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From Bush to Obama - America's Fiscal Collapse BOOK PREVIEW: Excerpt
from "The Global Economic Crisis: The Great Depression of the XXI
Century."
By Michel Chossudovsky
URL of this article:www.globalresearch.ca/index.php?context=va&aid=21969
Global Research, December 18, 2010
The following is an excerpt from a chapter by Michel Chossudovsky
in Global Research's new book entitled:
"The Global Economic Crisis: The Great Depression of the XXI Century."
Michel Chossudovsky and Andrew Gavin Marshall, editors, Global
Research, Montreal, 2010
Order your copy directly from Global Research For more details click
below:
The Global Economic Crisis
What has been implemented under Obama is strong economic medicine
with a human face. Promise amid peril. The stated priorities of the
Obama economic package are health, education, renewable energy,
investment in infrastructure and transporta-tion. Quality education
is at the forefront. Obama has also promised to make health care
more affordable and accessible for every American.
At first sight, the budget proposal had all the appearances of an
expansionary program, a demand-oriented Second New Deal geared
towards creating employment, rebuilding shattered social programs
and reviving the real economy.
The realities are otherwise. Obamas promise is based on a mammoth
austerity program. The entire fiscal structure is shat-tered, turned
upside down. To reach these stated objectives, a significant hike
in public spending on social programs (health, education, housing,
social security) would be required, as well as the implementation
of a large-scale public investment program. Major shifts in the
composition of public expenditure would also be required, i.e. a
move out of a war economy, requiring a shift out of military-related
spending in favor of civilian programs.
In actuality, what we are dealing with is the most drastic cur-tailment
in public spending in American history, leading to social havoc and
the potential impoverishment of millions of people. The Obama promise
largely serves the interests of Wall Street, the defense contractors,
the oil conglomerates and Big Pharma. In turn, the Bush-Obama bank
bailouts have led America into a spiraling public debt crisis. The
economic and social dislocations are potentially devastating.
War and the Economic Crisis
The worldwide meltdown of financial markets occurs at the crossroads
of a major military adventure. The global financial crisis is
intimately related to the war. (For further analysis, see chapters
9-12). A spiraling defense budget backlashes on the civilian sectors
of economic activity. The war economy has a direct bearing on fiscal
and monetary policy. Defense appropria-tions are in excess of 700
billion dollars (for the 2010 fiscal year). An impending fiscal
crisis is looming which threatens to under-mine the entire structure
of public spending.
War is Good for Business: the powerful financial groups which
routinely manipulate stock markets, currency and com-modity markets,
are also promoting the continuation and esca-lation of the Middle
East war. The financial crisis is related to the structure of U.S.
public investment in the war economy versus the funding, through
tax dollars, of civilian social programs. More broadly, this also
raises the issue of the role of the US Treasury and the US monetary
system, in relentlessly financing the military industrial complex
and the Middle East war at the expense of most sectors of civilian
economic activity.
The war is profit-driven, financed through the massive worldwide
expansion of dollar denominated debt. War and globalization go hand
in hand. Wall Street, the oil companies and the defense contractors
have concurrent and overlapping interests. The oil companies were
behind the 2008 speculative surge in crude oil prices on the London
energy market, which preceded the collapse of the stock market in
September-October of 2008. In turn, resulting from the military
agenda, the U.S. civilian economy is in crisis as the nations
resources, including tax dollars, are diverted into funding a
multibillion dollar Middle East war.
Defense Outlays for the Wars in Iraq and Afghanistan
This is a war budget. The austerity measures hit all major fed-eral
spending programs with the exception of defense and the Middle East
Central Asian War, the Wall Street bank bailout and interest payments
on a staggering public debt. The nations bud-get diverts tax revenues
into financing the wars in Iraq and Afghanistan, not to mention the
set-up of new military bases in Colombia. It legitimizes the
fraudulent transfers of tax dollars to the financial elites under
the bank bailouts.
The pattern of deficit spending is not expansionary. We are not
dealing with a Keynesian-style deficit which stimulates investment
and consumer demand, leading to an expansion of production and
employment. The bank bailouts (involving sev-eral initiatives
financed by tax dollars) constitute a component of government
expenditure. Both the Bush and Obama bank bail-outs were handouts
to major financial institutions. They did not result in a positive
spending injection into the real economy. In fact, the opposite is
true. The bailouts have contributed to financ-ing the restructuring
of the banking system, leading to a massive concentration of wealth
and centralization of banking power.
A large part of the bailout money granted by the U.S. government
has already been transferred electronically to various affili-ated
accounts including the hedge funds. The largest banks in the U.S.
are also using this windfall cash to buy out their weaker competitors,
thereby consolidating their position. The tendency, therefore, is
towards a new wave of corporate buyouts, mergers and acquisitions
in the financial services industry.
In turn, the financial elites will use these large amounts of liq-uid
assets (paper wealth), together with the hundreds of billions
acquired through speculative trade, to buy out real economy
cor-porations (airlines, the automobile industry, telecoms, media,
etc.), whose quoted value on the stock markets has tumbled. In
essence, a budget deficit (combined with massive cuts in social
programs) was required to fund the handouts to the banks, as well
as finance defense spending and the military surge in both Iraq and
Afghanistan.
Obamas 2010 Budget
Obamas budget for the 2010 fiscal year was of the order of 3.94
trillion dollars, an increase of 32 percent. Total government
rev-enues for the 2010 fiscal year, according to estimates by the
Bureau of Budget, were quoted at 2.381 trillion dollars. This puts
the predicted budget deficit at 1.75 trillion dollars, equaling
almost twelve percent of the U.S. Gross Domestic Product.
1. Defense spending of 534 billion dollars for 2010, a supple-mental
130 billion dollars appropriation for fiscal 2010 for the wars in
Afghanistan and Iraq, and a supplemental 75.5 billion dollars
emergency war funding for the rest of the 2009 fiscal year. Defense
spending and the Middle East war, with various supplemental budgets,
was (offi-cially) of the order of 739.5 billion dollars. Some
estimates placed aggregate defense and military related spending
at over one trillion dollars.
2. A bank bailout of 750 billion dollars announced by Obama, which
was added on to the 700 billion dollars in bailout money already
allocated by the outgoing Bush administration under the Troubled
Assets Relief Program (TARP). The total of both programs is a
staggering 1.45 trillion dollars, to be financed by the Treasury.
(See Table 1.3 next page). It should be understood that the actual
amount of cash financial aid to the banks is significantly larger
than 1.45 trillion dollars.
3. Net interest on the outstanding public debt was estimated by the
Bureau of the Budget at 164 billion dollars in 2010.
The magnitude of these allocations is staggering. Under a balanced
budget criterion which has been a priority of gov-ernment economic
policy since the Reagan era almost all the revenues of the federal
government amounting to 2.381 trillion dollars would be used to
finance the bank bailout (1.45 trillion), the war (739.5 billion)
and interest payments on the public debt (164 billion). In other
words, no money would be left over for other categories of public
expenditure.
The Budget Deficit
Three categories of expenditure, namely defense, the bank bail-out
and interest on the public debt, had virtually swallowed up the
entire 2010 federal government revenue of 2381.0 billion dollars.
Moreover, as a basis of comparison, all the revenue accruing from
individual federal income taxes (1.061 trillion dollars in fis-cal
2010), that is, all the money households across America paid annually
in the form of federal taxes, did not suffice to finance the handouts
to the banks, which officially amounted to 1.45 trillion dollars.
This amount includes the 700 billion dollars granted during fiscal
year 2009 under the TARP, program plus the proposed 750 billion
dollars granted by the Obama administration.
Bushs Troubled Assets Relief Program and Obamas 750 bil-lion dollar
bank bailout although disbursed over more than one fiscal year
nonetheless represented almost half of total gov-ernment expenditure
(half of Obamas 3.94 trillion dollar budget for fiscal 2010), which
was financed by regular sources of revenue (2381 billion dollars),
plus a staggering 1.75 trillion dollar bud-get deficit, which
ultimately required the issuing of Treasury Bills and government
bonds. The feasibility of a large short-term expansion of the public
debt at a time of crisis was yet another matter, particularly with
interest rates at abysmally low levels.
The budget deficit was 1.58 trillion dollars according to offi-cial
sources. Obama acknowledged a 1.3 trillion dollar budget deficit,
inherited from the Bush administration. In actuality, the budget
deficit was much larger. The official figures tended to underestimate
the seriousness of the budgetary predicament. The 1.58 trillion
dollar budget deficit figure was questionable because the various
amounts disbursed under TARP and other related bank bailouts including
Obamas 750 billion dollar aid program to financial institutions
were not acknowledged in the governments expenditure accounts.
The aid hasnt been requested formally, but appears in a line item
for potential additional financial stabilization efforts, ac-cording
to the budget overview. The budget office calculated a $250 billion
net cost to taxpayers this year, because it anticipates it would
eventually recoup some, though not all, of the money expended to
help financial companies.
The funds would come on top of the $700 billion rescue package
approved last October by Congress. The White House budgets no money
for fiscal 2010 and beyond for such aid.
Fiscal Collapse
A major crisis of the federal fiscal structure was in the making.
The multibillion dollar allocations to the war budget and to the
Wall Street bank bailout program backlash on all other catego-ries
of public expenditure. In November 2008, the federal govern-ments
bank rescue program was estimated at a staggering 8.5 trillion
dollars, an amount equivalent to more than sixty percent of the
U.S. public debt estimated at fourteen trillion dollars (2007).
Meanwhile, under the Obama budget proposal, 634 bil-lion dollars
were allocated to a reserve fund to finance universal health care.
At first glance, it appears to be a large amount. But it is to be
spent over a ten year period, i.e. a modest annual commitment of
63.4 billion. Thus public spending will be slashed with a view to
curtailing a spiraling budget deficit. Health and education pro-grams
will not only remain heavily underfunded, they will be cut, revamped
and privatized.
The likely outcome is the outright privatization of public ser-vices
and the sale of state assets, including public infrastructure, urban
services, highways and national parks. Fiscal collapse leads to the
privatization of the state. The fiscal crisis is further exacer-bated
by the compression of tax revenues resulting from decline of the
real economy. Unemployed workers do not pay taxes, nor do bankrupt
firms. The process is cumulative. The solution to the fiscal crisis
becomes the cause of further collapse.
The Structure of the Public Debt
This large-scale appropriation of liquid money assets under the
bank bailouts by a handful of financial institutions serves to
increase the public debt overnight. When the U.S. Treasury under
the Bush administration allocates 700 billion dollars to the Troubled
Assets Relief Program, it constitutes a budgetary out-lay which
inevitably must be financed from within the structure of government
revenues and expenditures. A similar reasoning applies to the bank
bailouts under the Obama presidency.
Unless all other categories of public expenditure including health,
education and social services are slashed, the various out-lays
under the bank bailouts will require running a massive bud-get
deficit, which in turn will increase the U.S. public debt. Bear in
mind, this budget deficit is not expansionary (in the Keynesian
context). It does revive investment and consumer spending. It has
no direct bearing on the real economy. It is a money transfer from
U.S. tax payers into the coffers of a handful of financial institutions.
America is the most indebted country on earth. The United States
(federal government) gross public debt is currently of the order
of fourteen trillion dollars. This does not include mount-ing public
debts at the state and municipal levels.
This U.S. dollar denominated (federal) debt is composed of outstanding
treasury bills and government bonds. The public debt, also called
the national debt is the amount of money owed by the federal
government to holders of U.S. debt instru-ments. These are held by
American residents (as part of their savings portfolios), companies
and financial institutions, U.S. government agencies, foreign
governments and individuals in foreign countries, but does not
include intergovernmental debt obligations or debt held in the
Social Security Trust Fund. Types of securities held by the public
include, but are not limited to, Treasury Bills, Notes, Bonds, TIPS,
United States Savings Bonds, and State and Local Government Series
securities.
The proposed solution becomes the cause of the crisis. The 700
billion dollar bailout under the Troubled Asset Relief Program,
combined with Obamas 750 billion dollar aid package to the financial
services industry, is but the tip of the iceberg. A panoply of
bailout allocations in addition to the 700 billion dollars have
been decided upon. Moreover, an additional budget-ary overrun was
implemented under Obamas stimulus package of 787 billion dollars
launched in February 2009 under The American Recovery and Reinvestment
Act of 2009. The stimulus package, as distinct from Obamas bank
bailout program, is in part directed towards the real economy.
Spiraling Public Debt Crisis
Is the Treasury in a position to finance this mounting budget deficit
officially tagged at 1.58 trillion dollars through the emis-sion
of Treasury bills and government bonds? The actual bud-get deficit
is much higher.
We are facing the largest ever budget deficit coupled with the
lowest interest rates in U.S. history. With the Feds near zero
percent discount rate, the markets for U.S. dollar denominated
government bonds and Treasury bills are in a straightjacket. Moreover,
the essential functions of savings (which are central to the
functioning of a national economy) are in crisis.
Who wants to invest in U.S. government debt? What is the demand for
Treasury bills at exceedingly low interest rates? The market for
U.S. dollar denominated debt instruments is poten-tially at a
standstill, which means that the Treasury lacks the ability to
finance its mammoth budget deficit through public debt operations,
leading the entire budgetary process into a quandary. The question
is whether China and Japan will contin-ue to purchase U.S. dollar
denominated debt instruments. Washington is running a public relations
campaign to lure Asian investors into buying T-bills and U.S.
government bonds.
With the markets for U.S. dollar denominated debt (both domestically
and internationally) in crisis, further pressure will be exerted
on the Treasury to slash (civilian) public expenditure to the bone,
exact user fees for public services and sell off public assets,
including state infrastructure and institutions. In all like-lihood,
this crisis is leading us to the privatization of the state, where
activities hitherto under government jurisdiction will be transferred
into private hands.
Who will be buying state assets at rock bottom prices? The financial
elites, who are also the recipients of the bank bailout.
Consolidation of the Banks
A massive amount of liquidity has been injected into the finan-cial
system, from the bailouts but also from pension funds, individual
savings, etc. The stated objective of the bank bailout programs is
to alleviate the banks burden of bad debts and non-performing loans.
In actuality what is happening is that these massive amounts of
money are being used by a handful of institutions to consolidate
their position in global banking. The exposure of the banks, largely
the result of derivative trade, is estimated in the tens of trillions
of dollars, to the extent that the amounts and guarantees granted
by the Treasury and the Fed will not resolve the crisis. Nor are
they intended to resolve the crisis.
The mainstream media suggests that the banks are being nationalized
as a result of TARP. In fact, it is exactly the opposite: the state
is being taken over by the banks, the state is being priva-tized.
The establishment of a worldwide unipolar financial system is part
of the broader project of the Wall Street financial elites to
establish the contours of a world government.
In a bitter irony, the recipients of the bailout under TARP and
Obamas proposed 750 billion dollar aid to financial institutions
are the creditors of the federal government. The Wall Street banks
are the brokers and underwriters of the U.S. public debt. Although
they hold only a portion of the debt, they transact and trade in
U.S. dollar denominated public debt instruments world-wide. They
act as creditors of the U.S. State; they evaluate the creditworthiness
of the U.S. government; they rank the public debt through Moodys
and Standard and Poor; they control the U.S. Treasury, the Federal
Reserve Board and the U.S. Congress; they oversee and dictate fiscal
and monetary policy, ensuring that the state acts in their interest.
The government hands mon-ey to assist the banks under the bank
bailout. As a result, its cred-it rating established by Wall Street
is affected.
The U.S. Government Finances its Own Indebtedness: Circular and
Contradictory Relationship
Since the Reagan era, Wall Street dominates most areas of eco-nomic
and social policy. It sets the budgetary agenda, ensuring the
curtailment of social expenditures. Wall Street preaches bal-anced
budgets but the practice has been to lobby for the elimina-tion of
corporate taxes, grant handouts to corporations and tax write-offs
in mergers and acquisitions, all of which lead to a spi-raling
public debt. It oversees the U.S. public debt and the banks are
involved in the sale of treasury bills and government bonds on
financial markets in the U.S. and around the world. They also hold
part of the public debt and are the creditors of the U.S. government.
In a bitter irony, the massive increase in the public debt (2009-2010)
required to rescue the banks was financed and brokered by the
financial institutions which were the direct beneficiaries of the
Bush and Obama bank bailouts.
The Federal Reserve System is a privately owned central bank. While
the Federal Reserve Board is a government body, the pro-cess of
money creation is controlled by the twelve Federal Reserve banks,
which are privately owned. The shareholders of the Federal Reserve
banks (with the New York Federal Reserve Bank playing a dominant
role) are among Americas most powerful financial institutions.
The increase in the U.S. public debt in 2009-2010 was a direct
result of the bailout monies transferred to the banks. To finance
the bank bailouts, the Treasury was obliged to run up a massive
budget deficit. While the Federal Reserve creates money out of thin
air, the multibillion dollar outlays of the Treasury (includ-ing
the Bush and Obama bank bailouts) required a massive emis-sion of
public debt in the form of Treasury Bills and government bonds.
Only part of these T-Bills are held by the Fed.
We are dealing with a pernicious circular relationship. When the
banks pressured the Treasury to assist them in the form of a major
bank rescue operation, it was understood from the outset in September
2008 that the banks as creditors would in turn assist the Treasury
in coping with a skyrocketing public debt.
Public opinion had been misled. A diabolical circular process had
been set in motion. The U.S. government is in a sense financ-ing
its own indebtedness: the money granted to the banks is in part
financed by borrowing from the banks. To finance the 1.45 trillion
dollar bailout, the government needs to borrow, through the emission
of public debt. Where does the government go? To the banks. In other
words, with the money the banks lend to the government, the Treasury
finances the bailout in favor of the banks.
In turn, the banks impose conditionalities on the management of the
U.S. public debt. They dictate how the money should be spent. After
having cashed in on their bailout money, they impose fiscal
responsibility on the U.S. Treasury; they demand massive cuts in
public spending, which eventually results in the collapse and/or
privatization of public services; they impose the privatization of
urban infrastructure, roads, sewer and water systems, public
recreational areas everything is up for privatization.
This public debt crisis triggered by Wall Street is all the more
serious because the U.S. federal government does not control monetary
policy. All public debt operations go through the Federal Reserve,
which is in charge of monetary policy, acting on behalf of private
financial interests. The government as such has no authority over
money creation. This means that public debt operations essentially
serve the interests of the banks.
Where is the Money Going?
The Obama economic stimulus program constitutes a continua-tion of
the Bush administrations bank bailout packages. The proposed policy
solution to the crisis becomes the cause, ulti-mately resulting in
further real economy bankruptcies and a cor-responding collapse of
the standard of living of Americans. Both the Bush and Obama bank
bailouts are intended to come to the rescue of troubled financial
institutions, to ensure the payment of inter-bank debt operations.
In practice, large amounts of money transit through the banking
system, from the banks to the hedge funds, to offshore banking
havens and back to the banks.
The government and the media tend to focus on the ambigu-ous notion
of inter-bank debts. The identity of the ultimate creditors is
rarely mentioned. The legitimacy of the creditors is never questioned.
Multibillion dollar transfers are conducted electronically from one
financial entity to another. Where is the money going? Who is
collecting these multibillion debts, which are in large part the
consequence of financial manipulation and derivative trade?
There are indications that the financial institutions are trans-ferring
billions of dollars into their affiliated financial entities and
hedge funds. From these hedge funds, money is also being used to
acquire real economy assets. Through what circuitous financial
mechanisms were these debts created? Where is the bailout money
going? Who is cashing in on the multibillion dol-lar government
bailout money? This process is contributing to an unprecedented
concentration of private wealth.
Financial manipulation is an integral part of the New World Order.
It constitutes a powerful means to accumulate wealth. It has
contributed to destabilizing the U.S. fiscal structure. Under the
present political arrangement, those responsible for mone-tary
policy are quite deliberately serving the interests of the financiers,
to the detriment of working people, leading to eco-nomic dislocation,
unemployment and mass poverty.
More generally, this restructuring of global financial markets and
institutions (alongside the pillage of national economies) has
enabled the accumulation of vast amounts of private wealth, a large
portion of which has been amassed as a result of strictly speculative
transactions. This critical drain of billions of dollars of household
savings and state tax revenues paralyzes the func-tions of government
spending and spurs the accumulation of a public debt, which can no
longer be financed through the emis-sion of U.S. dollar denominated
debt instruments.
What we are dealing with is the fraudulent confiscation of life-long
savings and pension funds and the appropriation of tax rev-enues
to finance the bank bailouts. To understand what has hap-pened,
follow the money trail of electronic transfers with a view to
establishing where the money has gone. What is at stake is the
outright criminalization of the financial system, financial theft
on an unprecedented scale.
The monetary system, which is integrated into the state bud-getary
process, has been destabilized. The fundamental relation-ship between
the monetary system and the real economy is in crisis. The creation
of money out of thin air threatens the value of the U.S. dollar as
an international currency. Similarly, the financing of a mammoth
U.S. budget deficit through dollar denominated debt instruments is
impaired as a result of exceed-ingly low interest rates. Moreover,
the process of household sav-ings is undermined with interest rates
close to zero.
What we have dealt with in this chapter is one central aspect of
an evolving process of global financial collapse. While the finan-cial
apparatus has not collapsed, the Great Depression of the 21st century
is by no means over. We can expect a renewed wave of bank failures,
mergers and acquisitions in the years to come.
Financial Disarmament
The complexity of this crisis is overwhelming. While specific ad
hoc measures including the freeze of speculative trade can be
envisaged, there are no ready solutions under the prevailing global
financial architecture. What is at stake is the power con-figuration
behind these measures. Economic policy quite deliberately serves
the interests of the financial elites, who in turn control the
political process. Meaningful policies cannot be achieved without
radically reforming the workings of the inter-national banking
system.
What is required is an overhaul of the monetary system includ-ing
the functions and ownership of the central bank, the arrest and
prosecution of those involved in financial fraud both in the financial
system and in governmental agencies, the freeze of all accounts
where fraudulent transfers have been deposited and the cancellation
of debts resulting from fraudulent trade and/or market manipulation.
People across the land, nationally and internationally, must mobilize.
This struggle to democratize the financial and fiscal apparatus
must be broad-based and democratic, encompassing all sectors of
society at all levels, in all countries. What is ulti-mately required
is to disarm the financial establishment:
confiscate those assets which were obtained through fraud and
financial manipulation
restore the savings of households through reverse transfers
restore home ownership to those who lost their homes through the
process of foreclosures
return the bailout money to the Treasury
freeze the activities of the hedge funds
freeze the gamut of speculative transactions including short-selling
and derivative trade
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