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August 27th, 2008

THE RESTLESS MISCREANT: GUNS, BUTTER & PIZZA

by Delbert Grady

Well, we’ve gotten plenty of the first two from our fearless leader and benefactor, George Walker Bush. Now comes the third, but in a very different way than we’re used to.

Let’s start at the beginning: the tech bust of 2000. If you look back in history, that kind of beating has always been followed by serious economic problems.Well, none of those for Dubya! With the help of Alan Greenspan (interest rates), Congress (tax reductions and pork barrel), an unnecessary war (procurement spending) and totally irresponsible banks and other lenders (no-equity mortgages and virtually unlimited credit card lines), he’s been able to dodge the bullet for 6 years. Till now.

Now we have giant budget and trade deficits because we’re spending far more as a government and a people (U.S. households savings rate is actually negative for the first time since the Great Depression) than we can possibly afford and a repayment schedule for all this funny-money spending that’s going to be a bitch.

Plus, in any event, you can add to all this exponentially growing debt the cost of oil due to a plethora of problems which will not go away and the true eventual cost of the Iraq fiasco, which has been estimated by Joseph Stiglitz of Columbia and Linda Bilmes of Harvard as $1.3 trillion. That’s about $4,500 for every man, woman and child in the country. (That was in 2006—much more now.) And let’s not forget the almost 50% of the relatively anemic jobs creation numbers in this country since 2000 were in construction due to the runaway housing boom, which has now ended.

So what does all this mean for us? It means we’re fucked, that’s what. Here’s my cheery scenario:

1. We’ve gotten by so far in this drunken orgy of spending via foreigners buying our debt—not out of the goodness of their hearts but because it supports the value of their currencies and theoretically insures ongoing strong exports to America.

2. At some moment in time, these creditors will pull back from further purchases unless interest rates rise enough to justify their risk in holding dollars. As we speak, it seems likely that gold is being driven up by their purchases in order to reduce that risk.

3. We will therefore be forced to increase interest rates to continue to attract that foreign capital in the future, further compounding the ultimate cost of the debt. (So far they’re still pretty much playing ball but, at the same time, continuing to add huge dollar reserves to their “sovereign funds,” which will come back to haunt us on the cheap.)

4. Increasing interest rates will crack both the housing and stock markets. (Well, it seems those markets now have done it all on their own without help from rates.)

5. Those busts will insure that there will be massive layoffs and unemployment at the same time that prices (in dollars) rise. (The prices of necessities, that is, not assets, which are generally falling.)

6. Speculators will go broke, pensions will stop and the boomers and echo boomers will be stuck in their expensive to heat and maintain McMansions with the Escalades in the driveway.

Welcome to the New Weimar Republic.* Hope you enjoy your $50 pizza. Hats off to you, Dubya.

*For those not familiar with that period in history, the Weimar Republic in Germany existed from 1919 to 1933, during the latter stages of which it experienced a disastrous runaway inflation due largely to reparation costs of World War I. That’s what it means to be a debtor nation.

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