economic fundamentals

[darkbeaver]

Time to Change America by Challenging
Economic Fundamentals
by Richard C. Cook
www.dissidentvoice.org
February 18, 2007

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Though headlines are dominated by the war in Iraq, everyone realizes there is something wrong with the US economy. But few have focused on the connection between the two.
It is clear that the post-World War II era of worldwide dollar hegemony is beginning to slip. The ideas of a "New American Century" put forth by Washington-based neocons actually may represent a last-gasp attempt to use military force to hold onto a system whereby the US has supported its domestic economy through trade domination of most of the rest of the world.

But the world has changed. The US produced half the world's GDP in 1950 vs. twenty percent in 2003. The nations of what used to be called the "Third World" are growing up. Increasingly, their vision does not include continuing as dependencies of the IMF, World Bank, and WTO, all of which have become instrumentalities of US corporate/global finance. They include many of the nations of mainland Asia, the Islamic world, Africa, and Latin America. There is also a resurgent Russia.
US dogmas cause us to view these changes as hostile and ideological, even as a "clash of civilizations." It is this way of thinking, rather than viewing other nations and regions as having their own legitimate aspirations, that is contributing toward the possibility of a larger conflagration.

The US military-industrial complex, along with the Council on Foreign Relations and similar institutions, suggests that to reach for "full-spectrum dominance" is a sign of strength. Rather it is a weakness, showing a broad-spectrum failure to devise rational, humane, and multilateral solutions to trade and economic issues. History shows that the economic costs of imperial conquest usually outweigh the benefits. The British Empire, for instance, fell apart after Britain bankrupted itself fighting World War I.

But the tragedy that is calling to the US with its siren song of wealth, power, and glory might be averted if we change the way we think about economic fundamentals.
In this article, I will examine the unfolding disaster, starting with our domestic economy, then propose solutions based on the best thinking of cutting edge movements. Political progressives should take these ideas seriously. By a "political progressive," I mean anyone who wants to solve the deepening crisis without a major war.

Amid claims that Federal Reserve Chairman Ben Bernanke has engineered a "soft landing" by holding interest rates steady after the downturn of the housing market, he told the Senate Banking Committee on February 14, "The current stance of policy is likely to foster sustainable economic growth and a gradual ebbing of core inflation." But the sense of middle class voters that their standard of living is on a slippery slope downward was a factor in the Democrats' regaining control of Congress last November. This sense is not going away, because it's the result of trends over the last decade. Bernanke said nothing to the Senate on February 14 or to a House committee the next day to allay these concerns.

In his response to President George W. Bush's January 23 State of the Union address, freshman Senator James Webb of Virginia actually put the health of the economy first before discussing problems with the war. Webb said that, "Wages and salaries for our workers are at all-time lows as a percentage of national wealth, even though the productivity of American workers is the highest in the world." He added, "In short, the middle class of this country, our historic backbone and our best hope for a strong society in the future, is losing its place at the table."

While the economy grew 3.4% in 2006, the unemployment rate moved higher in January 2007, with manufacturing employment declining for the seventh straight month. The US household savings rate was negative again last year. What this means is that we are still in a "jobless recovery," with consumers taking on even more debt. According to economist Michael Hudson, the money that is sucked out of the economy when people pay interest on loans is being recycled by the banks for more loans, not invested in the producing economy. The debt pyramid is suffocating normal economic activity.

The Bush administration's strategy of Reagan-style supply-side tax cuts for the upper brackets, while the private sector replaces manufacturing occupations with low paying service jobs, has been a political loser. So was the Federal Reserve's attempt to float the economy by pumping in cash through lower long-term interest rates, a failed policy which resulted in asset inflation but is terminating in the deflating housing bubble.

Like soaring costs for higher education and health care, the housing inflation is eating away at the incomes of the middle class, after their initial delight from the cash realized by house-flipping and refinancing. Foreclosures and bankruptcies, made more arduous by the 2005 "reforms" enacted by Congress at the urging of the credit card industry, are soaring as ARM monthly payment increases kick in. Governments which saw tax windfalls from the housing boom are feeling the pinch from falling revenues due to the slowdown.

It is notorious that the federal government is staying afloat only through the purchase of Treasury debt by foreign central banks, chiefly those of China and Japan. On top of this are the astronomical costs of the failing Iraq/Afghan wars and the botched Katrina clean-up. Matters look even worse with President Bush's proposed FY 2008 budget, with sharply increased spending for defense and veterans' benefits and 9.3 percent growth in interest on the national debt. Social services for the most vulnerable Americans will be cut by twelve percent, and proposed reductions for health care are being called "devastating" by the American Hospital Association. The federal deficit is still projected at $250 billion.

Yet it's the best of times for the wealthiest class of Americans whose main financial problem is angst over where to park their surplus cash. It's the same for a banking industry whose wealth is multiplied by its ability to create and profit from liquidity from its fractional reserve lending privileges. While huge federal deficits from tax cuts and the Iraq War spill government red ink, they add to the banking system's reserve lending base and spread dollar hegemony abroad.

It's also no problem for consumers to continue to get unsecured loans or run up huge charges on their credit cards. But while corporate profits have not been impressive, the glut of capital has kept stock prices high, with businesses taking advantage of productivity gains without raising wages. Meanwhile, the average wage and salary earner is steadily falling behind as debt payments come due and new loans must be taken out to pay down the old ones. Bernanke says debt is not a problem because bankruptcies are not increasing, without noting that 2005 "reform" legislation made the criteria for bankruptcy declaration much more onerous and excluded student loans from eligibility for debt relief.

What gives the situation urgency is the dilemma federal policymakers now face with the value of the dollar. If it continues to slide -- the euro is now at $1.32 against the dollar vs. $1.18 two years ago -- foreign investors will continue to dump them as a reserve currency, leaving the US with no way to finance its enormous trade and fiscal deficits. On February 14, the day of Bernanke's House testimony, CNBC reported that foreign purchase of Treasury securities for December 2006 was at its lowest level for five years. On the other hand, if the government shores up its public and private debt through higher interest rates, millions of ordinary people could be worse off and even lose their homes and jobs.

The Iraq war is making things worse. The unspoken essence of the Bush administration's war policy is to prop up the domestic economy through control of Middle Eastern resources. The poli


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