How to Transform a Democracy Into a Feudal State

High drama in Washington.  It's the sort of political theatre that is enormously riveting.  Congress is tossing about a ticking time bomb - supposedly - the US federal debt ceiling.   Either the Republicans and Democrats reach a deal or the American government defaults - supposedly - and Western civilization collapses in ruin.

The Republican leadership in the House thought they had a clever offer only to discover the Hezbollah contingent of Tea Party GOPers refused to go along pretty much with anything.   They seem stuck on "no" but, of course, appearances can be deceiving.   This might actually be a Republican ploy to make the Senate Dems frightened and grateful for anything the Repugs finally put on the table, no matter how awful.

If I was a Repug I'd know that will probably work.   The Dems are pussies.  They fold under pressure and the Republicans have learned how to maul them until they bleed.  Obama - pretty much the same.  Apparently he brought his ego from Chicago but left his courage behind.

That's one scenario.   The Repugs are ratcheting up the pressure on the Dems until it becomes unbearable.   That, of course, assumes this is all a carefully staged, tightly scripted performance by the Republican House leadership.

Then again.  This could be an indication of a terminal fracture in the Republican ranks, an in-house Tea Party insurrection aimed at sweeping the Old Guard aside to facilitate a takeover by the radicals.  Boehner does seem to be worried that his own political fortunes depend on appeasing the irrational right.

Recent polls seem to suggest the American public sees the debt ceiling standoff as more the doing of the Repubs than the Dems.   If the Republicans sense they're going to have to wear the fallout of a federal default, the sane bunch could be vulnerable to a wedge offer by Senate Democrats.  After all, Boehner can't get a Republican bill through the House yet the Dems can get their alternative through the Senate.   And, with enough House Republican support, the Democratic proposal could actually make it to Obama's desk.

My guess is that the Tea Party contingent are crazy but not quite suicidal.   They'll want the Republicans to have at least some debt ceiling relief bill on the table although they'll expect something far more onerous than Boehner's original attempt.   Even then they may keep their tantrum raging for another day or two.   An 11th hour, "take it or leave it" bill with no time left to negotiate further compromise, a bill that makes Obama wear the debt so deliberately crafted by the Republicans under Bush II, would suit their purposes perfectly.

For this isn't about debt or the solvency of America or protecting America's economy and their constituents' livelihoods.  This is about somebody else having to take the blame for the gross malfeasance of the Republican Congress and White House during the reign of Bush the Dimmer.   This is about preserving those tax cuts for the rich into perpetuity and sticking working class Americans and their kids and their grandkids with the bill while cutting their "entitlements."

This could just be the creation of a true American aristocracy and, worse, a true American peasantry.

 UPDATE - The New York Times columnist Ross Douhat suggests sane Republicans may want Boehner's House debt plan to fail - for their own sake.

The Myth of American Prosperity

The CBC's Don Newman has written a lament about how badly Canada trails the United States in prosperity.

But neither Stephen Harper, nor any Canadian political leader for that matter, is discussing the little acknowledged reality that Canada has been steadily falling behind the U.S. — not only our closest neighbour, but our biggest trading partner — for the past 30 years.

No one wants to talk about the data that everyone should be studying, except perhaps for the Institute for Competitiveness and Prosperity, whose recent study —"Beyond the Recovery" — should be required reading.

So not only is much of our Canadian self-congratulation misplaced when it comes to the recession, our continued back-patting obscures the main point of the institute's report, which is that Americans are still, on average, much richer than Canadians.

And except for the occasional exception, they have been getting richer by the year, which is something we have been very good at ignoring.

The Institute for Competitiveness and Prosperity, which is attached to the Rotman School of Business at the University of Toronto, reports that, at the end of 2009, the prosperity gap between the average Canadian and the average American was $9,300 in America's favour.

I like Don Newman but sometimes he can be pretty obtuse. This is one of those times. It's a "figures don't lie but liars figure" sort of thing. Let's start with the "average" American making $9,300 more than the average Canadian. That suggests the prosperity advantage is spread more or less equally among all Americans whereas, as we know, the growth in American wealth during the Reagan "Age of Ruin" has been obscenely concentrated in the richest of the rich. The middle class, or what remains of it, has been battered senseless and working class wages have stagnated for decades even as worker productivity has sharply increased. Per unit of work the incomes of blue collar Americans have declined. So this notion of the "average" American is genuinely warped. Newman ought to know better.

And what does prosperity mean without looking at the other side of the balance sheet - debt and unfunded liabilities. How does the extra cash in your pay packet compare with the IOU you've had to sign to get it? While you're counting your extra 9,300 greenbacks, who is pledging your credit, mortgaging your future (and your kids' future) and for how much?

Even before the collapse/bailout, America's former Comptroller General was telling anyone who would listen that the average American family's share of their federal government's debt and "unfunded obligations" stood at $480,000 USD. As he put it, it's like having a big mortgage only without getting a house. So let's work that out. 9,300 into 480,000 is what? That's about 50-years worth of prosperity advantage right there. And that doesn't include dime one of the stimulus bailouts or the projected mega deficits for years to come, as far as the eye can see. But wait, there's more!

It isn't just America's federal government that's broke. So are most American states, an awful lot of municipalities, a good segment of American business and, of course, an alarming number of ordinary Americans too.

Take California - please. In Friday's Report on Business there's a story, "California, on verge of system failure." That's right, the Golden State, 7th largest economy in the world, is teetering on the verge of bankruptcy and turning to an already skint Washington for a bailout.

It’s a story that’s being repeated all across California – and throughout the United States – as cash-strapped state and local governments grapple with collapsed tax revenues and swelling budget gaps. Mass layoffs, slashed health and welfare services, closed parks, crumbling superhighways and ever-larger public school class sizes are all part of the new normal.

California’s fiscal hole is now so large that the state would have to liberate 168,000 prison inmates and permanently shutter 240 university and community college campuses to balance its budget in the fiscal year that begins July 1.

Think of California as Greece on the Pacific: bankrupt and desperately needing a bailout.

“We are on the verge of system failure,” warned Jean Ross, executive director of the California Budget Project, an independent think tank based in Sacramento.

None of this would matter much to anyone outside the not-so-Golden State except that California’s budget crisis is a harbinger of a grim dilemma that all Americans will soon confront. The country has built an elaborate and costly government machine, tied to a regressive tax system that can’t generate enough revenue to pay for it all.

After unveiling a grim budget last month that scraps a popular welfare program for a million children and slashes countless other programs for the poor and elderly, California Governor Arnold Schwarzenegger complained that the state’s broken budget process has left him facing a “Sophie’s Choice.” That’s a reference to the story of the Polish Jew forced by the Nazis to choose between saving her son or her daughter from the Auschwitz gas chambers.

Experts say the U.S. government will inevitably have to come to the rescue, using its borrowing clout to save the state from near-bankruptcy or devastating service cuts. Do nothing, and the entire U.S. economy could be put at risk. California, like the country’s banks, may be too big to fail.

So, do you still feel dejected about being $9,300 a year behind your American cousins in prosperity? It sounds like Don Newman gorged himself on a super-sized portion of rightwing bullcrap.

First It Was Houses, Now It's the Malls

Trying to find the eye in America's fiscal hurricane isn't easy but it is generally considered to be residential real estate and the myriad ways that was gamed by homeowners, mortgage lenders, securities traders and the political establishment.

Now America is on the verge of being hit by another wave - commercial real estate. From McClatchey Newspapers:

Thousands of commercial mortgages valued at hundreds of billions of dollars are approaching their renewal dates, and by some estimates, two out of three no longer will meet the original loan conditions and won't be able to refinance. With prices for commercial properties expected to plunge, a vicious cycle could unfold, much as it has in the nation's housing market.

"It's the next wave to hit. It's the next round of bad news," said Scott Talbott, the senior vice president of government affairs for the Financial Services Roundtable, a trade group for big banks and other financial institutions who are collectively concerned about the coming problems.

A commercial mortgage meltdown is likely to prolong the nation's economic recovery. Falling prices of commercial real estate would lead to additional bank losses at a time when banks already are sapped by home mortgage defaults and soaring credit card defaults. This could lead to future additional taxpayer assistance for the banks.

http://www.mcclatchydc.com/homepage/story/67187.html

Climates of Fear

You have to give them their due. Over the past decade, the right wing has demonstrated an unrivalled mastery of fear as a tool of political manipulation. It's said that humans have a strong attraction to fear which accounts for the steady stream of horror movies and action flicks. I guess that makes us predisposed to a Pavlovian response when we're bombarded with warnings of imminent danger, real or simply imagined.

Right wingers - politicians, preachers and pundits - use fear as a construct, carefully crafting a subset of things to fear and, just as importantly, things not to fear. Things to fear include terrorism, foreigners and socialism. Things not to fear range from global warming to authoritarianism. It gives rise to a black and white, good/bad dichotomy that, by virtue of its simplicity and absolutism becomes ridiculously easy to inculcate and perpetuate.

We know that, with rare exception, virtually nothing is truly black or white. It's all varying shades of grey but sometimes things that are genuinely dingy are still presented to us as white and pure and good. The more we're conditioned by fear the more likely we are to have prejudices and biases that allow us to accept as white what is truly grey. Isn't that after all the real basis of the "my enemy's enemy" line of thought?

I don't much care for the American national anthem but the last line is genuinely prescient. "The Land of the Free and the Home of the Brave." There's a direct link between bravery and freedom. There is no freedom without bravery. What is bravery then? Isn't it the rejection and overcoming of fear? You may still be afraid but you're brave enough to confront your fear and surmount it.

What is terrorism but the application of fear to achieve a desired response? The whole essence of terrorism is to provoke a predictable reaction. Fear, palpable even tangible, that sends people racing out to empty hardware store shelves of plastic sheeting and duct tape.

The Bush-Cheney regime used fear as a weapon or tool against the American people. Armed with their talking points they would barrage the American public by swamping the media with images of Saddam Hussein and mushroom clouds or chemical weapon attacks on the Homeland. Remember Homeland Security director Tom Ridge's colour-coded alert system that curiously only seemed to spike at moments when political interests also peaked?

Fear was used by the White House against the American people to garner support for a bellicose foreign policy and illegal wars of conquest and occupation. Fear was used to render the public insecure enough that they would surrender constitutional freedoms and protections and accept a more invasive, authoritarian government; an oligarchy that served the most advantaged to the detriment of all others.

The Islamist terrorists wanted the American people afraid, cowed. So did the American administration. The Republicans saw fear as a means to win undeserved electoral victories.

Speaking from the grave, Dick Cheney came out last week to have the complacent American media spread the word that Obama's decision to close Guantanamo would leave the United States vulnerable to another terrorist attack. Now you would have thought a responsible media would have placed Cheney's warning in the context of the litany of lies and empty propaganda he so shamelessly spun over the past eight years but, no, they didn't.

It's become clear of late that Congressional Republicans have decided to stick with the fear gameplan, to adopt it as their vehicle to undermine the public's confidence in Barack Obama. Ignoring the fact that it was the Republican Congress and administration that decriminalized the securities scams that have toppled the global economy and having no ideas beyond further insane tax cuts to remedy their country's predicament, these political hacks and their collaborative pundits are waging a determined campaign to make the American people fearful of their president and his measures to salvage America's economy. They shamelessly depict Obama's policies as begetting socialism and political tyranny.

It's a scary thing to be an American today. The former Comptroller General last year warned anyone who would listen that the American governments' debt and unfunded obligations such as Social Security represented an average indebtedness of $480,000 per household. That was before the bailout and stimulus emergency budgets. Who wouldn't be scared by that, especially those with employment insecurities and personal debt problems?

These are hard times indeed for much of the planet and particularly for the United States. It is now when America most needs a brave citizenry willing to look fearlessly at what they're facing and the arduous path to recovery. If they can find that bravery it is conceivable that America may emerge from this travail a better place than it has been since Reagan inflicted his toxic ideology on the country. If they can find that bravery, they just might restore their Constitution to its rightful place as the repository of their freedoms and protections. The Republicans know this. It's why they're so determined to once again enslave their own people with those damned rusty chains of fear.

American Madness

How can an entire country go mad. The while thing - a people, their economy, their governments - all of them mad as hatters.

As details emerge demonstrating that America is gripped not by a liquidity problem but a widespread insolvency problem, the question must become how could such a powerful, privileged and advanced people have thought to spend themselves into a fiscal gutter?

We know where the madness began. It started with the Nixon administration. That ushered in what Lewis Lapham has described as the moment when Americans began to equate wealth with virtue. It was when the Calvinism of the pilgrims began yielding to hedonistic nationalism. But it was the presidential mad hatter himself, Ronald Reagan, who launched America headlong onto the path of illusion and self-deception.

Remember the anecdote of Cheney, goading Bush into a second wave of tax cuts for the rich, noting that Reagan had shown that "deficits don't matter." It was lunacy enough that Cheney should make the point but even more insane that Bush should swallow it. It echoed in a blue collar class fed a diet rich in triumphalism to mask their famine.

There's been a lot of nonsense spawned over the last decade about Canadians harbouring a seething anti-Americanism. In my case, at least, it wasn't envy at American prosperity that led me to speak out, it was fear of American profligacy. I knew that Reagan had transformed the United States from the world's largest creditor nation, when he took office, to the world's largest debtor nation, when he left office just eight years later. I followed America's balance of trade deficits and their balance of payments deficits along with their wholesale outsourcing of manufacturing to Asia. I watched the Dot.Com bubble and saw how people made and lost fortunes on companies that never, ever, not once turned a profit before they disintegrated. I watched as the Dot.Com bubble gave way to an equally insane housing bubble. I watched, and worried, as the initiative to deeply integrate the Canadian and American economies quietly progressed.

And yes I did speak out about this and I freely criticized the United States and the American people for acting as though they could actually defy gravity. Bear in mind that there were a great many Americans saying the same thing - a lot but just not enough.

And yes I criticized the Bush government at every turn. I criticized the juvenile Bush doctrine and a foreign policy that undermined global security and even fueled Islamist extremism. I criticized Bush for his illegal invasion of Iraq, a folly that, like so many stupid things he did, added more bricks to the backpack America carried until it could carry it no more.

And when we became ensnarled with a prime minister who actually admired the people and politics that were bringing America to the edge of collapse, I criticized the American government even more. It was a close thing. It was more than fate that kept the Reform/Alliance/Conservatives from coming to power with the majority they would have required to steer Canada down the Bush/Cheney/Howard path. It was a level of awareness, or unease that stopped Harper in his pro-Republican tracks.

The madness of America is only starting to be played out. The recession won't be like other downturns in which an otherwise sound economy bounces back. This recession has a millstone tied around its feet, a massive indebtedness that reaches through the federal, state and municipal governments; most of the corporate sector; and straight into American families. Losing your job is one thing but losing your job right when you're up to your alligators in debt with assets whose value is steadily dwindling is another matter altogether. It's enough to drive you mad.

Oh Dear - California Craters

With the focus on Wall Street and the US federal government, the fiscal plight of individual states is understandably overlooked. Well, no longer. California, which if it were a country, would have the 7th largest economy in the world, is tapped.

The last time the state had money to pay its bills was July 17th, 2008. Since then it's been borrow, borrow, borrow until it can't borrow any more or, in layman's terms, today. McClatchey Newspapers reports California has gone through a mountain of borrowed money:

As in $21.5 billion worth of borrowed money, according to state Controller John Chiang: $16.5 billion borrowed from some of the state's 1,000-plus special funds, plus $5 billion in "revenue anticipation notes," which are basically money borrowed from private investors.

But, Chiang, whose office writes the state's checks, says California is about out of stopgap tricks to pay its bills and keep all its programs running.

The controller says California is down to Plan D on its checklist of paying bills. Its cash reserves are piddling; the special funds it borrows from are tapped out, and no one in the private sector is going to lend it any cash at a reasonable interest rate.

That leaves what in state government circles are called "payment deferrals" and what in real life is called "stiffing your creditors."

California contributes about 13% of the American economy. The fiscal health of the state (and it's also unmentioned municipalities) impacts on the entire nation. The trouble is that bailing out California (the Governator already asked Bush) is to open a door to the swarm of other states in the same predicament.

When you begin factoring in broke states and municipalities and heap them up on the pile of broke industries, federal government debt and homeowner debt, about the only thing that America has in abundance is debt.

I think the experts may be right. What's facing Obama now isn't a matter of liquidity, it's a full-blown, national insolvency. And, just to tweak your memory, our economy is lashed tightly to theirs.

America's Problem Isn't Liquidity - It's Insolvency

America's problem isn't finding a way to free up credit. It isn't the federal government's debt. The problem is that the country, and especially the private sector, is hopelessly debt-bound. The country is insolvent, it's broke, it's bankrupt.

Ed Kemp writing in Reuters makes a compelling argument that America's efforts to rescue the country through trillions of dollars of bailouts and stimulus spending can't work because those measures don't shrink what's squeezing the life out of America, the mountain of debt weighing down on its chest.

The United States and the United Kingdom stand on the brink of the largest debt crisis in history.

While both governments experiment with quantitative easing, bad banks to absorb non-performing loans, and state guarantees to restart bank lending, the only real way out is some combination of widespread corporate default, debt write-downs and inflation to reduce the burden of debt to more manageable levels. Everything else is window-dressing.


Kemp notes that America's fiscal house began falling apart around 1970. From 1975 to 2997, total US output, gross domestic product or GDP, has increased just under eight fold. In that same interval, however, rose 20 fold, two and a half times faster than the growth in GDP. In the result, total debt, public and private sector, soared from 155% of GDP to the astonishing 355% where it stands today.

...the real debt explosion has come from the private sector. Private debt outstanding has risen an enormous 22 times, three times faster than the economy as a whole, and fast enough to take the ratio of private debt to GDP from 117 percent to 303 percent in a little over thirty years.

For the most part, policymakers have been comfortable with rising private debt levels. Officials have cited a wide range of reasons why the economy can safely operate with much higher levels of debt than before, including improvements in macroeconomic management that have muted the business cycle and led to lower inflation and interest rates. But there is a suspicion that tolerance for private rather than public sector debt simply reflected an ideological preference.


...By 2000-2007, total debt was rising almost twice as fast as output, with the rapid issuance all coming from the private sector, as well as state and local governments.

This created a dangerous interdependence between GDP growth (which could only be sustained by massive borrowing and rapid increases in the volume of debt) and the debt stock (which could only be serviced if the economy continued its swift and uninterrupted expansion).

...the necessary condition for resolving the debt crisis is a reduction in the outstanding volume of debt, an increase in nominal GDP, or some combination of the two, to reduce the debt-to-GDP ratio to a more sustainable level.

...having governments buy distressed assets from the banks, or provide loan guarantees, is not an effective solution. It does not reduce the volume of debt, or force recognition of losses. It merely re-denominates private sector obligations to be met by households and firms as public ones to be met by the taxpayer.

This type of debt swap would make sense if the problem was liquidity rather than solvency. But in current circumstances, taxpayers are being asked to shoulder some or all of the cost of defaults, rather than provide a temporarily liquidity bridge.

Avoiding Depression

Trying to cut debt by reducing consumption and investment, lowering wages, boosting saving and paying down debt out of current income is unlikely to be effective either. The resulting retrenchment would lead to sharp falls in both real output and the price level, depressing nominal GDP. Government retrenchment simply intensified the depression during the early 1930s. Private sector retrenchment and wage cuts will do the same in the 2000s.

Shrinking the Real Beast

The solution must be some combination of policies to reduce the level of debt or raise nominal GDP. The simplest way to reduce debt is through bankruptcy, in which some or all of debts are deemed unrecoverable and are simply extinguished, ceasing to exist.

But widespread bankruptcies are probably socially and politically unacceptable. The alternative is some mechanism for refinancing debt on terms which are more favorable to borrowers (replacing short term debt at higher rates with longer-dated paper at lower ones).
The final option is to raise nominal GDP so it becomes easier to finance debt payments from augmented cashflow. But counter-cyclical policies to sustain GDP will not be enough. Governments in both the United States and the United Kingdom need to raise nominal GDP and debt-service capacity, not simply sustain it.

There is not much government can do to accelerate the real rate of growth. The remaining option is to tolerate, even encourage, a faster rate of inflation to improve debt-service capacity. Even more than debt nationalization, inflation is the ultimate way to spread the costs of debt workout across the widest possible section of the population.

Could Kemp possibly have this right? Are the governments, especially the American and British administrations, simply squandering trillions of dollars in bailouts and stimulus spending?

If Kemp is right, America has a near lethal addiction to debt, one that its foreign lenders have been willing to keep supplied. One flaw in his thinking is that he's looking at solutions to clean up the mess that's accumulated since the Nixon days. What he doesn't address is what an America, freed of debt addiction, would look like. How is America to function, how are its people to live, if they have to operate on a reality budget, if they have to live within their means?

Suddenly Stevie Harper's grand vision of America the Beautiful doesn't look nearly as grand any longer.

http://www.alternet.org/story/122302/the_u.s._and_uk_are_on_the_brink_of_debt_disaster/?page=1

Just Like Reagan, Only In Reverse

It's not true but Americans like to believe their idol, Ronald Reagan, vanquished the Soviet Union by forcing Moscow into a ruinous arms race that left the country bankrupt. It was actually a nation with a feeble manufacturing sector and broad fiscal deficits that became entirely dependent on oil exports at high world oil prices that toppled when oil prices collapsed.

Today we're confronted with another superpower with a gutted manufacturing sector and broad fiscal deficits - federal, state, municipal, corporate and individual - that may just have fallen prey to a predator entirely of its own making. The United States of America and the People's Republic of China.

A couple of years back I wrote of how diabolical it would be if China's communist dictatorship had schemed to use its adversary's weapon, capitalism, to bring its rival down and clear the way for its own ascendancy. What a perfect scheme - soak up your enemy's wealth, use it to grow your own economy and undermine your opponent's economy, and then wait for victory to arrive at your doorstep with nary a cannon being fired. Lull your opponent into crafting his own demise.

Whether that was a deliberate plot by Beijing or just the inevitable result of the Reign of Greed crafted by Ronald Reagan and embraced by America and its economic oligarchy ever since probably doesn't make a lot of difference at this point. After all, no one really forced American companies and their key investors to shift all those plants and all those manufacturing jobs to China did they? No one forced the American government to sit by while America's wealth was drained away to grow the economy of its main rival, did they? And no one forced America, its government and its industries and its people, to become addicted to foreign loans, did they? Who forced any American or American institution to consistently spend more than they made?

Finally Americans are waking up and beginning to wonder if they've been had. From The New York Times:

"In March 2005, a low-key Princeton economist ...coined a novel theory to explain the growing tendency of Americans to borrow from foreigners, particularly the Chinese, to finance their heavy spending.

The problem, he said, was not that Americans spend too much, but that foreigners save too much. The Chinese have piled up so much excess savings that they lend money to the United States at low rates, underwriting American consumption.

Today, the dependence of the United States on Chinese money looks less benign. And the economist who proposed the theory, Ben S. Bernanke, is dealing with the consequences...

In the past decade, China has invested upward of $1 trillion, mostly earnings from manufacturing exports, into American government bonds and government-backed mortgage debt. That has lowered interest rates and helped fuel a historic consumption binge and housing bubble in the United States.

China, some economists say, lulled American consumers, and their leaders, into complacency about their spendthrift ways.

“This was a blinking red light,” said Kenneth S. Rogoff, a professor of economics at Harvard and a former chief economist at the International Monetary Fund. “We should have reacted to it.”

In hindsight, many economists say, the United States should have recognized that borrowing from abroad for consumption and deficit spending at home was not a formula for economic success. Even as that weakness is becoming more widely recognized, however, the United States is likely to be more addicted than ever to foreign creditors to finance record government spending to revive the broken economy."

...Today, with the wreckage around him, Mr. Bernanke said he regretted that more was not done to regulate financial institutions and mortgage providers, which might have prevented the flood of investment, including that from China, from being so badly used. But the Fed’s role in regulation is limited to banks. And stricter regulation by itself would not have been enough, he insisted.

...The inaction was because of a range of factors, political and economic. By the yardsticks that appeared to matter most — prosperity and growth — the relationship between China and the United States also seemed to be paying off for both countries. Neither had a strong incentive to break an addiction: China to strong export growth and financial stability; the United States to cheap imports and low-cost foreign loans.

...Mr. Greenspan and the Bush administration treated the record American trade deficit and heavy foreign borrowing as an abstract threat, not an urgent problem.

Mr. Bernanke, after he took charge of the Fed, warned that the imbalances between the countries were growing more serious. By then, however, it was too late to do much about them. And the White House still regarded imbalances as an arcane subject best left to economists.

...By the early part of this decade, the United States was importing huge amounts of Chinese-made goods — toys, shoes, flat-screen televisions and auto parts — while selling much less to China in return.

“For consumers, this was a net benefit because of the availability of cheaper goods,” said Laurence H. Meyer, a former Fed governor. “There’s no question that China put downward pressure on inflation rates.”

But in classical economics, that trade gap could not have persisted for long without bankrupting the American economy. Except that China recycled its trade profits right back into the United States.

It did so to protect its own interests. China kept its banks under tight state control and its currency on a short leash to ensure financial stability. It required companies and individuals to save in the state-run banking system most foreign currency — primarily dollars — that they earned from foreign trade and investment.

America continues to pressure China to revalue its currency, something that might have been done in boom times. But, with American consumption waning, China's economy is feeling the pinch and suddenly forcing an already restive Chinese people to endure employment insecurity and higher prices at the same time is risky business.

Throughout the Cold War we were taught that democracy was ours and capitalism was ours too and that they went hand in glove. Communism, by contrast, was dictatorship and vile socialism. We never imagined how well capitalism could thrive under communist rule but, as it turns out, capitalism seems to like political certainty over the messy and fickle business that is our cherished democracy.

How will America get out of this genuinely Made in America mess? That all depends on whether the America people want to merely fix the symptoms or are willing to actually cure their disease.

The Wrong Guy to Rescue America?

If, as has been widely claimed, the real Achilles' Heel to the global financial meltdown, lies in $60-trillion dollars of bogus Credit Default Swaps dumped into the markets by American financial giants, how wise is it to rely on the recent head of one of those very companies to rescue America from this very curse?

Just read the Wikipedia biography of Henry Paulson and you decide:

Paulson was Staff Assistant to the Assistant Secretary of Defense at The Pentagon from 1970 to 1972.[7] He then worked for the administration of U.S. President Richard Nixon, serving as assistant to John Ehrlichman from 1972 to 1973.

He joined Goldman Sachs in 1974, working in the firm's Chicago office for Manmeet Taneja. He became a partner in 1982. From 1983 until 1988, Paulson led the Investment Banking group for the Midwest Region, and became managing partner of the Chicago office in 1988. From 1990 to November 1994, he was co-head of Investment Banking, then, Chief Operating Officer from December 1994 to June 1998;[8] eventually succeeding Jon Corzine (now Governor of New Jersey) as its chief executive. His compensation package, according to reports, was US$37 million in 2005, and US$16.4 million projected for 2006.[9] His net worth has been estimated at over US$700 million.[9] Paulson has personally built close relations with China during his career. In July 2008 it was reported by The Daily Telegraph that: "Treasury Secretary Hank Paulson has intimate relations with the Chinese elite, dating from his days at Goldman Sachs when he visited the country more than 70 times."[10]

[edit] Tenure at and later relationship with Goldman Sachs

In 2004, at the request of the major Wall Street investment houses, including Goldman Sachs, then headed by Paulson, the U.S. Securities and Exchange Commission agreed unanimously to release the major investment houses from the net capital rule, the requirement that their brokerages hold reserve capital that limited their leverage and risk exposure. The complaint that was put forth by the investment banks was of increasingly onerous regulatory requirements -- in this case, not U.S. regulator oversight, but European Union regulation of the foreign operations of US investment groups. In the immediate lead-up to the decision, EU regulators also acceded to US pressure, and agreed not to scrutinize foreign firms' reserve holdings if the SEC agreed to do so instead. The 1999 Gramm-Leach-Bliley Act, however, put the parent holding company of each of the big American brokerages beyond SEC oversight. In order for the agreement to go ahead, the investment banks lobbied for a decision that would allow "voluntary" inspection of their parent and subsidiary holdings by the SEC.

During this repeal of the net capital rule, SEC Chairman William H. Donaldson agreed to the establishment of a risk management office that would monitor signs of future problems. This office was eventually dismantled by Chairman Christopher Cox, after discussions with Paulson. According to the New York Times, "While other financial regulatory agencies criticized a blueprint by Mr. Paulson, the [new] Treasury secretary, that proposed to reduce their stature — and that of the S.E.C. — Mr. Cox did not challenge the plan, leaving it to three former Democratic and Republican commission chairmen to complain that the blueprint would neuter the agency."[11]

In late September 2008, Chairman Cox and the other Commissioners agreed to end the 2004 program of voluntary regulation.

I don't know but it sure sounds to me as though Paulson was one of the key players who were gaming the American economy with these toxic, Credit Default Swaps, that created the Wall Street house of cards that now lies flattened.