Stimulating the US Government to Bankruptcy

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.

The excessive sustenance for the economy finally peaked with no new strategy to continue the effort. As a result, an economic fall rapidly accelerated.

Paulson’s thrust supports the financial system 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. If the newly available credit is exhausted, and industry is not 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, together with the Federal Reserve, is now trying – massive printing of money. What will be the result of this venture?

An excessive and 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 more likely 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 for job creation also lead 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 identical to President Roosevelt’s policies for attacking the Great Depression, the US can still expect trouble. Roosevelt ‘s policies provided a short-term recovery for several years but eventually proved insufficient for correcting the economic decline. Novel and less conventional approaches will be necessary to restart a failed system.

Dan Lieberman publishes commentaries on foreign policy, economics, and politics at  He is author of the non-fiction books A Third Party Can Succeed in America, Not until They Were Gone, Think Tanks of DC, The Artistry of a Dog, and a novel: The Victory (under a pen name, David L. McWellan). Read other articles by Dan.

11 comments on this article so far ...

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  1. giorgio said on December 18th, 2008 at 1:06pm #

    The article ends with this:
    “Nevertheless, if the president-elect polices are identical to President Roosevelt’s policies for attacking the Great Depression, the US can still expect trouble. Roosevelt ’s policies provided a short-term recovery for several years but eventually proved insufficient for correcting the economic decline. Novel and less conventional approaches will be necessary to restart a failed system.”

    Wasn’t the failed system restored with WWII which took the USA to the position of strengtht it holds today? So the War on Terror is now its perfect continuation. It’s undeclared and therefore can never come to an end by the signing of a peace treaty for there is, very conveniently, I must say, nobody to sign it with: it just goes on, and on, and on, ad infinitum… isn’t this the perfect economic “panacea” of all time? and doesn’t it explain why it has been around for so long and is not likely to abet? Peace, after all, is a YAWN! …which takes me to my favorite lyric “There is no business like WAR business”.

    As for printing dollars out of thin air, no problem with that! The problem will come only when the printing machines will choke and refuse to churn out more paper. Then only then the bubble will burst.
    Paulson (and the Fed) surely will keep them happy and well oiled. That’s his job!

  2. DavidG. said on December 18th, 2008 at 2:35pm #

    I’m going to follow Paulson’s lead and start printing my own money! I mean, if it’s good enough for him, it’s good enough for me.’

    Now, where did I put that printing press?

  3. Petronius said on December 18th, 2008 at 2:46pm #

    it should be abundantly clear where the power rests in this country, the banks and wall street, not the producing sectors of the economy and that is worse now than when john pierpont morgan ran the country in the early 1900’s because then there were still many viable producers
    of goods, not the present domination of speculators who are sterile in producing wealth (except for themselves of course).

  4. Deadbeat said on December 18th, 2008 at 4:56pm #

    giorgio writes…

    Wasn’t the failed system restored with WWII which took the USA to the position of strength it holds today? So the War on Terror is now its perfect continuation.

    Giorgio is correct that WWII got the USA out of the recession. The problem was that Roosevelt didn’t aggressively primed the pump of spending. JM Keynes criticized Roosevelt for not doing enough and Roosevelt was about to face a challenge from his left-flank by Huey Long because Roosevelt was not doing enough to stimulate the economy.

    The problem today with the War on Terror is that it doesn’t have the kind of stimulus that WWII spending had. In other words War is extremely limited in today term than it was during the 1930’s. The major powers do not engage in War against each other that leaves them devastated. That is how the U.S. got to its unique place. Destroying Iraq and Afghanistan doesn’t have that same effect. It does however benefit Israel (and Zionism) much more than it benefits the USA.

    Therefore we should be “War” and “Empire” in its proper context of the times than just say that War is what it is all about. Clearly the BANKS benefits from the deficit spending but the banks would benefit even if the government engaged in deficit spending if that spending was directed toward people rather than the war machine. In fact I would argue that war spending is really NOT in the U.S. interest and has a negative effect since it has little to no multiplier effect. Thus war spending is more directed toward maintaining special interest such as military contractors and neo-conservatives but doesn’t benefit the national interest which is why you’ve seen even paleo-conservatives argue for years against the bloated military spending.

    What is needed IMO is debt relief for citizens rather than a bailout of the banks. If the 8 trillion dollars were distributed to each citizen most people could have paid off their debts. Not only debt relief but direct payments to citizens because the reason for the debt has been due to low pay but the real problem is that much of the huge inflation has been for vital spending needs: housing (shelter), transportation, health care, education as well as regressive taxation.

  5. Petronius said on December 18th, 2008 at 4:56pm #

    Wall street has this country, its next administration and in fact the whole Western world at a short leash. B’arf !

  6. Chancey Gardin said on December 19th, 2008 at 3:35am #

    Would the gentleman please explain to me what I consider to be a very serious moral problem at the heart of our financial system. When the average joe mortgages his future real earnings for the privlege of obtaining a roof over his sorry head , and slaving away for 30 years in a wage stagnant economy, ( not to mention the evil conseqences of the usurious payback scheme required of him on the part of his banking “partner” in general), in light of the fact that the funds required for the home transaction are “magically” created out of thin air at that very moment the loan is made (through the dubious miracle of fractional reserve banking)–How does this transaction meet the test of bonafide “legal consideration” on the part of the bankers? Before the client/ sucker asks for a loan, the bank has no legal title to the property. Then, as soon as he signs on the dotted line, the money is magically created and the bank is somehow granted legal title to the property. In the case of the borrower defaulting, the bank ends up owning the property which it then controls, holds, and/or may liquidate at its pleasure. Aside from taxes or maintanence costs, the payments of which are sometimes deferred until a future sale is made, the bank doesn’t really have to “pay itself back” the principle, does it? Am I wrong in thinking that the bank, because of its priveleged postion in the economic pecking order, and by the magic of fractional reserve banking is able to obtain real title to real properties without really contractually exchanging anything that is REAL , ie, fiat money/ leveraged credit? The average joe exchanges the blood, sweat and tears of his labor for this dream of homeownership. Since there is nothing backing the dollar except CONfidence, what does the bank really offer in exchange? Whether this amounts to a sham or a scam, I leave to your own opinion, especially since nobody is requiring the borrower to take on the debt in the first place (he can always rent–in which case he is just participating in a similar scheme, just one more player away from the banker, but still playing the same game). Homeowners are discouraged by the tax system to pay off their homeloans early, as some of the interest on their payment is tax deductable. I wonder what percentage of new homeowners actually pay off their loans? There seems to be evidence that people are moving every 5 to 10 years. When they sell to the proverbial next “greater fool” a new loan is created and another bank gets title to the property. It seems to me that it is the banks that are the ones who own the great majority of homes, we just only THINK we own them. Are homeowners really nothing more that glorified renters taking pride in maintaining “their ” homes for the benefit of some unknown future banking or government parasite? Who is running this carnival?

  7. bozh said on December 19th, 2008 at 8:57am #

    it is interesting, to me, that we do not know why US invaded afgh’n and later iraq.
    we have to guess. perhaps decades from now we may learn what were the aims/goals for warfare in the two evil empires.
    but historical evidence stronlgy suggests that nato and/or US invaded the two empires merely to establish perm bases there; split the evil empires in pieces, if necessary (in US mind); keep the empires together ; w. nations fighting one another.
    this, of course, benefits also israel and europe, japan, and even some fascist lands.
    u’r right ab minimal damage inflicted on afghan infrastructure, economy, etc.
    i also suggest that next in line to be “fixed” to US/nato, et al’s liking is syria, iran, pakistan, and other ‘stans.
    w. bases in afgh’n and iraq, US/nato/fascists can easily accomplish this.
    sure, thousands of amer soldiers wld die but that’s the way to go in order to defend US interests, says uncle. and if amers in large numbers refuse to fight for the uncle, uncle already has lotsof eurofascists to do it for him. thnx.

  8. Deadbeat said on December 19th, 2008 at 11:13am #

    it is interesting, to me, that we do not know why US invaded afgh’n and later iraq.

    I would suggest bozh to read Project for a New American Century (PNAC) and review the interest of those authored these documents.

  9. bozh said on December 19th, 2008 at 11:32am #

    deadbeat, respectfully,
    i’m interested in US documents and/or any written material anent the two US aggressions.
    i do not know what PNAC stands for or whether its a NGO. in case it’s a NGO, whatever it says may be interesting but cannot be evaluated as factual. unless of course, it had obtained copies of genuine documents.
    because of wmd and how easily we can evaporate when they wld be used, it’s of utmost import that we distinguish btwn facts and guesses.
    concluding is OK; so long one is fully aware that conclusions r not facts.
    one can see even on DV how many people posit conclusions hoping we wld evaluate them as facts.
    kahar is an extreme example of such subterfuge. even nearly everything that obama has said to date is just
    conclusions/wishes/predictions/hopes. and not to mention half truths, lies, etc. thnx

  10. Deadbeat said on December 19th, 2008 at 8:16pm #

    bozh writes…

    i do not know what PNAC stands for or whether its a NGO

    Here’s a link to start you on your journey…

    Project For The New American Century

  11. bozh said on December 20th, 2008 at 5:24am #

    deadbeat, thnx for the link.
    i have read some of it. too early to make a comment.