February 10, 2009

When Destruction Is the Cost of Denial

It is far from a novel observation to note that most people live in varying degrees of denial. We rarely encounter the person who is rigorously honest about his own virtues and defects, who acknowledges the full truth concerning those individuals most important to him, and who actively questions the validity of his deepest convictions. In part, this is due to social convention; it often is an understandable (if not desirable or healthy) part of a survival strategy.

If we recognize that denial represents valuing delusion more than reality, the seriousness of the danger carried by denial depends on the respective proportions of denial and truth in our lives. Our particular delusions may appear to provide us comfort and safety. As long as our lives continue to be sustained in significant part by what is true and healthy, denial will not seriously threaten our survival. But when what is true in our lives is overwhelmed by the lies we insist upon, our days grow shorter.

What is true for the individual is also true, in much more complex ways, of a nation and a culture. Many of us may know the individual story from our own experiences. We tragically may have encountered the person who destroys himself, his family, and perhaps a business and many other people, because he demands one more drink, or one more affair, or because he has to place one last bet. We hear that he has finally died alone in pitiful circumstances. Maybe he succumbs at last in an especially awful and desolate manner. He dies in a filthy hovel, or on the street. The destruction he causes may be terrible, but it remains limited. We may not be aware he has ceased to exist for months or even years after the fact.

The United States today is determined to act out the final stages of denial and destruction. Our ruling class refuses to pause and take stock, or to ask themselves if the edifice they have erected on a huge body of lies must be painfully reconstructed on a foundation closer to the truth. A pattern that is pitiful in the individual case is terrifying when it occurs on this much vaster scale. In the case of the United States, the terror is greatly increased. The accumulated reservoir of power, including an arsenal of weapons more powerful than the world has ever known, means that a last drink, or a last affair, or a final orgy of financial bets and war may result in the ultimate destruction of not only the United States itself, but of large parts of the rest of the world.

We may now have entered the final phase of this hideous drama. Because of the multiplicity of factors involved, this phase may last for years, or even decades. But it could reach its devastating end much more quickly. This is a time of immense historic peril, when any vestiges of a concern with truth would demand that the ruling class finally begin to loosen its death grip on delusion. Yet the ruling class continues in its absolute refusal to surrender even one of the endless lies it tells itself. Destruction rushes ever closer, and the ruling class persists in its delusions, repeating them with greater frequency and in a louder and louder voice. Nothing will stop them as they hurtle themselves toward devastation. We have no choice but to be concerned with these matters; as the ruling class destroys itself, it may destroy many of us as well.

We can observe this pattern in the two areas of greatest moment: the economic collapse of the United States, and the United States' conduct of foreign affairs. Let us now consider each of these subjects.

As a starting point for a discussion of the continuing economic collapse, try to make real to yourselves the overwhelming magnitude of these figures:
The stimulus package the U.S. Congress is completing would raise the government’s commitment to solving the financial crisis to $9.7 trillion, enough to pay off more than 90 percent of the nation’s home mortgages.

The Federal Reserve, Treasury Department and Federal Deposit Insurance Corporation have lent or spent almost $3 trillion over the past two years and pledged up to $5.7 trillion more. The Senate is to vote this week on an economic-stimulus measure of at least $780 billion. It would need to be reconciled with an $819 billion plan the House approved last month.

Only the stimulus bill to be approved this week, the $700 billion Troubled Asset Relief Program passed four months ago and $168 billion in tax cuts and rebates enacted in 2008 have been voted on by lawmakers. The remaining $8 trillion is in lending programs and guarantees, almost all under the Fed and FDIC. Recipients’ names have not been disclosed.


The pledges, amounting to almost two-thirds of the value of everything produced in the U.S. last year, are intended to rescue the financial system after the credit markets seized up about 18 months ago. The promises are composed of about $1 trillion in stimulus packages, around $3 trillion in lending and spending and $5.7 trillion in agreements to provide aid. The total already tapped has decreased about 1 percent since November, mostly because foreign central banks are using fewer dollars in currency-exchange agreements called swaps.

Federal Reserve lending to banks peaked at a record $2.3 trillion in December, dropping to $1.83 trillion by last week. The Fed balance sheet is still more than double the $880 billion it was in the week before Sept. 17 when it agreed to accept lower-quality collateral.

The worst financial crisis in two generations has erased $14.5 trillion, or 33 percent, of the value of the world’s companies since Sept. 15; brought down Bear Stearns Cos. and Lehman Brothers Holdings Inc.; and led to the takeover of Merrill Lynch & Co. by Bank of America Corp.
With this incomprehensible amount of present and future debt fixed firmly in your mind, focus on this statement from President Obama yesterday, a statement which serves as the primary justification for yet another increase in this staggering amount of debt based on what is now hugely less than nothing:
It is absolutely true that we can't depend on government alone to create jobs or economic growth. That is and must be the role of the private sector. But at this particular moment, with the private sector so weakened by this recession, the federal government is the only entity left with the resources to jolt our economy back into life. It is only government that can break the vicious cycle where lost jobs lead to people spending less money, which leads to even more layoffs. And breaking that cycle is exactly what the plan that's moving through Congress is designed to do.
Try to set aside the endless lies told to you by almost every voice of alleged "authority." Try to grasp the truth: the United States government has no resources left. The full truth is far, far worse: the United States government is bankrupt and in debt for trillions of dollars. Almost all our leaders and major Establishment voices tell us there is only way to solve this frightening problem: increase the debt still more.

This is the final bet our delusional ruling class insists it "has" to place, even as their world shatters and flies apart. The ruling class still hopes, with the intensity of the deranged maniac who hopes that one more high will finally take him into the realm of unimaginable ecstasy, that the bet can be made good. What if it can't?

This comes perilously close to clinical madness. But it is not quite fully mad. To appreciate what I mean, you need to remember two of the points I made in one of my first posts about the economic unraveling. In "The Vampire, Struck by Sunlight," I explained these points as follows:
Two: You, the "ordinary" American, are the one who finally pays for all of this. You are the ultimate sucker.
On this point, remember Mike Whitney's observation, as well:
Keep in mind, the biggest source of American power is its access to cheap capital via the US taxpayer.
The other point is this one:
Three: As with every other crisis, the ruling class, which created the crisis in the first place, will tell us how to "solve" it.
In that article, I also identified the ultimate purpose of this near-madness:
The crisis may be ameliorated to a degree, and the worst of the consequences may be postponed for a while. But whatever "solutions" are implemented, whatever reorganization and reregulation is imposed, it will all be done in accordance with the ruling class's desires and goals. It will all be to protect their own wealth and power to whatever extent is possible, and to expand their wealth and power still more, if that remains at all feasible.
For this, the ruling class will destroy the world.

In the last few months, I have seen two articles that describe what is now happening with special accuracy and power. Both writers express what is essentially the same idea, and come to the identical conclusion: at some point, perhaps very soon, this final bet will not be redeemed. This bet is very likely to be just that: the final one.

From the beginning of January, a Paul Craig Roberts article, "Will There be a Recovery?":
Economists will scoff at the question in the title. But that’s because they are trying to fit the present into the past.

In the past recoveries were routine, because recessions were temporary restraints resulting from the Federal Reserve putting the brakes on an overheating economy. ...

In those days when workers borrowed to spend, they were borrowing against rising real wages from rising productivity. In economic downturns, few workers actually lost their jobs. They were laid off from their jobs for temporary periods. Workers seldom lost their homes or cars, thanks to union funds and unemployment benefits.

Today the situation is different. In the 21st century real wages have not risen. Workers have spent more by accepting deteriorating household balance sheets. They have maxed out their credit cards and spent the equity in their homes. Imitators of the US government, American consumers borrow to pay their bills.

The expansion of household debt relative to income created the illusion that the economy was sound. But the consumer economy was as much of a credit-based bubble as the real estate bubble and the financial sector bubble. The economy has lost its real basis.

Today it is difficult to stimulate consumer demand by lowering interest rates. Consumers are too heavily in debt to borrow any more. Financial institutions are too impaired to want to lend to anyone except those who don’t need to borrow. ...

And there’s another problem. Much of what American consumers purchase today is made offshore. Stimulating consumer demand in America puts factories back to work, but those factories are located elsewhere in the world.

How does an economy consume more than it produces? Previously, this question applied only to poor third world countries. These countries would consume by the grace of World Bank loans. From time to time they would pay for their consumption by being put through an IMF restructuring program that would curtail their consumption to make them repay their loans by forced saving.

The United States has so far avoided such humiliation, because its currency is the world money. The US has been able to borrow endlessly, because it can pay its debts in its own currency.

This ability might be coming to an end. The US has been using up the bulk of the world’s supply of saving for years in order to finance its consumption. Considering the outlook for the US economy and dollar, the productive nations of the world and those with oil have more dollars and dollar-denominated assets than they want. The US, with its collapsing economy, its bailouts of financial institutions, and its wars, is facing the largest government budget deficit in its history, both in absolute amount and as a percentage of national income. The easy monetary policy, which the Fed hopes will arrest deflation, threatens inflation and further deterioration in the dollar. Foreigners simply do not want to lend more large sums to a country that, from all appearances, has no way to close its trade and budget deficits. They certainly do not want to lend when the interest rate offered is close to zero and the reserve currency status of the dollar is in doubt.

Economists and the policy-makers they advise are thinking in the past, a time when low interest rates stimulated consumer and investment demand, thus lifting the economy. Today the low interest rates threaten the dollar, discourage foreigners from lending more to the US, and deprive Americans of interest income necessary to their ability to pay their bills.


The United States is walking on quicksand. It is dependent on foreigners for the funding to conduct the day-to-day operations of its government. Its economy is a hollow shell reduced to dependence on a financial sector that is discredited worldwide. America’s government believes that its foreign wars of aggression are more important than any domestic needs, including the health care of its population.


What we are witnessing is a once great power engaging in fantasy to disguise from itself that it is a failed state.
The second article (via) is from the beginning of this month, and is by Willem Buiter:
On a number of occasions I have cautioned against deficit-financed fiscal stimuli in countries whose governments have weak fiscal credibility, that is, countries where current tax cuts or public spending increases cannot be credibly matched by commitments to future public spending cuts and tax increases of equal present discounted value. I believe that both the US and the UK fall into this category.


For a fiscal stimulus (current tax cut or public spending increase) to boost demand, it is necessary that the markets and the public at large believe that sooner or later, measures will be taken to reverse the tax cut or spending increase in present value terms. If markets and the public at large no longer believe that the authorities will assure fiscal sustainability by raising future taxes or cutting future public expenditure by the necessary amounts, they will conclude that the government plans either to permanently monetise the increased amounts of public debt resulting from the fiscal stimulus, or that it will default on its debt obligations. Permanent monetisation of the kind of government deficits anticipated for the next few years in the US and the UK would, sooner or later be highly inflationary. This would raise long-term nominal interest rates and probably give risk to inflation risk premia on public and private debt instruments as well. Default would build default risk premia into sovereign interest rates, and act as a break on demand.

Because I believe that neither the US nor the UK authorities have the political credibility to commit themselves to future tax increases and public spending cuts commensurate with the up-front tax cuts and spending increases they are contemplating, I believe that neither the US nor the UK should engage in any significant discretionary cyclical fiscal stimulus, whether through higher public spending (consumption or investment) or through tax cuts or increased transfer payments.


The US is helped by the absence of ‘original sin’ – its ability to borrow abroad in securities denominated in its own currency – and the closely related status of the US dollar as the world’s leading reserve currency. But this elastic cannot be stretched indefinitely. While it is hard to be scientifically precise about this, I believe that the anticipated future US Federal deficits and the growing contingent exposure of the US sovereign to its financial system (and to a growing list of other more or less deserving domestic industries and other good causes) will cause the dollar in a couple of years to look more like an emerging market currency than like the US dollar of old. The UK is already closer to that position than the US, because of the minor-league legacy reserve currency status of sterling.


The only element of a classical emerging market crisis that is missing from the US and UK experiences since August 2007 is the ’sudden stop’ - the cessation of capital inflows to both the private and public sectors. There has been a partial sudden stop of financial flows, both domestic and external, to the banking sector and the rest of the private sector, but the external capital accounts are still functioning for the sovereigns and for the remaining creditworthy borrowers. But that should not be taken for granted, even for the US with its extra protection layer from the status of the US dollar as the world’s leading reserve currency. A large fiscal stimulus from a government without fiscal credibility could be the trigger for a ’sudden stop’.

So just don’t do it. Focus fiscal resources on getting the credit mechanism and other key parts of the financial intermediation process going again. Effective Keynesian fiscal policy requires a virtuous policy maker, capable of credible commitment - that is, commitment capable of resisting the future the siren calls of opportunistic reneging on past commitments. The Obama administration is new and has had but limited opportunity to abuse the trust placed in its promises and commitments. That puts it in a better position that the UK government, which has been in office since May 1997. But many of the top players in Obama’s economic team are strongly identified with the failed policies, regulations and laws that brought us the disaster we are facing. So the amount of credibility capital is severely limited even for Obama. Use it to get credit flowing again. Tax cuts for friends and favoured constituencies, replacing clapped-out infrastructure and even the fight against global warming will have to wait until trust - public credit - is restored.
By their resolute insistence on maintaining their web of lies, our ruling class makes a "sudden stop" virtually inevitable. Much of the rest of the world now sees through those lies; only the United States ruling class refuses to give them up. To surrender them would threaten their own lives of power, wealth and comfort. We may find out very soon, much sooner than we might hope, whether their commitment to what is now a hollowed-out shell of power and wealth, to, that is, a fantasy of immense destructive force, is greater than their fear of the diminishment of their own belief that they can continue to make the rest of the world conform to their own delusions.

On top of these continuing economic delusions, we have the ruling class's delusions in the realm of foreign policy. We will look at those next. From the evidence already available, it appears that the ruling class is determined to place one last bet there as well. The destruction that may result is more frightening than any of us would dare to imagine. But such concerns don't matter to the ruling class. They have lived in their delusions for so long that they can no longer tell the difference between their imaginings and what is real. For them, their delusions are life; they have rendered themselves incapable of seeing that the delusions mean only destruction, and death.

So the madness and the destruction come still closer.