[R-G] [BillTottenWeblog] America's Fiscal Collapse

Tue Mar 3 07:45:44 MST 2009

by Michel Chossudovsky

Global Research (March 02 2009)

"We will rebuild, we will recover, and the United States of America will
emerge stronger". -- President Barack Obama, State of the Union Address
(February 24 2009)

"Those of us who manage the public's dollars will be held to account -
to spend wisely, reform bad habits, and do our business in the light of
day - because only then can we restore the vital trust between a people
and their government". -- President Barack Obama, A New Era of
Responsibility, the 2010 Budget

"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 transportation. "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 has 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.

Obama's promise is based on a mammoth austerity program. The entire
fiscal structure is shattered, 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: that is, a move out of a war
economy, requiring a movement out of military related spending in favour
of civilian programs.

In actuality, what we are dealing with is the most drastic curtailment
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
defence contractors and the oil conglomerates. In turn, the Bush-Obama
bank "bailouts" are leading America into a spiralling public debt
crisis. The economic and social dislocations are potentially devastating.

Obama's budget submitted to Congress on February 26 2009 envisages
outlays for the 2010 fiscal year (commencing October 1st 2009) of $3.94
trillion, an increase of 32 percent. Total government revenues for the
2010 fiscal year, according to preliminary estimates by the Bureau of
Budget, are of the order of $2.38 trillion.

The predicted budget deficit (according to the president's speech) is of
the order of $1.75 trillion, almost twelve percent of the US Gross
Domestic Product.

War and Wall Street

This is a "War Budget". The austerity measures hit all major federal
spending programs with the exception of: (1) Defence and the Middle East
War, (2) the Wall Street bank bailout, (3) Interest payments on a
staggering public debt.

The budget diverts tax revenues into financing the war. 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 several initiatives financed by tax
dollars) constitute a component  of government expenditure. Both the
Bush and Obama bank bailouts are hand outs to major financial
institutions. They do not not constitute a positive spending injection
into the real economy. Quite the opposite. The bailouts contribute to
financing 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 US government will be
transferred electronically to various affiliated accounts including the
hedge funds. The largest banks in the US will also use 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 liquid
assets (paper wealth), together with the hundreds of billions acquired
through speculative trade, to buy out real economy corporations
(airlines, the automobile industry, Telecoms, media, et cetera ), whose
quoted value on the stock markets has tumbled.

In essence, a budget deficit (combined with massive cuts in social
programs) is required to fund the handouts to the banks as well as
finance defence spending and the military surge in the Middle East war.
Obama's budget envisages:

1. Defense spending of $534 billion for 2010, a supplemental 130 billion
dollar appropriation for fiscal 2010 for the wars in Afghanistan and
Iraq, and a supplemental $75.5 billion emergency war funding for the
rest of the 2009 fiscal year. Defence spending and the Middle East war,
with various supplemental budgets, is (officially) of the order of 739.5
billion. Some estimates place aggregate defence and military related
spending at $1 trillion+.

2. A bank bailout of the order of $750 billion announced by Obama, which
is added on to the 700 billion dollar 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. It should be understood that the
actual amount of cash financial "aid" to the banks is significantly
larger than $1.45 trillion. {1}

3. Net Interest on the outstanding public debt is estimated by the
Bureau of the Budget at $164 billion in 2010.

The order of magnitude of these allocations is staggering. Under a
"balanced budget" criterion - which has been a priority of government
economic policy since the Reagan era - almost all the revenues of the
federal government amounting to $2.38 trillion would be used to finance
the bank bailout (1.45 trillion), the war ($739 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

These three categories of expenditure (Defence, Bank Bailout and
Interest on the Public Debt) would virtually swallow up the entire 2010
federal government revenue of 2381 billion dollars

Moreover, as a basis of comparison, all the revenue accruing from
individual federal income taxes ($1.061 trillion in Fiscal Year 2010),
namely all the money households across America pay in the form of
federal taxes, will not suffice to finance the handouts to the banks,
which officially are of the order of 1.45 trillion. This amount includes
the $700 billion (granted during Fiscal Year 2009) under the TARP
program plus the proposed $750 billion granted by the Obama
administration.

While TARP and Obama's proposed bailout are to be disbursed over Fiscal
Years 2009 and 2010, they nonetheless represent almost half of total
government expenditure (half of Obama's $3.94 trillion budget for fiscal
2010), which is financed by regular sources of revenue ($2381 billion)
plus a staggering $1.75 trillion budget deficit, which ultimately
requires 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 is yet another matter, particularly with interest rates
at abysmally low levels.

The budget deficit is of the order of 1.75 trillion. Obama acknowledges
a 1.3 trillion-dollar budget deficit, inherited from the Bush
administration. In actuality, the budget deficit is much larger.

The official figures tend to underestimate the seriousness of the
budgetary predicament. The $1.75 trillion dollar budget deficit figure
is questionable because the various amounts disbursed under TARP and
other related bank bailouts including Obama's announced $750 billion aid
program to financial institutions are not acknowledged in the
government's expenditure accounts.

"The aid hasn’t been requested formally, but appears in a line item 'for
potential additional financial stabilization efforts', according 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." (Bloomberg, February 27 2010)

Fiscal Collapse

A major crisis of the federal fiscal structure is occurring. The
multibillion dollar allocations to the War Budget and to the Wall Street
Bank Bailout program backlash on all other categories of public
expenditure.

The Bush administration's $700 billion bailout under the Troubled Asset
Relief Program (TARP) was approved by Congress in October. TARP is but
the tip of the iceberg. A panoply of bailout allocations in addition to
the $700 billion were decided upon prior to Obama assuming office. In
November, the federal government's bank rescue program was estimated at
a staggering 8.5 trillion dollars, an amount equivalent to more than
fifty percent of the US public debt estimated at fourteen trillion
dollars in 2007 {1}.

Meanwhile, under the Obama budget proposal, 634 billion dollars are
allocated to a reserve fund to finance universal health care. At first
sight, it appears to be a large amount. But it is to be spent over a ten
year period, that is, a modest annual commitment of 63.4 billion.

Public spending will be slashed with a view to curtailing a spiralling
budget deficit. Health and education programs will not only remain
heavily underfunded, they will be slashed, revamped and privatized. The
likely outcome is the outright privatization of public services and the
sale of State assets including public infrastructure, urban services,
highways, national parks, et cetera. Fiscal collapse leads to the
privatization of the State.

The fiscal  crisis is further exacerbated 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.

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 US Treasury allocates 700 billion dollars to the Troubled
Assets Relief Program, this amount constitutes a budgetary outlay which
inevitably must be financed from within the structure of government
revenues and expenditures.

Unless all other categories of public expenditure including health,
education and social services are slashed, the various outlays under the
bank bailout will require running a massive budget deficit which in turn
will increase the US public debt.

America is the most indebted country on earth. The US (federal
government) public debt is currently of the order of $14 trillion. This
does not include mounting public debts at the state and municipal levels.

This US 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 US debt instruments.

US debt instruments are held by American residents as part of their
savings portfolio, companies and financial institutions, US government
agencies, foreign governments, 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
bailout under the Troubled Asset Relief Program (TARP) combined with the
proposed Obama $750 billion aid to financial services industry is but
the tip of the iceberg. A panoply of bailout allocations in addition to
the 700 billion have been decided upon.

The Bush Administration's "Bank Bailout"

The government's bank rescue program under the Bush administration was
estimated at a staggering 8.5 trillion dollars, an amount equivalent to
sixty percent of the Total Gross Federal debt of 14.078 trillion in 2010
{1}. This amount does not include the "aid" to financial institutions
proposed by the Obama administration, including an additional 750
billion dollars in Obama's February 2009 budget proposal. The size of
these allocations of liquid assets endangers the very structures of the
fiscal and monetary system.

The total of Bush bank bailouts (8.5 trillion) can be broken down into
funds granted by the Federal Reserve, the Treasury, the Federal Deposit
Insurance Corporation and the Federal Housing Authority.

The handouts to the financial institutions financed out of Treasury are
government expenditures, to be met either through tax revenues or
through the emission of public debt instruments.

The disbursements under TARP are categorized by the Bureau of the Budget
as part of "a mandatory program" under an Act of the US Congress. The
Treasury's liability, which includes the controversial Troubled Assets
Relief Program, was estimated in November 2008 at 1.1 trillion dollars
{1}. Further Treasury allocations, which serve to heighten the burden of
the public debt have been envisaged by the Obama administration.

Spiralling Public Debt Crisis

Is  the Treasury in a position to finance this mounting budget deficit
officially tagged at 1.75 billion through the emission of Treasury bills
and government bonds?

The largest budget deficit in US history coupled with the lowest
interest rates in US history: With the Fed's "near zero" percent
discount rate, the markets for US dollar denominated government bonds
and Treasury bills are in straightjacket. Moreover, the essential
functions of savings (which is central to the functioning of a national
economy) is in crisis. .

Who wants to invest in US government debt?  What is the demand for
Treasury bills at exceedingly low interest rates?

The market for US dollar denominated debt instruments is potentially 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 continue to purchase US
dollar denominated debt instruments. Washington is running a public
relations campaign to lure Asian investors into buying T-bills and US
government bonds.  .

With the markets for US 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 likelihood, 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, which are also the recipients of the bank bailout.

Consolidation of the Banks

A massive amount of liquidity has been injected into the financial
system, from the bailouts but also from pension funds, individual
savings, et cetera.

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 privatized. 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 Obama's
proposed 750 billion aid to financial institutions are the creditors of
the federal government. The Wall Street banks are the brokers and
underwriters of the US public debt, although they hold only a portion of
the debt, they transact and trade in US dollar denominated public debt
instruments Worldwide.

They act as creditors of the US State. They evaluate the
creditworthiness of the US government, they rank the public debt through
Moody's and Standard and Poor. They control the US Treasury, the Federal
Reserve Board and the US Congress. They oversee and dictate fiscal and
monetary policy, ensuring that the state acts in their interest.

Since the Reagan era, Wall Street dominates most areas of economic and
social policy. It sets the budgetary agenda, ensuring the curtailment of
social expenditures. Wall Street preaches balanced budgets but the
practice has been lobbying for the elimination of corporate taxes, the
granting of handouts to corporations, tax write-offs in mergers and
acquisitions et cetera, all of which lead to a spiralling public debt.

Circular and Contradictory Relationship

The Federal Reserve system is a privately owned central bank. While the
Federal Reserve Board is a government body, the process 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 America's most powerful
financial institutions.

While the Federal Reserve can create money "out of thin air", the
multibillion outlays of the Treasury (including the TARP program) will
require the emission of public debt in the form of treasury bills and
government bonds.

US financial institutions oversee the US public debt. They are involved
in the sale of treasury bills and government bonds on financial markets
in the US and around the World. But they also hold part of the public
debt. In this regard, they are the creditors of the US government. Part
of this increased public debt required to rescue the banks will be
financed or brokered by the same financial institutions which are the
object of the bank rescue plan.

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 that the banks would in
turn assist the Treasury in financing the handouts of which they are the
recipients.

To finance the bank bailout, the Treasury needs to run a massive budget
deficit, which in turn requires a staggering increase of the US public
debt.

Public opinion has been misled. The US government is in a sense
financing its own indebtedness: the money granted to the banks is in
part financed by borrowing from the banks.

The banks lend money to the government and with the money they lend the
government, the Treasury finances the bailout. In turn, the banks impose
conditionalities on the management of the US public debt. They dictate
how the money should be spent. They impose "fiscal responsibility", they
dictate massive cuts in social expenditures which result 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.

The recipient banks are the beneficiaries as well as the creditors. As
creditors, they will oblige the government (a) to slash expenditures and
(b) to run up the public debt through the issuing of treasury bills and
government bonds.

This public debt crisis is all the more serious because the US 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.

Continuity from Bush to Obama

The Obama stimulus program constitutes a continuation of the Bush
administration's bank bailout packages. The proposed policy solution to
the crisis becomes the cause, ultimately resulting in further real
economy bankruptcies and a corresponding 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 ambiguous notion of
"inter-bank debts". The identity of the creditors is rarely mentioned.

Multi-billion 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 transferring
billions of dollars into their affiliated hedge funds. From these hedge
funds they can then channel money capital towards the acquisition of
real assets.

Through what circuitous financial mechanisms were these debts created?
Where is the bailout money going? Who is cashing in on the multibillion
dollar government bailout money? This process is contributing to an
unprecedented concentration of private wealth.

Concluding Remarks

Financial manipulation is an integral part of the New World Order. It
constitutes a powerful means to accumulate wealth.

Under the present political arrangement, those responsible for monetary
policy are quite deliberately serving the interests of the financiers,
to the detriment of working people, leading to economic dislocation,
unemployment and  mass poverty.

This article has focussed on how financial manipulation has served to
shatter the structure of US public expenditure.

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 paralyses the functions of government spending and
spurs the accumulation of a public debt, which can no longer be be
financed through the emission of US dollar denominated debt.

What we are dealing with is the fraudulent transfer and confiscation of
lifelong savings and pension funds, the fraudulent appropriation of tax
revenues to finance the bank bailouts, et cetera. To understand what has
happened, follow the money trail of electronic transfers with a view to
establishing where the money has gone

The monetary system, which is integrated into the State budgetary
process, has been destabilized. The fundamental relationship between the
monetary system and the real economy is in crisis.

The creation of money "out of thin air" threatens the value of the US
dollar as an international currency. Similarly, the financing of a
mammoth US budget deficit through dollar denominated debt instruments is
impaired as a result of exceedingly low interest rates. Moreover, the
process of household savings is undermined with interest rates close to
zero.

What we have dealt with in this article is one central aspect of an
evolving process of global financial collapse.

The international payments system is in crisis. The economic prospects
are terrifying. Bankruptcies in the US, Canada, the European Union are
occurring at an alarming rate. Country level exports have collapsed,
leading to a contraction of international trade. Reports from the Asian
economies indicate a massive increase in unemployment. In China's Pearl
River basin in Southern Guangdong province's industrial export
processing economy, some 700,000 were laid off in January. In Japan,
industrial output has collapsed by more than twenty percent since
December. In the Philippines, a country of ninety million people,
exports collapsed by more than forty percent in December.

Financial Disarmament

There are no solutions under the prevailing global financial
architecture. Meaningful policies cannot be achieved without radically
reforming the workings of the international banking system.

What is required is an overhaul of the monetary system including 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, the cancellation of debts resulting from
fraudulent trade and/or market manipulation.

People across the land, nationally and internationally  must mobilize.
This struggle to democratise the financial and fiscal apparatus must be
broad-based and democratic encompassing all sectors of society at all
levels, in all countries. What is ultimately 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,

- return the bailout money to the Treasury, freeze the activities of the
hedge funds, and

- freeze the gamut of speculative transactions including short-selling
and derivative trade.

Link:

{1} See Table 2 at
http://www.globalresearch.ca/index.php?context=va&aid=12517

Annex:

Budget of the United States Government: http://www.whitehouse.gov/omb/budget

Fiscal Year 2010 The Budget Documents: http://www.whitehouse.gov/omb/budget

A New Era of Responsibility: The 2010 Budget:
http://www.whitehouse.gov/omb/budget

The tables contained in Annex can also be consulted by clicking:

Summary Tables:
http://www.whitehouse.gov/omb/assets/fy2010_new_era/Summary_Tables2.pdf