The US Debt Crisis – Constituency Madness

I am hoping I have misread the situation, but from the distant Island where I sit, it appears we have been treated to the unedifying spectacle of Washington politicians using a principle of unintended but inevitable self harm to protect tribal constituencies and thereby endanger what’s left of the US economy. As if that was not enough, they also have adopted a means which is virtually guaranteed to take much of the Western World with it. In 1971, John Connally, at the time America’s Treasury Secretary, told the international markets : “The dollar is our currency but it is your problem.” With two thirds of the world’s investment trade in US dollars and 99% of this going through Wall Street we can now see what he meant. All those economies in the West that need to borrow (ie virtually the lot) are now looking extremely nervously at the US to see what Washington is going to come up with next.
First can I check out if I have my facts right.

I understood that Bill Clinton despite his shonky personal life, left the White House with a National zero debt deficit. He had achieved that in part by insisting on sharing the tax burdens between both rich and poor and attempting as best he could to serve the interests of Middle America. This may have been a slight problem for the wealthy classes and corporations in the US but was good news for the West in general because it made the American Bonds very secure in their triple A rating and ensured stability for the rest of the nations who needed a massive secure international fund to borrow against. Stable economies in the world scene are presumably good for the US economy as well in that they provide the trading partners and allies.

Clinton was followed by George W Bush who despite his renowned lack of both intelligence and international understanding turned out to be a very cunning constituency politician. His main constituency of the rich and the powerful via the corporates rapidly destroyed the small National surplus as they moved to secure their fortunes. With virtually no interest in fate of the poor, US industries were closed down on US soil and cheaper manufacturing was chosen overseas. The desultory trickle down streams were shut off one by one and the gap between rich and poor grew at an accelerating pace. Prior to Enron and the Sub Prime mortgage crash etc, Wall Street had a field day. Small or even non-existent tax on investment gains encouraged bubble after bubble whereby paper exchanged hands many times without increase in tangible product, while banks were packaging and repackaging parcels of debt and on-selling this for amazing profit. With the gold standard largely defunct and US based manufacturing proportionately smaller, US bonds were sold overseas in increasing proportion. The AAA rating of those bonds ensured that the predominantly Asian investors took a larger and larger share of US wealth.

Obama has tried to return to exactly the same principles that Clinton used to bail out the US economy last time. The Republican influence in Congress has been blocking him by insisting that Washington returns to exactly the same form of reasoning that George Bush used to protect his constituency (now reformed as the Tea Party). Perhaps George Bush was right and his turning zero debt into a $9 trillion debt in the space of 8 years was a minor oversight and a small price to pay for ensuring the viability of the real constituency of the corporations.  I know when women got the vote but the date for the advent of the voting influence of the “corporate personhoods” is harder to nail.

That the Pareto Principle (of ensuring help for one party does not create harm for others) is being ignored almost goes without saying. Constituency appeasement means by definition you look after the direct interests of the group who support you.
There is however a consequence that is overlooked by the politicians. If the collateral damage of those harmed builds to the point where you discover their future is enmeshed with yours, self harm inevitably follows. For those relieved the worst is over it should be remembered that Moody’s has placed the US on negative credit watch, explaining that even the negotiated agreements to make spending cuts are yet to be turned into any sort of reality.   Given the vested interests and powerful lobby groups it is hard to see substantial cuts for example being made in the military sector.  About the only thing the US has in its favour is the size of its economy which constrains the rating agencies from taking the sort of action it takes with smaller nations.   For example NZ had its rating reduced because its gross debt to GDP ratio is 32%.  The US ratio is now a staggering 96%.   The mystery to independent observers is not that Congress has taken so long to authorise an increase in the debt, but that the Credit agencies have delayed what looks to everyone else to be the inevitable.

The strange blind-spot in the US economy is that of taxation. Ignoring the blindingly obvious need to tax those who are holding more money than they can possibly use in a single lifetime to reduce the colossal and unacceptable debt is one thing, but if the consequence of not using this source strikes a death blow to principal investments, based on such matters as the confidence of the Share market and the on-going security of the triple A rating for investment bonds, then the individual loss to the wallets of the rich is bound to be infinitely greater than any direct tax. To insist on the right not to lose an additional $1000 in tax when even a rather dim Wall Street banker can see the alternative is taking a million dollar bath in investment losses is nothing if not curious. One consequence of the now increasingly likely move to down-grade the AAA rating of the US bonds to AA is that there would be a massive tightening of credit conditions as companies and economies holding US bonds will then be required to buy more bonds to retain the equivalent security. The other consequence for massive damage is that Asian markets would have far less reason to value US bonds and would take their investment elsewhere. This would be a great boost for countries with physical assets eg Australia with its gigantic mining assets. I guess the only ones who will be surprised when the stock markets tumble hitting the very folk Congress was trying to protect will be the politicians and the Tea Party gurus. If Sarah Palin is one of the minds behind the current Tea Party stance to protect their constituency by blocking the Obama tax suggestion, in retrospect this may endanger any future possibility of her winning the Nobel Prize in economics.

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12 Responses to The US Debt Crisis – Constituency Madness

  1. Charles says:

    As a result of this debt crisis investor confidence is being blown and money will go to safe havens such as China. As a consequence China’s credit rating agency has already downgraded the US credit rating. All bad news for the US economy,which will snowball, especially to European countries.

  2. Marty says:

    Corporate personhood was established with the 1886 case of Santa Clara County vs Southern Pacific Railroad. Many think this was the beginning of the end of democracy in the United States. And then with the most recent case of Citizens United vs FEC, corporate personhood has been solidified permantly perhaps. Fred Reed calls what’s going on in these here United States “Slouching Toward Guatamala”. I don’t know what it’s called, but it’s definitely slouching.

    • peddiebill says:

      Charles Reed has a wonderful turn of phrase. My own take on it is that it is democracy without soul. Again, from where I sit, the strength of the US was always that all those new immigrants could arrive and be free to make their own way in the society which was forming. By hard work success would follow. What has gone wrong is that the starting place for each successive set of individuals in each following generation appears to have been increasingly unequal. Corporate personhood is a good term for the subtribes with mutual interests who gradually forced themselves into unassailable positions of control. The bit that was missing was that despite most within each corporate sub-entity having a faith to follow there was no buy in to the principle of care for the other. This grew to the point where there was actually shame associated with assistance to those at the bottom end. There was also a lack of real feeling for those in poorer parts of the world. The superb irony of the US going begging bowl in hand to the previously despised Chinese on the assumption that the Chinese in gratitude to the US for being a major market will do anything to keep the US rich is starting to play out with uncertain results. However at least the US can expect the same consideration from China that the US offered Asia in the past.

  3. peddiebill says:

    I see Standard and Poors has at last done what seemed inevitable and today downgraded the US from its AAA to the next grade down AA+ and claimed a further negative outlook. There have been the inevitable howls of protest. But I have a question. I am missing something. If we at this distance could see it coming then presumably the suits with their Harvard MBAs who advise the GOP and the Tea Party and who are much closer to the action could also see it coming. Since the Tea Party Republicans in Congress would therefore have known what they were doing and they must have known how that downgrade would hurt the back pocket of those they represented why did they persist in opposing Obama’s solution, which though unpopular would have at least lessened the chance of the downgrade.
    Can one of the visitors to this site explain?

    • Marty says:

      It’s simple really and they have been quite open about it. The Republicans will do anything…anything…no matter who gets hurt…to bring Obama down and to ensure he only has a one term presidency. Even some in his own party. It could backfire, however. I’m waiting to see what happens with the re-call elections in Wisconsin on Tuesday. That could tell us something about the mood of the working class. I am, however, always the skeptic. I believe both political parties are controlled by corporate interests. And it is next to impossible for a 3rd party to be viable. Public financing of elections might solve this problem and doing away with the electoral college system, implementing the popular vote. But I’m not holding my breath on that.

  4. peddiebill says:

    If that is true I hope someone is reminding them of the old adage “be careful what you wish for”
    I can see an awful lot being hurt by way of collateral damage in the current debacle.

    • Marty says:

      All the countries that still have an AAA credit rating also have Universal Health Care and a much stronger social safety net. I don’t think anyone in Washington will notice this.

      • peddiebill says:

        Thanks for pointing that out. I had totally overlooked that.
        I suspect your earlier comment about both parties now being controlled by corporates is also unfortunately likely to be true particularly when you look at the size of the corporate empires. Most of the big ones have larger budgets (and hence more clout) than many of the smaller nations. I havent yet checked it out but I heard for example that Apple has a larger income than the US government.

  5. Peter says:

    You are right in that America’s sinful and wicked spending has left not only it but all the world in jeopardy. This wasteful spending on bureaucratic and inefficient programs has left America $14 trillion plus in debt. What is sad is that many do not even see this as wicked and perverse. You made a few mistakes glorifying Clinton. It is the congress that sets the budget. The reforms of the Republicans led to the surplus in the balance. You are definitely mistaken in comparing Obama to Clinton. the last year of the Republican budget in 2006 led to a minimal deficit of only $161 billion in 2007. The democrats replaced the Republicans that year and with the ultimate liberal ideologue. Obama, being elected in 2008 the budget deficit ballooned to a wicked $1.65 trillion. this is a 10x (ten fold ) increase over the last Republican budget. Bush was bad but literally Obama and the Democrats are 10x worse. This is legalized government plunder and generational theft. It is immoral to steal from our children and grandchildren. Our founding fathers must be rolling over in their graves. Thomas Jefferson fully understood the potential for wickedness on behalf of a sick and over controlling government that would allow spending to get out of control. Consider some of his wisdom

    Thomas Jefferson quotes (American 3rd US President (1801-09). Author of the Declaration of Independence. 1762-1826)

    “To compel a man to furnish funds for the propagation of ideas he disbelieves and abhors is sinful and tyrannical.”

    “It is incumbent on every generation to pay its own debts as it goes. A principle which if acted on would save one-half the wars of the world.”

    “I predict future happiness for Americans if they can prevent the government from wasting the labors of the people under the pretense of taking care of them.”

    I wish Obama would read our constitution and the founding fathers instead of Marxist / socialist philosophy

    • Marty says:

      Pfft….Obama is a capitalist…you’ve been reading too many of those ridiculous e-mails Peter.

      Here’s another Jefferson quote for you:
      “I hope we shall… crush in its birth the aristocracy of our moneyed corporations which dare already to challenge our government in a trial of strength, and bid defiance to the laws of our country.”

  6. peddiebill says:

    Thanks for that Peter. You make some interesting points and the Jefferson quote is a good one.
    Being outside the US we get to read different stuff and some of the leading local economists (and some economists I read from the UK) claim that since Obama was borrowing heavily to bail out the banks and Wall Street to try to recover from the mess left behind three years ago, the ballooning of debt when Obama took office was an inherited problem. Even the US economists who (from this safe distance) have been seriously wrong in the past, have been saying that Obama has been blocked at every turn on his suggested reforms ( and by both major parties on his insistence that the coorporates and rich should start to take their share of the burden). Perhaps the US doesnt have the growing gap between the rich and the poor that our economists say, but from here it looks as if Washington has a poor collective grasp of Pareto. Because I hear very similiar rhetoric from Clinton and Obama I am not yet convinced they are as different as you say.

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