Global Economic Crisis

The warning is crystal clear. Before the onset of the current financial and economic crisis, the U.S. had structural deficits measured in the hundreds of billions of dollars. Now, however, the fiscally toxic combination of Wall Street bailouts and economic stimulus programs requiring massive public borrowing have created the unprecedented phenomenon of multi-trillion dollar deficits, equal to 15% or more of the entire United States GDP. If would be bad enough if only the U.S. was engaged in such staggeringly high levels of public borrowing. However, virtually every major economy on the globe, including China and Japan, America’s two largest creditors, are also engaging in large deficit-financed stimulus programs. At a time when the U.S. requirement for credit is ballooning, its traditional sources of such largesse are under fiscal pressures of their own. Only by elevating yields on its Treasury bills will the United States be able to attract interest in its ever-expanding menu of Treasury auctions.

Raising yields on Treasuries will greatly increase the cost of public borrowing, thus adding to the fiscal imbalance confronting Washington. The growing unease regarding the size of the U.S. deficit by both sovereign wealth funds and private investors, and the real possibility that Washington will lose its coveted AAA status, has implications beyond Treasury yields. Policy decisions that address the nation’s fiscal imbalance may become essential in order to maintain interest in purchasing U.S. public debt instruments. This would mean budget cuts and tax increases, which would greatly increase the likelihood of a double-dip recession.

Given the track record of the U.S. political establishment, I suspect that they will delay a serious  deliberation on the fast-developing fiscal crisis confronting the public finances of the federal budget until it is too late to avoid the most critical consequences. What the recent Treasury auction demonstrated is that Washington may be fast approaching a situation where  insufficient demand exists to satisfy the government’s appetite for borrowed money. What happens then? The most likely result would be monetization of the debt by the Federal Reserve. In effect, the Fed would conjure money out of thin air, and use this newly printed stack of greenbacks to purchase Treasuries that are left behind by global investors and sovereign wealth funds. Should that unhappy day arrive, you can lay the U.S. dollar to rest, for it will not be worth the paper it is printed on.

When the global financial crisis first arose, leading to a worldwide credit crunch, it became apparent that the economic policies of George W. Bush would be the defining issue of the 2008 presidential campaign, spelling doom for the Republican nominee. When the Republican candidate, Senator John McCain, proclaimed that the economic fundamentals of the U.S. were sound, he insured that Barack Obama would win the election and become the 44^th president of the United States. In fact, the fundamentals of the American economy are as feeble as were those of the Soviet Union before it collapsed.

Barack Obama is a very intelligent politician, and is already being compared to President Franklin Roosevelt, who presided over the New Deal economic policies of the 1930s in the depths of the Great Depression. However, Barack Obama may also be compared to Mikhail Gorbachev, the last leader of the once-mighty Union of Soviet Socialist Republics.

Gorbachev, like Obama, is a highly intelligent man. He was selected by the Soviet elite as their last-ditch candidate to save the crumbling Soviet Union. In spite of his best efforts, he failed. The economy of the Soviet Union imploded, leading to the total disintegration of the Soviet State, which once was deemed an equal superpower rival to the United States of America. Will Obama’s fate be that of Franklin Roosevelt, or Mikhail Gorbachev? There are disturbing parallels between the United States of 2009 and the Soviet Union in its last years of existence. These may prove more relevant than the comparisons some American economists are trying to draw between Obama’s and Roosevelt’s America.

Consider the following: prior to its extinction, the Soviet Union was driven to bankruptcy by bloated military expenditures, exacerbated by a losing war in Afghanistan. Its economy was immune to reform due to the tyranny of central planners. In the America that gave birth to the global financial crisis and credit crunch, the government’s finances have been driven to the brink of bankruptcy by vastly excessive military expenditures, run amok by a losing war in Afghanistan and an unnecessary war in Iraq. Its economy, supposedly a paean of free-market flexibility, has now proven to be a myth constructed by the financial alchemists of Wall Street and pseudo central-planners of the Federal Reserve and Treasury Department. Just as the Soviet Union used tax-payer money to bail out failed industries, the United States through its Treasury Department and Federal Reserve Bank have deemed failed financial enterprises “too big to fail,” warranting hundreds of billions of dollars in deficit borrowing that tax payers are responsible for in an equally futile rescue bid.

Obama, like Gorbachev, will be tied to an elite that has a vested stake in salvaging a doomed system, even at the risk of national insolvency. If Barack Obama has the intellectual stamina to resist the American financial elite and recognize that the Global Economic Crisis calls for a total restructuring of the economic order of the United States, he will go down in history as the president that saved America’s economy and preserved its status as the dominant economic power in the world. If, however, he is unable to unshackle himself from the failed policies of the American financial elite, he will be doomed to share the fate of Mikhail Gorbachev as that of being a valiant failure.