Tuesday, April 05, 2005

The sky IS falling, Chicken Little 
Today, in Parkersburg West Virginia, George W. Bush made a speech. It'll be ignored by the main-stream media, i.e. dutifullly buried on page A16, and that'll be the end of it, right? So what's the big deal about THIS speech?, you might ask. The big deal is that, in today's speech, he essentially disavowed the debts of the US government. He pointed to ledgers supposedly containing the bonds which back the Social Security trust fund, and said they were mere pieces of paper - IOU's that are intrinsically worthless - and that he Social Security Trust Fund does not exist.
``A lot of people in America think there is a trust - that we take your money in payroll taxes and then we hold it for you and then when you retire, we give it back to you,'' Bush said in a speech at the University of West Virginia at Parkersburg.

``But that's not the way it works,'' Bush said. ``There is no trust `fund' - just IOUs that I saw firsthand,'' Bush said.
Those 'IOUs' are US Treasury debt instruments. While not negotiable, they are still bonds, representing $1.7 trillion of debt that, until today, everyone believed the US government was, eventually, good for.

With today's speech, Bush announced to the world that his adminstration is ready to disavow the full faith and credit of the United States government, and stands ready to stiff its creditors. Whether this year's stiff-ees are Americans expecting their Social Security checks, or the Saudis and Chinese who are currently propping up the the US economy with infusions of credit, the chickens are going to come home to roost. Who will continue to lend money (or be willing to pay taxes, for that matter) to a government that even hints, as Mr. Bush did today, that their investments are worthless?

The Bush administration has been pursuing a weak dollar since it entered office. And they've succeeded. One of the reasons oil is so expensive today is trhat a dollar doesn't buy much on the world market. Combine that with a huge load of import-fueled dollars floating around the world, and where we end up is with Saudi oil dollars and Chinese hard-goods dollars coming back here to buy up our country's IOUs on the cheap. That's how the Republican tax-cuts and the Iraq war are being financed - with Saudi and Chinese debt. This is bad enough; but if they start to believe that those IOUs are not going to be honored - that they're merely pieces of paper in a file - that flood of money will slow to a trickle. If indeed we don't end up in wars over this debt.

If these huge creditors are willing to bite the bullet and try to avoid hot wars over it, their wisest course is to write off their current US debt holdings, stop investing here, move their money, and denominate their goods, in some other currency. They could easily say "We no longer accept dollars - you want to buy from us, bring Euros." I'm sure the EU could live with that - but the United States of America would be flat broke. I wouldn't be willing to bet against the US going to war over something as drastic as that. It's not a pretty picture to contemplate.

Maybe Paul Wolfowitz is now president of the World Bank because the Bush administration knows the truth - pretty soon the US is going to need the World Bank to bail itself out, and no one else would be willing to do it.

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