of the U.S. economy has not been reduced; it has been increased. That is why the U.S. is condemned to continue its foreign borrowing binge for some time to come.

In general, too much foreign borrowing is bad for an economy, especially if it is done to finance an excessive level of domestic consumption. When this happens, it is a sign that total domestic expenditures (government, corporations, consumers) exceed total incomes. The country lives beyond its means and the gap has to be filled with net foreign borrowings.

The principal indicator of this situation is the current account (a broader measure than the external trade balance) of the country. When a country's current account turns negative, more money for imports and interest payments is flowing out of the country than is coming in through exports and investment income. Like any individual, of course, a country can borrow abroad if its credit rating is good. The question is how much and for how long. For countries that have fully convertible currencies or, better, for countries like the United States whose national currency also serves as an international key-currency, [http://en.wikipedia.org/wiki/United_States_dollar]  the situation can endure for a longer period, but there is always a day of reckoning.

In general, for a normal economy, a negative current account that exceeds six (6) percent of Gross Domestic Product (GDP), especially if this is due to a negative trade balance, usually indicates a non sustainable situation of foreign borrowing and foreign indebtedness that can lead to a financial crisis. [http://www.TheNewAmericanEmpire.com/tremblay=1095] Countries like Mexico (1994-95) and Thailand (1997-98) [http://www.springerlink.com/content/k253568732264232/] experienced such a financial crisis in the 1990's. Such was the case also with Argentina [http://www.jstor.org/pss/20033080] at the turn of the century.

Since 2000, and coinciding with the arrival of the George W. Bush Republican administration, the United States has also embarked upon a policy of excessive domestic spending, resulting in larger and larger and persistent current account deficits and huge foreign borrowings. Indeed, the adoption of an imperial foreign policy [http://www.amazon.com/New-American-Empire-Rodrigue-Tremblay/dp/0741418878/ref=sr_11_1/104-842810] of permanent war throughout the world, financed on credit, and an ideological preference for large fiscal deficits, have translated into large American current account deficits.

In 2006, the U.S. (external) current account deficit reached 6.5 percent of GDP. This was the apex of external debt sustainability and a harbinger of economic troubles to come for the U.S. economy. As a matter of fact, this induced me to write an article on October 16, 2006 entitled “Headwinds for the US Economy”, [http://www.TheNewAmericanEmpire.com/tremblay=1041]  in which I warned that it was a "matter of months, not years", before the U.S. economy and the U.S. dollar begin to experience some downward pressures. I repeated the warning a few months later when I wrote on May 5, 2007, (A Slowdown or a Recession in the U.S. in 2008?), [http://www.TheNewAmericanEmpire.com/tremblay=1064] that we could expect "the collapse of one and possibly several major financial institutions under the pressures of bad loans and record foreclosures... The rate of foreclosure is bound to spike in the coming months, possibly culminating in the next two years into a
 financial hurricane." This was said many months before the onset of the 2008-09 recession and the September 15, 2008 failure of the large investment bank Lehman Brothers.

In 2008, in the midst of the economic recession, the U.S. current account deficit was still estimated at –$706 billion (nearly all caused by a –$707.8 billion trade deficit) for a $14,441 U. S. GDP, that translated into a 4.9 percent current account deficit relative to the economy.

With the 2008–09 economic crisis and recession, the US current account deficit has since been somewhat reduced due to a drop in incomes and in imports, and partly due to a sharp decline in oil prices, but it is expected to remain above four percent of GDP. In the coming years, this ratio is likely to increase again as the long-term U.S. fiscal deficit is expected to remain at 10 percent of GDP for years to come.

The Fed's Role in Creating Asset Price Bubbles

The causes of a financial crisis are complex and can vary from one country to the next. In general, however, they usually stem from the central bank becoming subservient to the government when the latter decides to embark upon a policy of large fiscal deficits. If the central government opts in favor of monetizing the public deficits and keeping interest rates low, an asset bubble [http://en.wikipedia.org/wiki/Economic_bubble] is bound to emerge.

Unfortunately, that's pretty much what the Greenspan Fed elected to do in maintaining an easy money policy for too long and in keeping interest rates too low, for too long, in the late 1990s and in the first part of the 2000 decade. Indeed, most economists agree that in 2003-04, the U.S. Fed should have raised short-term interest rates (pushed down to 1 percent in June 2003 from 6.5 percent in December 2000). But the then Greenspan Fed (current Fed Chairman Ben S. Bernanke has been a Fed Board member since 2002) was deeply embroiled in the Bush political agenda. Chairman Alan Greenspan publicly acknowledged this fact when he declared on September 17, 2007, in an interview with the Financial Times, that “raising interest rates sooner and faster (before the 2004 presidential election) would not have been acceptable to the political establishment given the very low (official) rate of inflation”.

In financial matters, the American central bank (the Fed or the Federal Reserve System) [http://en.wikipedia.org/wiki/Federal_Reserve_System] is a curious animal. It is an institution that is entrusted to regulate banks and other financial institutions, but it is partly owned by the large money center banks. It is in a perpetual conflict of interests. In fact, it can be said that the Fed is the banks' own private government. In good times, large Wall Street banks, bank holding companies and other large integrated financial groups, such as AIG (American International Group), are pretty much left alone and allowed to build profitable but risky and shaky financial pyramids, with scant supervision. When things go bad, however, the Fed stands ready to bail them out with automatic discounting, zero-interest loans and other goodies, the overall cost being transferred to the general public through an inflation tax and a debased currency. We know since 2008 that
 the U.S. Treasury also stands ready with public money to bailout the large Wall Street banks when their gambles go sour. The $700 billion Troubled Assets Relief Program (TARP). [http://en.wikipedia.org/wiki/Troubled_Assets_Relief_Program

] is testimony to that effect.

A central bank can always print new money. But this is hardly a magic recipe for prosperity. If it were so, many Third World countries could claim to have discovered this magic potion. The current Bernanke Fed is tragically wrong in its belief that it can reverse the current over-indebtedness situation in the economy and its mismanagement of the financial crisis by printing money. It is not true that the real economy always respond positively to heavy doses of monetary stimulus. In fact, the contrary is usually the case. If it were true, Zimbabwe, [http://en.wikipedia.org/wiki/Hyperinflation_in_Zimbabwe] which is an African economic basket case with an uncontrolled bout of hyperinflation, would be prosperous. The U.S. economy is not exempt from fundamental economic laws. A few years down the road, people will see why.

It is my feeling that the U.S. economy is presently in the eye of a powerful financial hurricane of debt liquidation. [http://en.wikipedia.org/wiki/Debt_deflation] Such systemic crisis happens no more than twice in a century and it takes at least a decade to work itself out. In this environment, one should be wary of the stock market as a barometer of the real economy. There could be artificially created short-term “liquidity” rallies, when all the while the real economy remains in the doldrums. The 2009 liquidity-driven stock market rally has all the appearances of such a bear market rally destined to fail and trap many unwary investors. In fact, this rally looks like a mirror repeat of the 1930 stock market rally that saw stocks retrace some fifty percent of their initial 1929 losses. We know now that this was only a mirage, and that the worst was still to come.

In my last July 10 blog, [http://www.TheNewAmericanEmpire.com/tremblay=1113] I stated that there is likely to be a prolonged 2007-2017 economic stagnation period in the U.S. —I reconfirm this assessment, which is reinforced by my conviction that the Bernanke Fed is making matters worse by its unlimited printing press so-called “solution” of discounting everything but the kitchen sink. It is my contention that this imprudent Fed is paving the way for the mother load of bubble and subsequent crash. This is because, as alluded to above, they seem to have forgotten that the credit cycle [http://en.wikipedia.org/wiki/Credit_cycle] and the process of debt build-up, and the subsequent debt liquidation that follows, are the primary driving forces in the underlying economic cycle. [http://www.vigile.net/Economic-Cycles-and-Political]

This time the crash will be initiated in the huge bond market, [http://en.wikipedia.org/wiki/Bond_market] will spread to the commercial loan market and ultimately to the stock market, and then will further crush the real economy in a way that few understand today but will learn the hard way in the coming years.

Let us keep in mind that in the recent past, the Fed and the U.S. Treasury did not see the subprime and housing crises coming. They were completely taken off-guard. In 2005, according to then Fed member Ben Bernanke, “there was no housing bubble”, even though everybody and his uncle could see that the real estate bubble was about to burst.

And now, let us look at the figures. At the end of 2009, reflecting a binge of printing new money by the Fed, the U.S. monetary base, [http://en.wikipedia.org/wiki/Money_supply] i.e. money circulating through the public and banking reserves on deposit with the Federal Reserve, stood at more than $2,016,136,000,000, after having increased 146 percent in three years. This is unprecedented. —Even if one subtracts the inactive excess bank reserves at the Fed, worth more than $1 trillion (and earning interest!), the U.S.'s monetary base has grown 22 percent in three years, from a starting point of $818 billion in early 2006.
Nevertheless, Fed Chairman Ben Bernanke said in 2009, that he does not fear inflation and that, in fact, inflation could even go down from then on. He could be right for the next few months, but how about the next few years?

Those who listened to Chairman B. B. in 2005, and kept buying leveraged real estate, lost their shirt. I am of the feeling that those who believed Chairman B.B in 2009, and kept buying long-term U.S. Treasury bonds, are also going to lose their shirt. Because of the huge federal deficits and Fed policy to monetize a big chunk of them, U.S. long-term rates are bound to increase in the coming years, whether the real economy grows or not. That would be the next Fed-created bubble bursting, the bubble of artificially low interest rates, excessive money creation and artificially high asset prices for long-term Treasury bonds.

In the past, the big losers of this policy were the millions of people who lost their homes through foreclosures, the millions of people who lost their jobs through bankruptcies and the millions of retirees who saw their retirement incomes plummet with near zero interest rates. In the future, the principal losers will still be middle class families who will continue being the victims of a massive spoliation and will still have trouble making ends meet, plus retirees whose retirement capital will be further eroded.. Where is AARP [http://www.aarp.org/aarp/About_AARP/] when we need it?

http://www.TheNewAmericanEmpire.com/tremblay=1119


Wednesday, December 23, 2009
The New Crusade: Imperial U.S. vs Political Islam
By Rodrigue Tremblay [http://www.thenewamericanempire.com/author.html]


"I am as intolerant of imperialistic designs on the part of other nations as I was of such designs on the part of Germany. The choice is between two ideals; on the one hand, the ideal of democracy, which represents the rights of free peoples everywhere to govern themselves, and, the ideal of imperialism which seeks to dominate by force and unjust power, an ideal which is by no means dead and which is earnestly [sought] in many quarters still."
U.S. President Woodrow Wilson, July 1919

"Fight and kill the disbelievers wherever you find them, take them captive, harass them, lie in wait and ambush them using every stratagem of war."
The Qur'an (9:5), Islam's holy book

"We are fighting them (the terrorists) over there so that we won't have to fight them here at home."
Former U.S. President George W. Bush's political slogan

“I, like any head of state, reserve the right to act unilaterally if necessary to defend my nation.”
U.S. President Barack Obama, December 10, 2009

“When the tyrant has disposed of foreign enemies by conquest...and there is nothing to fear from them, then he is always stirring up some war.”
Plato, ancient Greek philosopher (428/427-348/347 B.C.)


In the political movie “Charlie Wilson's War” about the Soviet-Afghanistan war, the hero states “America does not fight religious wars.” Is this possibly wrong, dead wrong?

In fact, is it not possible that since September 11, 2001, a new type of “holy war” may have begun? This time, the new crusade with strong religious overtones pits fundamentalist Christian America and its allies, against political Islam and the Islamist al Qaeda terrorist organization. On September 16, 2001, then President George W. Bush set the tone when he said: “This crusade, this war on terrorism, is gonna take awhile.”

On December 1, 2009 Nobel “Peace” laureate Barack Obama, [http://www.cbsnews.com/stories/2009/12/01/politics/main5855734.shtml] president of the United States since January 20, 2009, decided to follow in the footsteps of his predecessor, President George W. Bush. He announced a policy of stepping up the U.S.-led war in Afghanistan-Pashtunistan. [http://www.nytimes.com/2009/12/06/weekinreview/06shane.html] He announced an escalation in the military occupation of Afghanistan by sending extra American troops in that Muslim country, putting the number of American soldiers in Afghanistan at more than 100,000. Not satisfied in using the same vocabulary as George W. Bush, Barack Obama pushed the symbolism by adopting Bush's practice of announcing policies surrounded by more than 4,000 students dressed as soldiers at the West Point Academy. This was all too reminiscent of President Lyndon B. Johnson's fatal decision in 1965 to acquiesce to the request from
 U.S. commanders to enlarge the Vietnam war [http://www.TheNewAmericanEmpire.com/tremblay=1115] by sending scores of additional U.S. soldiers to that Asiatic country.

America seems to be in a constant need of a foreign enemy. First, it was the British. Then it was the Indians. Then it was the Mexicans. Then it was the Spanish. Then it was the Philippinos. Then it was the Japanese. Then it was the Germans. Then it was the Italians. Then it was the Koreans. Then it was the Cubans. Then it was the Vietnamese. Then it was the Soviets. Then it was the Iraqis. Then it was the Islamists. Then it was the Talibans. And, once the current conflict in Pashtunistan-Afghanistan-

Pakistan is over, it will possibly be the Iranians, the Chinese, the Russians...etc.!

The reason for such a permanent-war mentality is most likely related to the U.S. military-industrial complex, [http://www.TheNewAmericanEmpire.com/tremblay=1038] an enormous beast that must be fed regularly hundreds and hundreds of billions of dollars, if not trillions of dollars, to sustain itself.

In the months following the collapse of the Soviet Union in December 1991, the high echelons at the Pentagon were busy designing a new post-cold-war strategy designed to keep the U.S. war machine humming. Paul Wolfowitz, then Undersecretary of Defense for Policy under Secretary of Defense Dick Cheney in the George H. Bush administration, wrote a memorandum titled “The Defense Policy Guidance 1992-1994”, which was dated February 18, 1992. The new so-called Wolfowitz Doctrine [http://en.wikipedia.org/wiki/Wolfowitz_Doctrine] was a blueprint to "set the nation’s [military] direction for the next century." This new neocon military doctrine called for the replacement of the policy of "containment" with one of military "preemption" and international "unilateralism", [http://en.wikipedia.org/wiki/Unilateralism] in effect, discarding the United Nations Charter [http://www.un.org/en/documents/charter/] that forbids such international behavior.

The Pentagon's overall goal was to establish, through military force, a “one-Superpower World”. The more immediate objectives of the new U.S. neocon doctrine was to "...preserve U.S. and Western access to the [Middle East and Southwest Asia] region's oil", and, as stated in an April 16, 1992 addendum, to contribute “to the security of Israel and to maintaining the qualitative edge that is critical to Israel's security”.

Because of some opposition within the U.S. Government, the new policy did not become immediately effective. But the objective remained.
For instance, in September 2000, under the auspices of “The Project for the New American Century”, a new strategic document was issued and was entitled "Rebuilding America's Defenses, Strategy: Forces and Resources For a New Century". [http://www.newamericancentury.org/RebuildingAmericasDefenses.pdf] The same goals expressed in the 1992 document were reiterated.

The belief was expressed that the kind of military transformation the (neocon) planners were considering required "some catastrophic and catalyzing event — like a new Pearl Harbor”, to make it possible to sell the plan to the American public.

They were either very prescient or very lucky, because exactly one year later, they were served with the "New Pearl Harbor" they had been openly hoping for. Indeed, the Islamist terrorist attacks of Sept. 11, 2001, turned out to have been a bonanza for the American military-industrial complex. The military planners' wish for a  "New Pearl Harbor", [http://en.wikipedia.org/wiki/The_New_Pearl_Harbor] was fulfilled at the right time. It is important to remember that from 2001 to 2005, Paul Wolfowitz served as U.S. Deputy Secretary of Defense in the George W. Bush administration, reporting to U.S. Secretary of Defense Donald Rumsfeld. In this capacity, he was well positioned to implement his own Wolfowitz doctrine that later morphed into the George W. Bush Doctrine. [http://en.wikipedia.org/wiki/Bush_Doctrine]

For the time being, this is the “doctrine” that newly-elected President Barack Obama continues to implement in the Pashtunistan-Afghanistan-Pakistan corridor. As a politician, Barack Obama may be new at the job, but the policy he is being asked to implement was crafted long before he even set foot in Washington D.C.

Another possible reason why the United States is so often involved in foreign wars, besides its obvious aim of imposing a New American Empire [http://www.amazon.com/New-American-Empire-Rodrigue-Tremblay/dp/0741418878/ref=sr_11_1/104-8428100-2298348?ie=UTF8] on the world, may be due to the strong influence of religion [http://www.guardian.co.uk/commentisfree/belief/2009/dec/08/religion-society-gregory-paul] in the United States. Just as for some aggressive Islamic countries, the U.S. is also the most religious of all first world countries. Researchers have found strong positive correlations between a nation's religious belief and high levels of domestic stress and anxiety, and other indicators of social dysfunction such as homicides, the proportion of people incarcerated, infant mortality, drug  abuse, sexually transmitted diseases, teenage births and abortions, corruption, large income inequalities, economic and social insecurity...etc.

It is possible that wars serve as an emotional outlet that allows some Americans to forget about their nation's domestic problems. I suppose more research would be necessary on this issue. Indeed, is it possible that foreign wars, including wars of aggression, are a way for the American elites to deflect attention from domestic social problems and, as such, are a convenient pretext to direct tax money to defense expenditures rather than to social programs? The issue deserves at least to be raised. This could explain why U.S. foreign policy is so devoid of fundamental morality. [http://www.amazon.com/Code-Global-Ethics-Humanist-Principles/dp/1616141727/ref=sr_1_1?ie=UTF8&s=books&qid=1260455785&sr=1-1]

U. S. politicians who become president understand this American proclivity for war. They know that the best way to popularity is to be seen as a “war president”. A president who does not start a war abroad or who does not enlarge one already in progress is open to criticism and is likely to suffer politically. He must be seen less as a president than as “commander-in-chief”, in effect, as an emperor. How could this be, when the framers of the U.S. Constitution attempted precisely to avoid that?

Indeed, Article One [http://en.wikipedia.org/wiki/Article_One_of_the_United_States_Constitution] (the War Powers Clause) [http://en.wikipedia.org/wiki/War_Powers_Clause] of the U.S. Constitution gives Congress, and not the President, the authority to declare war.

Since World War II, however, this central article of the U.S. Constitution has been circumvented by having Congress give the President a blanket authorization to deploy troops abroad for euphemistically called "police actions", [http://en.wikipedia.org/wiki/Police_action] without an explicit or formal congressional declaration of war. The term was first used by President Harry S. Truman to describe the Korean War.

This artifice has done a lot to trivialize the act of war. It also contributed much in the transfer of the powers of war and peace from the legislative branch to the executive branch. In doing so, it has reinforced the role of the U.S. president as a commander-in-chief or as a de facto emperor. Only a formal constitutional amendment [http://en.wikipedia.org/wiki/A_More_Perfect_Constitution] could restore, in practice, the framers' initial intent.

All said, it is easy to understand why when political faces change in Washington D.C., policies do not necessarily change. This push toward empire on the part of the United States can also explain why there is resentment and an anti-Americanism movement abroad.

_________________
Rodrigue Tremblay
[http://www.thenewamericanempire.com/author.htm] is professor emeritus of economics at the University of Montreal and can be reached at rodrigue.tremblay@yahoo.com. He is the author of the coming book "The Code for Global Ethics" at: http://www.TheCodeForGlobalEthics.com/

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