By Paul Craig Roberts
January 21, 2009
For a picture of the US real estate crisis, imagine New Orleans
wrecked by Hurricane Katrina, and before the waters even
begin to recede, a second Katrina hits.
The 1,120,000 lost US retail jobs in 2008 are a signal that
the second stage of the real estate bust is about to hit the
economy. This time it will be commercial real estate—shopping
malls, strip malls, warehouses, and office buildings. As businesses
close and rents decline, the ability to service the mortgages
on the over-built commercial real estate disappears.
The over-building was helped along by the irresponsibly low
interest rates, but the main impetus came from the slide of
the US saving rate to zero and the rise in household indebtedness.
The shrinkage of savings and the increase in debt raised consumer
spending to 72% of GDP. The proliferation of malls and the
warehouses that service them reflect the rise in consumer spending
as a share of GDP.
Like the federal government, consumers spent more than they
earned and borrowed to cover the difference. Obviously, this
could not go on forever, and consumer debt has reached its
limit.
Shopping malls are losing anchor stores, and large chains
are closing stores and even going out of business altogether.
Developers who borrowed to finance commercial ventures are
in trouble as are the holders of the mortgages, derivatives
and other financial junk associated with the loans.
The main source of the economic crisis is the infantile belief
of US policymakers that an economy could be based on debt expansion.
As offshoring moved jobs, incomes, and GDP out of the country,
debt expanded to take the place of the missing income. When
the offshored goods and services were brought back to be sold
to Americans, the trade deficit rose, adding another level
of financing for an economy that consumes more than it produces.
The growth of debt has outpaced the growth of real output.
Yet, the solution offered by Obama’s economic team is
to expand debt further. This is not surprising as Obama’s
economic team consists of the very people who brought on the
debt crisis. Now they are going to make it worse.
The unexamined question is: Who is going to finance the next
wave of debt?
The US budget deficit for fiscal year 2009 already appears
to be on a path to $2 trillion, and that is before Obama’s
stimulus program. What we are looking at is a $3 trillion budget
deficit if Obama’s program is enacted in time to impact
the economy this year.
Foreign countries can finance a $500 billion US budget deficit
out of their trade surpluses with the US. But foreigners do
not have the funds to finance a US budget deficit in the trillions
of dollars, and they would not finance such a deficit even
if they had the funds. Foreigners are over-weighted in dollar
holdings and prefer to lighten their holding than to add to
them. America’s economic prospects are dim as are the
dollar’s prospects as reserve currency. An annual budget
deficit in the trillions of dollars makes the dollar’s
prospects appear even dimmer.
The federal government’s likely solution to the debt
problem will be to monetize the debt, that is, the government
will finance its deficit by printing money. Debt will be inflated
away. But for those Americans without jobs or whose incomes
do not rise with inflation, life will be cruel.
Life is already cruel for Americans living on retirement savings.
Not only has the stock market bust reduced their wealth by
half, but also their remaining assets are producing no income.
Interest rates are so low that debt instruments produce no
income, and there are scant capital gains in the stock market.
Retirees are living by consuming their capital.
America’s economic policy of low interest rates and
debt expansion bodes ill for everyone living off their savings.
Their future prospects are even worse as high inflation will
destroy the value of their savings, especially if held in cash
or debt instruments, including “safe” US Treasuries.
There are more intelligent ways to try to escape from the
current crisis. However, the financial gangsters and their
shills that Obama has put in charge of economic policy are
thinking only of their own interest. What happens to the American
people is not a concern.
A compassionate government would handle the crisis in this
way:
The trillions of dollars in credit default swaps (CDS) should
be declared null and void. These “swaps” are simply
bets that financial instruments and companies will fail, and
the bulk of the bets are made by people and institutions that
do not hold the financial instruments or shares in the companies.
The ideology that financial markets were self-regulating allowed
illegal gambling free rein. There is no reason under the sun
for taxpayers to bail out gamblers.
The bailout money, instead of being given to favored financial
institutions to finance their acquisition of other institutions,
should be used to refinance the defaulting mortgages. This
would slow, if not stop, the growing inventory of foreclosed
properties that is driving down home prices.
The mark-to-market rule should be suspended until the real
values of the troubled properties and instruments can be determined.
Suspension of the rule would prevent the failure of sound institutions
and lessen the need for a bailout.
Interest rates have to be raised in order to encourage saving
and to provide incomes to retirees.
To preserve the dollar’s status as reserve currency,
a credible policy of reducing both budget and trade deficits
must be announced. In the near term the budget deficit can
be reduced by $500 billion by withdrawing from Iraq and Afghanistan
and by cutting a bloated defense budget that represents the
now unattainable goal of US world hegemony.
The trade deficit can be significantly reduced by bringing
offshored jobs back to America. One way to do this is to tax
corporations according to the value added to their output that
occurs in the US. Corporations that produce their products
for US markets abroad would have high tax rates; those that
produce domestically would have low tax rates.
This approach to the economic crisis stands in marked contrast
with the approach of the gangsters running US economic policy.
The gangsters are using the crisis as an opportunity to steal
from taxpayers and to finance their misdeeds and exorbitant
salaries with Federal Reserve loans. Their shills among economists
and the financial press tell the people that the solution is
to fatten up the banks with funds so they will resume lending
to an over-indebted public that will then return to the shopping
malls.
This unrealistic approach to a serious crisis indicates a
leadership crisis on top of an economic crisis.
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Paul Craig Roberts was Assistant Secretary of the Treasury
in the Reagan administration. He was Associate Editor of
the Wall Street Journal editorial page and Contributing
Editor of National Review. He is coauthor of The Tyranny
of Good
Intentions.
Paul Craig Roberts can be emailed
here
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