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The Spreading Economic Crisis

Wednesday, September 21st, 2011
economic crisis

The sighs of relief that everyone was breathing after the United States Congress finally passed a compromise budget on August 1 quickly turned into moans of agony and derision as the U.S. stock market persisted in its worst slide since the 2008 “great recession.”

Clearly the “great recession” has never ended, and the same fears for the global economy persist, perhaps more strongly than ever. The problems this time may be a little different, reflecting grave doubts about the fiscal viability of economies across southern Europe from Spain and Portugal to Italy and Greece and north to Ireland, which a few short years ago was touted as an economic wunderkind.

The ramifications of the seeming inability of the American economy, as the worlds biggest and once the world’s strongest, to pull out of financial distress, go far beyond the borders of the United States. Suspicions that the “almighty dollar” is no longer the world’s bellwether currency are rife. The spreading malaise through markets in Europe and Asia mean that business and industry will go on slowing down. Even if the U.S. economy picks up temporarily, the disillusionment generated by the terrible divisions in the American Congress, and among Americans in general, gives rise to the fear that the U.S. is in a permanent state of decline, perhaps slow, perhaps rapid.

The fall of America as the global economic leader jeopardizes trade and investment as well as military commitments worldwide. Members of the American Congress repeated again and again that the United States could not forever sustain a budget deficit of more than 14 trillion dollars and debts of approximately the same figure. Next, they will want to act decisively against the enormous American trade deficit beginning perhaps with the yawning gap in trade with China. They also have to slash the U.S. defense budget, compromising the ability of the United States to maintain defense commitments in Iraq and Afghanistan even as President Obama promises to pull out American troops. These moves raise questions about the U.S. commitment to costly overseas bases from Japan and Korea to Germany and England.

As the U.S. and global economy worsens, the differences between rightists and leftists in the United States also deepen with each side blaming the other for America’s problems. The budget debate in Congress, which very nearly put the U.S. into default, was only a symptom of the problem. What was one to make of the inability of members of Congress to come to terms? The first instinct was to say that George W. Bush when he was president got the whole system in trouble in the first place when he reduced taxes on the rich or merely the well-to-do. Was he thinking that everyone making more than US$200,000 a year selling used cars or writing advertising copy or shilling for special interests or selling widgets at the corner store really needed a tax cut in order to have enough incentives to go out and make more?

That was one of the prime arguments of the ingrates in the American Congress as they battled tooth and nail against Obama’s insistence that somebody, somewhere, somehow has got to start paying more taxes, and it might as well be those with more than enough to do so. Never mind, of course, that the federal government bailed out the highest fliers in the financial world when their firms started tanking during the 2008 global financial crisis. While everyone else was told to make “sacrifices” to weather the financial storm, did any of these people demonstrate such patriotism? No way. They laughed all the way to the bank, or to their second and third homes, thinking of ways to spend their bonuses, stock options and whatever other terms they’ve got for money they made but didn’t earn.

One of the claims of those who are rich and growing richer is that the “bloated” federal government has been wasting too much on handouts like unemployment insurance, social security and numerous other programs. They’re calling for reductions that hit the vast majority of America’s 300 million citizens, widening a rich-poor gap that is already one of the most pronounced in the world. Let only those who can afford it pay for their own higher educations. Let only those with the money to cover skyrocketing medical costs take advantage of the skills of some of the world’s best doctors. Aren’t education and medicine the perquisites of the rich? That’s the thinking among American rightists whose goal is to jettison policies and programs dating from the era of Franklin Delano Roosevelt, the president who led the U.S. out of the Great Depression of the 1930s and then through World War II.

The reversal of what was known as “The New Deal” has implications for U.S. foreign policy that may not be predictable. But none of the options or scenarios seems pleasant. As the United States battles economic problems, the specter of protectionism might well arise as business and labor together respond to the onslaught of foreign products. The urge to shut off markets could eventually win out over free trade agreements. Tensions could increase as China flexes its muscles militarily, claiming sovereignty over both the Yellow Sea and the South China Sea. Economic fears could interface with militarism on both sides of the Pacific.

The debate in Washington, though, does have a silver lining. It’s always possible to view seemingly irreconcilable differences in the Congress, in American state legislatures and in the body politic as exercises in democracy in action. At first glance, that was how many observers saw the budget bill Congress passed at the 11th hour, heading off fears that the United States was really about to go into default. According to this roseate view, all sides managed to come up with a plan that was less than ideal but represented as broad a spectrum as possible. It was hard, however, considering the enormity of the American debt, and the rising budget and trade deficits, to imagine a truly happy ending. The debate carried the seeds of bitter disappointment and worsening problems for the foreseeable future. As markets sank, the feeling was inescapable: if the American Congress had managed to insure payment of debts, it had done little to guarantee long-range or even mid- or short-range economic security.

The United States, to be sure, was by no means entirely responsible for the bleak global economic outlook. A parallel between the current ongoing recession and the Great Depression of the 1930s is obvious. The latter came on the heals of the American stock market crash of 1929 as global economic weakness extended from Europe to Japan. No one should forget the Japanese rationalized the conquest of much of China and almost all of Southeast Asia as the way to compensate for “the ABCD powers,” America, Britain, China and the Dutch, which ruled the East Indies, now Indonesia, shutting off the flow of oil into the Japanese economy.

So far, America’s economic problems have not stirred up emotions to the point of mass demonstrations, much less violence. Americans, however, are capable of enormous outbursts. Anyone who remembers the protests against U.S. involvement in the Vietnam War or during the civil rights struggle knows the potential for raging displays of discontent on American campuses and city streets. Right now the prevailing sentiment in the United States is that of disgust with leaders and legislators who lack the guts, and the common sense, to place the interests of the majority above those with enough left-over funds to finance petty politicking and reelection campaigns.

Contemplating the range of emotions at play in the American electorate, from far leftist “ radicals” to “tea party rightists,” foreign observers tend to laugh at the whole spectacle. China’s late leader Mao Zedong was fond of denouncing the United States as a “paper tiger,” but the image today is that of a wounded beast, thrashing wildly in the jungle, fending off foes in a desperate struggle to survive. At the same time, America’s critics, as well as sworn enemies, are finding they too are vulnerable to the vicissitudes of a worldwide drawdown of resources. Suddenly commentators are talking of a “Lehman moment,” a reference to the bankruptcy of Lehman Brothers, America’s fourth largest investment services firm when it went belly-up three years ago.

Could the woes of a few European countries overwhelm all 17 states in the “Eurozone” – plus Britain, which has spurned the Euro and remained on sterling? The response of the U.S. Federal Reserve has been to consider QE3, the third edition of “quantitative easing” – a fancy term for resolving an economic crisis, or “downturn,” by printing ever more money. That kind of solution, however, is no panacea. Yes, the U.S. threw tens of billions into entities on the verge of bankruptcy during the 2008 crisis, but those prescriptions did not come with authorization of refills at the counter. Nor would another attempt at “quantitative easing” seem likely to prove effective given the disappointing results of QE2, which went into effect as the world’s 20 most influential economic powers were meeting in Seoul, Korea, last November as the G20.

Hanging over all the calculations of America’s financial wizards was the realization that the American public is extremely disillusioned by their maneuvering. Many Americans share the conviction that a number of giant firms, such as AIG, the American International Group, the global insurance empire, might just as well have been left to die rather than recover on federal life support. The American public is tired of treating huge companies with federal funds, guaranteeing more good times for a few top-tier owners, executives and investors but not for everyone else. In the wake of the U.S. congressional budget debate, approval ratings for the Congress fell to all-time lows of well under 20 percent. The “trickle down” theory of economics – the view that money flows down from the top into the hands of the middle and working-class — is highly suspect. Trouble is, many believe there’s no reason to expect the economy would fare any better if the worst cases were hung out to dry and die.

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