Wednesday, August 3, 2011

The budget, the deficit, and the collapse

OK, first of all the budget isn't really the problem. It's the deficit (i.e., the national debt) that's the problem. But this debt is the result of 1. the huge Bush era deficits, which were astronomical and have accumulated, with interest; 2. the effects of the economic collapse of 2008, which was beyond astronomical. Obama's budget can't possibly be the problem because he is far from being the big spender the Tea Partiers are painting him as -- in fact the discretionary items in his budget are modest.

The biggest items in the budget are those that are usually considered beyond his control, the so-called "entitlements," and the cost of funding outsized and out of control military operations in Iraq, Afghanistan and now Libya. As I see it, the entitlements are not really a problem, so long as we are willing to accept a fairer, more equable, and more effective system of funding them via progressive taxation. (See the three previous posts.) Military expenditures represent a much more challenging problem. We definitely need to wind down our military operations, as humiliating as that will be, because we can no longer afford them. The Republican call to reign in the budget will therefore be meaningful only if it is applied most strongly to the military budget, which is the last item the Republicans want to touch.

So. As far as the budget is concerned, we need not cut back entitlements so long as we are willing to accept changes in the tax code; and military expenditures need not be a major problem so long as we are willing to pull out of Iraq and Afghanistan.

The national debt, however, is another matter entirely. It truly is out of control. It is in fact, essentially, the result of an ongoing Ponzi scheme, disguised by creative accounting methods worthy of Enron during its last, most desperate, phase. As I've argued in earlier posts, the world economy totally collapsed in 2008. Everything that's happened after that has just been smoke and mirrors to disguise this fact, in the hope that, if we kick the can far enough down the road, we'll be saved by a miracle.

While I have no respect whatsoever for the Tea Party and their mainstream Republican enablers, I do agree with the faction that opposed raising the debt limit. And I was, very frankly, hoping the failure of the two parties to reach a compromise would bring the crisis to a head by abruptly halting the US government's ability to borrow. Because the ability of the US to increase its debt in this manner is in fact equivalent to the ability of a con man like Bernie Madoff to suck more "investors" into his scheme. Nothing of value is being produced to warrant such an "investment." The only reason Treasuries are being purchased is because, as with Madoff's operation, they are deemed "safe." In fact, there is nothing really there to back them up. It's all a bluff.

If the debt limit could no longer be raised, and the US were forced into default, then the world would have no choice but, finally, to accept the bitter fact that there is no "there" there, that we can never return to the "free market" status quo. And we can finally begin the long process of constructing an alternative system, hopefully one that is fairer, more effective and more meaningful.

Significantly, just after the great compromise was reached, the Dow took a nosedive of almost 200 points. This after already having fallen by several hundred points in the previous week. Regardless, there was a great sigh of relief and everyone went back to their nice little pipedream in which at the very worst we have something called a "double dip" recession, which really doesn't sound all that bad, and at best we somehow manage to fully restore the status quo prior to 2008.

Like Wile E Coyote, in the cartoon I posted some time ago (see The Power of Magical Thinking) we are hovering over a vast expanse of nothing. But we won't actually take the fall until we become fully aware of our precarious condition. The collapse has already occurred, but it's going to take one more major event to shake us out of our complacency to the point that we are able to accept our fate -- and move on. The only alternative is a depressing and demoralizing process of gradual decay, leading to even more unfairness, inequality and cruel indifference.

What sort of event is looming? Well, we've all noticed how the too big to fail banks are once more taking outsized risks of exactly the same sort that caught up with them in 2008. If some of those events are repeated then, sorry Charlie, you may be too big to fail, but all the money in the world won't save you next time. You'll be going down -- and taking the rest of us with you. Another scenario, just as likely, would be the collapse of the Euro, precipitating a domino effect in which one bank after the other will collapse, and the world economy along with it.

As I see it, the sooner something like this happens (I like to call it the "Rapture") the better. Because, as I've argued many times, what we're talking about here is something that exists purely in the virtual world: money. It isn't really real, but somehow we've been hypnotized into thinking it is. When the financial system collapses, and only then, we will be freed from the spell. Looking around us, we'll see that everything of true value is still there. In the immortal words of John Cage: "nothing was lost when everything was given away."

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