all, what is it that the people get? Why�widows, taxes, wooden legs and debt.
--Samuel B. Pettengill
"Armies, and debts, and taxes are the known instruments for bringing the
many under the domination of the few. --James Madison, 4th U.S. President
(April 20, 1795)
"Let me issue and control a nation's currency and I care not who makes its
laws". --Nathan Rothschild, 1791
I observed that there was a solvency crisis underneath
the ongoing subprime mortgage liquidity squeeze.
Central banks can alleviate a liquidity crisis, but they cannot solve a solvency crisis.
Last year also, before the events, I warned that the U.S.
was heading toward stagflation. This was due to three
fundamental factors. First, the structural fiscal imbalances of the federal
budget in a period of prosperity, as a result of the Bush-Cheney
administration's continuous deficit spending linked to the Iraq and Afghanistan
wars and to its large tax cuts; second, the over-indebtedness of the overall
U.S. economy coupled with an overall saving rate close to zero (in 1981, it was
12 percent), and, as a consequence, the rapidly increasing foreign debt of the
U.S.; and, third, the required decline in the U.S. dollar to reverse and
correct the deteriorating American balance of payments. The second factor was a
harbinger of less consumer spending in the coming months while the third factor
would stoke the fire of overall inflation. And with already high budget
deficits, there would be less leeway for an aggressive fiscal policy to sustain
economic activity. The table was thus set for a bout of stagflation, i.e. slow
growth and rising inflation.
Now, stagflation is here. Economic growth is slowing down, M3 money supply numbers, as a
measure of overall liquidity in the economy, are in the double digits range,
the yield curve has inverted and become
negative (short term rates higher than longer term rates) and the U.S.
dollar has become one of the weakest currencies in the world. All this as
American twin deficits (balance of trade and federal
government budget deficits) are at record levels.
As I pointed out last year, " A lower currency
translates into more imported inflation and makes it difficult to maintain low
interest rates," even if, in due time, it will improve the trade
balance. This means that, for all practical purposes, monetary policy is also
severely constrained in what it can now accomplish. For all of 2007, inflation hit 4.1 percent, which
is two-thirds more than in 2006 when inflation registered at 2.5 percent.
Moreover, the surge in wholesale prices announces even higher inflation in the
With inflation being on the rise and real interest rates already in
negative territory, aggressive monetary stimulus would likely be
counterproductive, because too low interest rates would encourage capital
outflows, pushing the dollar further down, and translating into more imported
inflation. On top of that, one has to remember that monetary policy shifts take
at least nine to 12 months before impacting the real economy. One has also to
keep in mind that the U.S. operates, more and more, in an international
environment, and is less and less capable of influencing the domestic economy
by manipulating one variable only, such as the interest rate.
Of course, the Fed could have played a better preventive
regulatory role if it had intervened in 2003-04 to reign in the banks' unsound
lending practices that have led to the subprime debacle. But the milk is out of
the bottle now, and nothing can erase the damage done to the housing
construction sector and other parts of the economy because of this lack of
After seven years of continuous indulging, of borrowing and debt building, the U.S. government is
also in a fiscal bind and will find it difficult to effectively counteract the
slowdown in the economy. Indeed, over the last seven years, the Bush-Cheney
administration has run fiscal deficits on the average of $461.29 billion each
year, for a grand total of $3,229 trillion of cumulative on-budget deficits.
This makes it harder to embark upon a new round of deficit
spending to stimulate the economy. For one, fiscal policy shifts have even a
longer time horizon before impacting the real economy. Secondly, the coming
slowdown and recession will worsen an already high federal government deficit,
as government receipts decline with the rise in unemployment and the drop in
income growth. On the spending side, the Iraq war, in particular, is a black
hole that siphons off more than $100 billion each year, with no end in sight.
Oil prices are also very high, partly because of high world demand, partly
because of geopolitical instability and partly because of the lowered dollar.
After seven years of foreign policy madness and of empire
building on a mountain of debt, and of public indulging and private gouging,
the financial crisis and credit crunch, the plummeting dollar, the high price
for oil will all contribute to the 2008 economic slowdown, which is likely to
turn into a recession during the first half of
the year, if it is not already into one since last December. The downturn in
the world stock markets during this
month is another clear indication that something is wrong, not only with the U.S.
economy, but also with the world economy.
All that would seem to be very bad
news for George W. Bush's Republicans, just as it was bad news for the
Democratic Carter administration in the late '70s.
Indeed, over the last century, the U.S. economy has been in a recession four
times in the early part of a presidential election year, according to the
National Bureau of Economic Research. In each of those years � 1920, 1932, 1960
and 1980 � the party of the incumbent president lost the election.
Tremblay lives in Montreal and can be reached at email@example.com. He is the author of the book �'The New
American Empire.� His new book, �The Code for Global
Ethics,� will be published
in 2008. Visit his blog site at thenewamericanempire.com/blog.