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Walking the Plank
2009 will start with a splash

by Bryan Zepp Jamieson
January 4, 2009

We're being told to expect an annual deficit of two trillion dollars next year, and that's probably optimistic. Despite the fact that it's nearly four times bigger than any previous annual deficit, it's being understated. The occupations of Iraq and Afghanistan are still "off the books," thanks to some Republican gimmickry, and while costs in Iraq may go down (assuming it doesn't blow up again), Afghanistan is working on becoming an escalating, pointless, bloody mess, just like the one that played such a key role in destroying the Soviet Union.

The projections include the "normal" deficit of about $300 billion, and the $700 billion giveaway to the major financial houses. There's also about $150 billion allocated to stimulate main street lending, which, ominously, doesn't seem to be doing much of anything. It presumably also includes the $850 billion or so Obama wants to spend on vast public works programs as a way of "priming the pump," as FDR would put it. Keep people employed in some way, keep liquidity going so the wheels of the economy don't lock up. There's no choice in the matter.

However, the estimates on the deficit don't include other outlays the government is going to have to make in order to keep the states functioning. Present estimates are that the states collectively are looking at a cumulative deficit of one trillion dollars. California is currently at $40 billion in the red, but the recession is just getting started. In Sacramento, they are making all sorts of draconian proposals to cut the deficit: closing hundreds of schools, shortening the school year by two weeks, having all state employees take two unpaid days off a month, and suspending all state construction projects for up to six months. An 18 cent tax on gasoline was proposed, which sent Republicans right out of their minds. They didn't mind forcing state employees, teachers, and kids to sacrifice, but pay eighteen cents more on gasoline that cost two dollars less than it did six months ago? Sacrilege!

Conspicuously missing was one proposal to increase revenue that wouldn't stall out what's left of the economy or force anyone to suffer: taxing the rich. This was the sixth emergency budget proposal Arnie has made since the economy began to collapse in mid September, and he didn't even bother to turn up in person for this one. Arnie may not be the greatest governor in the world, but he's not a fool; he knows that the proposals are deeply unpopular, and in the face of rapidly-worsening conditions, utterly futile, and that only a federal bailout can save the state.

And California is a mighty economic engine, bigger than any corporation in the world, bigger than all but six of the world's nations. If conditions are that grim here, imagine how bad it is in places like Mississippi or Louisiana.

Other industries are lining up for bailouts, too. The steel industry wants a big bailout, even though it stands to massively benefit from public works programs involving highway and bridge reconstruction. Dan DiMicco, CEO of Nucor, is apparently unaware of why the Great Depression got so bad, and wants Congress to tack on a "Buy American" proviso to the bailout that would compel the government to buy only American materials. Just what we need: another dose of Smoot-Hawley. That would be the tariff act of 1930 that utterly killed remaining American world trade and vastly deepened the depression. Remember, kids: what's good for Nucor is good for...well, not even Nucor. As usual, American big business is incapable of recognizing its own best interests, let alone those of anyone else.

Other outfits lining up for giveaways are shopping malls (who are facing hundreds of thousands of retail store closures), credit card companies (apparently they can't make a profit charging 23% per annum on their cards, a rate that would make Tony Soprano blush), newspapers (already failing because they got bought out by corporate interests and no longer reliably report news Americans need to know) and, in the biggest redundancy of all, the ethanol industry. Corny but true.

As the Depression widens, a lot of the chains will be sticking out their hands, looking for public subsidies. I'm sure you'll be happy to spend tax dollars so a "big box" store can continue to undermine the US economy by buying cheap shit from China. That's the type of productivity that made America the great nation it is today.

Republicans are still clinging to the notion that if they weaken working Americans by reducing their wages and making them slaves to debt, this will somehow result in a stronger America. That was based on the notion that even after you eliminated most of the consumers in America, there would still be plenty of buyers, overseas if nowhere else. They simply refused to believe that a spike in basic commodities such as food and oil (food because of actual shortages fueled in part by acreage being turned over for the aforementioned heavily subsidized ethanol industry, oil from a speculative binge) would throw the whole world into a Depression. Didn't the free market people promise that sort of thing could never happen again? As a result, Republicans believe that the answer is to cut wages and benefits, and reduce health and safety standards. The resulting plunge in purchasing power can be remedied by easy credit and forcing consumers to acquire basic services such as health care through the private sector. Until they can't, of course.

So the Republicans, still fighting their class war, are of no use to America at all.

So it falls to Obama and the Democrats to try to salvage what they can.

Don't be surprised if the deficit ends up being four or five trillion, and the government is basically underwriting what in effect would be a missing third of an erstwhile $15 trillion economy. That will blow the national debt up to over 120% of annual economic activity (publicly and privately funded) and put the flow of red ink at levels not seen since world war two, when the government spent as much as three times what it took in.

The problem is that once things begin to improve a bit, massive inflation will kick in. That means that even with jobs at hand, working class and poor Americans will continue to suffer. It's impossible to predict just how bad the inflation will be, because it depends on a lot of factors such as the strength of the economic recovery, and whether the rest of the world will want to continue to hold America's debt, and for that matter, what the rest of the world does to get out of the economic morass. It depends on the costs of the twin occupations, and it depends in large measure on whether corporations just take the money and run, or actually use it to try to restore the American economy. Despite what the libertarians and endless TV ads claim, corporate interests are not American interests, and they will cheerfully let America collapse if it means bigger profits.

But the inflation is also an informal type of debt forgiveness. One huge disadvantage we face in this crisis that we didn't face in 1929 is the vast amount of debt the country was carrying going into the crash. Back then, state, local, and federal governments all had balanced books, consumer debt was nearly non-existent, and corporate debt was all secured. And it was still a hell of a climb out of the Depression.

Now, the debt is incredible. Not just the national debt, but vast amounts of corporate debt stemming from leveraged buyouts and bookkeeping games, and debts in the consumer sector that amount to nearly half a years' wages on average. And nobody knows how much debt (money owed on what are essentially bets) is out in the derivatives market. Estimates run as high as $600 trillion, which is more money than there actually is in the whole world.

But debt is expressed in current dollars, and an annual rate of 20% inflation has the effect of reducing debt by about 18% a year. Five years of such inflation, while wiping out savings that most Americans don't even have, will reduce the actual value of the debts on the books by more than half. Inflation also spurs at least an illusion of economic activity, which is another reason for government to like it.

This all may sound very duplicitous and contrary to the public interest, but the fact is that the government may have little or no choice in the matter. Without such extreme remedies and measures, it's entirely possible, for the next twelve months at least, that the economy might collapse altogether.

It's going to be a tough year, 2009, and most of us are going to suffer. But it beats the alternative, which is chaos, widespread starvation, and a complete breakdown of society.

But let's keep Republicans, CEOs, and stockbrokers near at hand.

They are, after all, edible.

You know. Just in case.

Posted: January 6, 2009

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