On Native Ground
ECONOMIC ARMAGEDDON? IT MAY COME SOONER THAN YOU THINK
by Randolph T. Holhut
American Reporter Correspondent
DUMMERSTON, Vt. -- There will be many chickens coming home to roost in President Bush's second term. Perhaps the biggest one of all will be the true state of the American economy.
Despite the wholly unjustified optimism we hear from the Bush administration, we are starting to hear some disturbing news about the true state of the domestic economic picture.
Economists are starting to use words like "meltdown," "Armageddon" and "banana republic" to describe what may be ahead for the United States.
How bad are things? Stephen Roach, the chief economist for Morgan Stanley, recently gave a closed-door briefing to New England mutual fund managers in Boston. The Boston Herald received a copy of Roach's talk and what he had to say is bloodcurdling.
Roach said the United States has about a one in 10 chance of avoiding a complete financial collapse, a three in 10 chance that another recession will hit and a six in 10 chance that "we'll muddle through for a while and delay the eventual Armageddon."
America has a record trade deficit (according to the Commerce Department, it was $549 billion in 2003 - $124 billion with China alone). We're importing far more goods than we're exporting and once they're tallied, the 2004 numbers will be even worse. To fund this deficit, the United States borrows more than $550 billion a year from foreign sources.
The federal government is running up record deficits, closing in on $500 billion in the current federal budget. The dollar is going down, down, down against the world's other currencies, making the imported goods that this nation has come to rely on that much more expensive.
As the trade deficit keeps rising, Roach said the dollar's value will keep falling and foreign investors will be less interested in lending us money. As the federal deficit keeps rising, the government will have to borrow more money, which will fuel inflation. Federal Reserve Chairman Alan Greenspan will end up having to raise interest rates higher and quicker than he'd like. Once interest rates go up, over-mortgaged and over-indebted households will hit the financial wall. Foreclosures will increase. Consumer spending will decrease. Unemployment will rise, as will the federal deficit.
Roach said the total debt of U.S. households 20 years ago was equal to half the size of the total domestic economy. Today, it's 85 percent. With Americans spending a record share of their disposable income to service their debt, a wave of bankruptcies seems inevitable if interest rates rise.
Paul Krugman, the Princeton economist and columnist for The New York Times, said in a recent interview with the Reuters news service that the U.S. economy now resembles Argentina in the 1990s.
Krugman pointed out that tax cuts and privatization of social security - the two centerpieces of President Bush economic plan for his second term - drove Argentina's debt to unsustainable levels, forcing the country to default on an estimated $100 billion of foreign debt in 2001, the largest default in modern economic history.
The combination of the falling value of the dollar and the skyrocketing trade and budget deficits is setting our nation up for a financial disaster of epic proportions - a disaster that is more likely to happen with President Bush's economic policies.
Krugman calls the Bush administration "a group of people who don't believe that any of the rules really apply. They are utterly irresponsible." He also said that the U.S. economy resembles Argentina's "a whole lot more than anyone is quite willing to admit at this point. We've become a banana republic."
The only saving grace that Krugman said he sees coming out of the coming economic disaster is that "at some point there is going be a popular tidal wave against what has happened. In the meantime, you keep banging on the drum, you keep telling the truth."
The truth which needs to be told and which Americans need to understand is that the United States is on a totally unsustainable economic course.
Our prosperity is completely tied to cheap oil, but the average price is now about $50 a barrel and experts believe the double whammy of increased global demand and declining reserves could mean even higher oil prices in the next decade.
Maintaining access to cheap oil means spending hundreds of billions of dollars maintaining a military force whose primary job these days is to be security guards for Middle Eastern petroleum. The money to pay for guarding the oil is drying up because of President Bush's insistence on cutting taxes. The "war on terror" is America's first war where taxes have not been increased to pay for it.
When the President first took office in 2001, the Congressional Budget Office forecast a $5.6 trillion federal budget surplus that would accumulate through 2010. That's now long gone. The CBO now predicts a budget deficit of at least $3 trillion by 2010.
President Bush managed to keep the worst of these economic problems at bay to ensure his winning a second term. He will not have such luck in the next four years. If foreign investors increasingly see the United States as an economically unstable banana republic whose debt is growing faster than its revenues, they are simply not going to keep lending us money.
That's when the bill will come due, and what happens after that could be exceedingly ugly.
Randolph T. Holhut has been a journalist in New England for more than 20 years. He edited "The George Seldes Reader" (Barricade Books). He can be reached at email@example.com.