Mr. Bernanke’s main field of study as an academic economist has been the Great Depression. As the current “Great Recession” developed the Fed’s primary concern therefore was to avoid the policy mistakes that turned the 1929 stock market crash into a disastrous ten-year downturn. Chief among these errors was the failure to provide abundant liquidity to the financial system.

Accordingly super-abundant liquidity was provided this time around, under the form of an intensive bank bailout, huge deficit spending, the creation of money, zero interest rates and a raft of financial facilities. As a result there was, initially, an economic bounce. But as this “recovery” now appears to be rapidly fading, the question bears asking: “Everything that should have been done has been done, but the effects are not up to expectations. Was something missed?”

Yes, it was. While study of the Great Depression can certainly teach us a lot, it was over 70 years ago.

Today we would not make a study of transportation on the basis of 1930 technology. At that time air transport was a minor factor. Today it is a major one.

In a similar vein, in 1930 our economy was almost entirely national, and all its components were within the reach, if not the control, of federal authorities. Today’s economy is globalized.

Global finance means that the sums moved daily around the world by private interests (many of them speculative) dwarf anything the U.S. government can muster. Foreign exchange transactions alone involve $4 trillion per day. In other words, the value of our currency is out of the government or anyone else’s control.

Global “free trade” translates into entire industries being transferred, within a few years, to whatever locations multi-national company executives may choose. With the industries go the jobs, services, investments and taxes.

In other words, whatever the government does might have a bigger impact in another country than it does in the United States, and much of the money spent will end up in China rather than Virginia or California. The same happens to jobs, whether they are existing ones that disappear abroad, or “newly created ones”, which materialize directly in foreign, low-cost locations.

The U.S. government and the Fed are pumping air into a leaky tire. Unless the leak is fixed, they can pump for years, but the tire – our economy – will stay flat.

U.S. authorities are treating the economy as if it was a constant entity, to which government spending can add, thereby creating growth. But the economy, and the wealth that goes with it, are no longer tied to the national territory and its population. Because U.S. political and economic leaders have chosen to practice an “open border” economic policy, wealth and activity have been flowing out for the past two decades. As a result, many “American” corporations have more interests abroad than they have here. They will invest, and create jobs, where their interests are.

If it is more profitable, short-term, to manufacture in China, that is where investments will be made. Profits will rise (and they have) but so will U.S. unemployment (and it has). The Fed will keep the money printing press running, and the administration will increase the deficit, and the “jobless recovery” will go on, until something gives.

If we want a real return to prosperity, we need to deal with this issue. Otherwise we will slide into another depression, with all the consequences this entails, political as well as economic.

Globalization has been presented to us as progress, the “next economic thing”, the way to world prosperity, and so on. Given the situation that the world economy is in, as well as our own, we need to reconsider.

It is one thing, however, to dislike a situation and say it. Another is to suggest the preferred alternative.

This does mean Americans are to be chastised for being whiners and malcontents. The dominant fact, in this election season, is that both parties have an excellent record at helping themselves, but by doing so at the expense of the people.

The last administration has opened the country wide to the predatory trade practices of China and other states. This has been lucrative to a number of large trans-national corporations, but has cost the general population dearly in terms of both income and employment.

The current administration has done little to correct the above, being busy engineering a vast expansion of government power and revenue, and protecting the income and positions of their supporters. The population will pay for this in terms of a sluggish economy, a vastly increased tax burden and reduced services.

It is no wonder voters are unhappy and feel a sense of betrayal. While the two parties’ hard bases are still supportive, a “wild center” of frustrated voters is rapidly taking shape, and expanding in both directions. These voters – and the “tea partiers” are only a fraction of the total – do not want incumbents returning to power and are tired of the old set of political practices. If the changes they ask for is not forthcoming they will soon be demanding them, and conventional politicians will be ignoring this trend at considerable peril.

What do the voters want?

One could here turn to the details of programs and policies, and there is much room for that. But there is also something deeper at stake

At this moment in the history of the Republic, the citizens first want respect.

And this, politically speaking includes two key components: representation, and participation.

Representation means that members of the government’s three branches concern themselves with the interests of the citizenry above those of anyone else, be it cabals, lobbies, interest groups, ideologues and campaign contributors. With genuine representation the main priority is no longer the re-election of the political person involved, or even the specific interests of a party or group of constituents. It is the interest of the nation as a whole.

Participation means that the citizens’ fate is no longer entrusted to impersonal entities such as “the government” or “the market”, but is put back into their own hands so they can effectively contribute to the country’s destiny.  Citizens no longer form an anonymous mass which is manipulated by the established leadership to achieve political or economic goals. They become again the active participants in a task involving the entire nation, and to which each of them can contribute.

Such a shift from party, interest groups or individual interest to a truly national purpose took place when America entered World War II. Before the attack on Pearl Harbor the country had been deeply divided: between Republicans and Democrats, socialists and free marketers, haves and have-nots, isolationists and globalists, private sector and New Deal government.

As the war began, with America in a defensive position, it immediately became clear that victory demanded not only full national unity and internal cooperation, but also the maximum contribution from every individual, group and organization, at every level and in every activity. Such dedication was demanded, and it was given. Our success in the war was the sum of efforts of every kind and at every level. We knew it, from the highest to the lowest, and we know that this is why we won.

Today America needs the awakening of a similar spirit. The candidate’s stump speech must change.

It has long been “Vote for me, and I will take care of things, and of course take care of you”.

Now it is time for: “This is the challenge we face, and let us face it together”.

This is what we want.

First, the approval rating of our Legislative Branch is abysmally low. Second, the legislative process is out of control.

The Republican dominance under President Bush made such a mess of things that the 2006 and 2008 elections produced that rare occurrence, a veto-proof Congress with both chambers controlled by one party. One could have hoped that this new arrangement would have produced decisive, effective legislation addressing the country’s numerous problems. Instead the Democrats produced two gargantuan bills vastly expanding the federal bureaucracy; a number of slush funds or bailout funds; and unheard of budget deficits.

The very size and complexity of the “reform bills” amply demonstrated that the current members of Congress are no longer capable of performing their main function, which is to produce meaningful and coherent legislation. During the process of assembling the “major achievements” of this Congress it became painfully obvious members were voting on bills they had neither written nor read, larded with a variety of provisions favoring special interests, and creating a web of new functions, obligations and duties the national government cannot hope to discharge with any degree of effectiveness.

Hence the statement, repeated by many prospective voters concerning their intentions for the coming elections: “Anything but an incumbent!”

Such intentions have been voiced before in our election history, and were often revealed to have more bark than bite. There were times, however, when the electorate did in fact “throw the bastards out”. This might be one of those.

If political frustration was the only factor, voter anger could be dismissed as inconsequential. But this time there is real economic hardship as well. Unemployment, stagnant wages and rising income inequality are still in full force, and the “recovery” from the Great Recession is proving more questionable every month that passes. In fact the start of an economic “double dip” may well coincide with the election campaign.

This, paradoxically, may help.

The two established parties are too entrenched to be easily gotten rid of, and each will end up with, approximately, a third of the seats. The remaining third might well end up, if things get bad enough, in the hands of the new ABI (Anything But Incumbent) crowd. A number of those will still belong, nominally at least, to the traditional parties. But the mandate they will receive from constituents will no longer be satisfied by the old methods and ideologies.

This diversity of mandates, together with the lack of any strong majority, will preclude the passage of “monster bills” such as those over health care and finance. Even a pure pork “stimulus” will not make it, because of the fiscal rectitude stance that many in Congress are now adopting. In fact the long accepted legislative approaches might now be inadequate to pass anything at all.

The only exception is what could be called the “one-liner bill”.

Congress’ inability to deal with issues does not eliminate them. The electorate will still demand that something be done. To achieve both congressional consensus and electoral support such legislation must be simple, clear, targeted and effective immediately. It must not deal with broad, complex domains but with a single, obvious problem. Once properly formulated, such “one-liner” legislation will pass, take effect and deliver visible results. From there more similar initiatives will flow, and the now broken trust of the voters in their representatives could begin to heal.

Some examples of “one-liners”:

• A progressive countervailing duty or sales tax on imports from countries engaging in predatory trade practices.
• In parallel, a domestic investment tax credit for corporations setting up job-producing facilities in the United States (similar to John Kennedy’s 1961 initiative)
• A transaction tax on excess leverage and trading frequency to prevent more Wall Street crashes.
• A full freeze on the hiring, salaries, and other benefits of federal employees.

Each such bill will chip away at our problems and move Congress away from its current dysfunctional state. Later, if emergency conditions no longer prevail, such single items can be integrated into wider frameworks.

http://www.blogtalkradio.com/diane-tegarden

Other governments have implemented similar policies. China’s “stimulus” is proportionately much larger than our own.

This unprecedented tide of money has produced some results. In the U.S. GDP has increased and corporate profits and the stock markets are up despite persistent unemployment and weakness in housing.  But this “fragile” recovery might now be faltering. The Brookings-Financial Times Index, designed to provide a “snapshot” of the global economy, has nose-dived since March. If it continues on the present course, we will be back in recession mode by Labor Day.

This begs the question: Are we dealing with a stubborn but still conventional cyclical downturn, or is there something more fundamentally wrong with the global economy as well as our own?

We are inclined to answer in the affirmative.

Just as the current downturn might be unprecedented, the two decades leading to it have seen a similarly novel development: globalization. There is likely to be a connection.

Globalization has occurred on two levels, financial and commercial. On the financial side all restrictions on the movement of currency and capital have been removed. This has led to a huge increase in financial activity amplified by global-scale leverage. Much of this activity has been of the speculative kind.

On the commercial or industrial side, national tariff barriers have been removed, allowing production to migrate to the lowest cost locations. Just as financial activity is amplified by leverage, this transfer of economic activity has been accelerated by mercantilist practices, of which China and its neighbors are the principal practitioners.

While this process has temporarily lifted profits for multi-national corporations, it has a dark side: it destroys wealth.

Consider a U.S. manufacturing plant worth $ 20 million. If production is moved to Mexico, the equivalent plant might be worth 15 million, due to less automation, fewer amenities, and looser environmental regulations. If production then moves to China, the plant might be worth $ 10 million, and even that is not sure, because the price will depend on government policy and possible intervention by local and national authorities.

The same will apply to all production-related expenses and accessory investments: wages, benefits, employee housing and enterprises servicing the plant. Only profit might be higher, but that will not compensate for the reductions listed above. It is likely to increase income inequality, which carries a social cost. So does the lower energy efficiency and increased environmental impact.

Ultimately, less new wealth will be created in the recipient country than has been lost in the U.S. China temporarily gains at the expense of the U.S., but it gains a piece of a shrinking global pie, because value has been lost in the transfer. In addition the resulting social (unemployment and the loss of accessory services) cost has to be borne by the U.S. taxpayers still employed, reducing the capital pool available to fund new industries.

On the whole, the world gets poorer, since globalization is by definition a race to the bottom. While there is development in some areas, the global asset base shrinks.  This has been, to a degree and for a limited period, compensated for by consumer indebtedness and government deficit spending. Both of these have reached their limits.

This global reduction in asset value probably contributes to the increasingly speculative character of finance. Money has to find returns somewhere. If opportunities for “real” investment disappear, new financial “instruments” will be created to fill the gap. The more widespread the use of such instruments, the higher financial volatility will be, with bubbles increasing in intensity and frequency of occurrence. Regulation might slow or mask this process, but cannot eliminate it.

In other words, the longer a policy of commercial globalization is maintained, the greater the likelihood of another financial implosion.

More ominous, in the short term, will be the deflationary effect, which is likely to defeat all current efforts to restart economic growth. Because globalization simultaneously lowers wages and prices, it introduces a deflationary bias against consumer spending, based on the expectation that well-paid jobs will continue to get scarcer while prices will stay stable or drop.

We are in the deepest recession since the thirties, and heading for the second dip. Globalized finance and “free trade” got us there. It is time to take a second look at their real effects.

That it most probably already is, but it could get much worse. Not “Waterloo”, but more like Napoleon’s ill-conceived Russian campaign of 1812, which cost him his army, his reputation, and, eighteen months later, his throne.

Napoleon roamed across Europe looking for enemies to defeat. If one does that long enough, one is bound to find one that can beat you. Russia, with tsar, soldier and winter each playing its part, whipped Napoleon.

President Obama has also thrived by taking adversarial positions, generously passing out blame to whoever happens to be the whipping boy of the hour: Bush, fat cat bankers, auto executives, Bush, congressional Republicans, insurance companies, Bush.

Now it is British Petroleum’s turn. And in BP’s vicinity stands the whole oil industry, “Big Oil”, as a fat target to attack and squeeze.

There is one problem with this: America needs oil.

Oil is the only source of energy we cannot go without. To generate electricity we can replace coal with gas, gas with wind, and wind with nuclear. To move our people and goods around this most mobile of nations, by truck, plane, barge or train, we have no alternative. Ninety-seven percent of our transportation runs on petroleum products, two thirds of it imported from abroad. It will take a decade or two, at the very least, to change that.

Trouble will come far sooner.

Let us simply look at Iran.

If Iran was after nuclear electricity generation, it can buy reactors, complete with fuel supply, from France, Russia or South Korea any time. Producing one’s own nuclear fuel is far more complicated and expensive. So it is logical to conclude that there at least could be an ulterior motive behind the Iranian uranium enrichment program: mainly nuclear weapons.

Israel cannot afford this possibility. It has its own nuclear arsenal, but it does not matter what happens to the enemy after the fact. Israel cannot afford a single nuclear hit, and that means that Iran may not get a single bomb.

There is a “red line date” after which Iran will have enough weapons-grade uranium to build such a device. That date is known to the Israelis with a fair degree of accuracy. They must strike before that date if they are to strike at all, and we are talking about months here, maybe a year, but before the November 2012 U.S. election in any case.

The U.S. now has some hundred thousand troops, backed by large air bases, on each side of Iran. To the south cruises the U.S. Navy. To the north is Russia, which has been neutral or cooperated with the United States in similar past circumstances. In other words, in case of a strike, Iran is a sitting duck.

But if they see their nuke program going down, they can still do a lot of damage, whether by closing the Strait of Hormuz or hitting Saudi or Iraqi processing facilities, together with assorted terrorist actions. An oil shortage is the logical outcome.

So it might be a grave error at this time to attack the oil industry, and particularly to interrupt drilling. Those 33 exploratory rigs the President has ordered idle for six months or more will not stay here. There is plenty of demand elsewhere, and once they move they will not come back.

BP might well have been greedy and careless in this case, and there should be adequate compensation.  Deep water drilling is risky, and there should be rules and safeguards. But these issues are best handled in a spirit of cooperation. The oil industry has powered our economy and fueled our wars with efficiency and dispatch for well over a century. It is still needed and can perform great service.

Maybe President Obama thinks that gas at seven dollars a gallon will help his “green” agenda. We would advise him to reconsider.

This was made possible by the peculiar geographical situation of the U.S. Soon after its inception it became by far the largest, wealthiest and most powerful nation on the North American continent, a position which, together with wide oceans to east and west, fully protected it from foreign invasion and other types of interference.

That “splendid isolation” was further enhanced by subsequent development. Gifted with an immense and rich territory, America had little need of an overseas empire, with the attending international rivalries and entanglements. Although it did at times acquire foreign possessions, it saw no need to keep them against the will of their native populations. Its few “colonies”, such as the Philippines and Cuba, were easily given up. During the 20^th century American industrial and military power kept potential enemies at bay, successfully resisting even the awesome might of the USSR.

Thus, whereas European nations had to struggle for centuries to defend and maintain their sovereignty against the ambitions and designs of their neighbors, Americans have always taken their national independence for granted.

For the first time in our history this implicit assumption is being put in question. America’s independence has begun to be undermined by the phenomenon generally called globalization. This trend is drawing the nation into a web of exchanges, relationships, commitments and dependencies that gradually but inexorably reduce its freedom of action with respect to the rest of the world. Globalization occurs primarily on three levels.

• On the financial level we are being tied into a single global market for currencies, equities and debt, which reduces our government’s control over the value of the dollar, the rate of inflation and the disposition of government borrowing.
• On the commercial-industrial level, globalization transfers industrial activity from U.S. territory to countries which practice mercantilism, an economic policy aimed at accumulating wealth within a country’s own borders at the expense of their trade partners.
• On the political level the United States is becoming subject to a growing number of regulations, obligations and commitments administered by non-representative international bodies. These strictures are generally established at the government level without prior consultation of the governed, thus creating an inherent conflict with the principles of representative government.

Because it proceeds by small and barely visible steps but affects every aspect of the citizens’ life, globalization is the ultimate “foreign entanglement” the Founding Fathers warned the nation against. It affects living standards, reduces employment, makes the country vulnerable to embargoes and financial crashes, encourages government indebtedness, and subjects the population to conditions and obligations they are barely aware of.

This creeping dependence on unknown foreign powers and influences is generally presented by its supporters as being both inevitable and beneficial. Accepting any condition as “inevitable” is of course totally opposed to the principles enunciated in the Declaration of Independence. As to the “benefits”, there is good reason to put them in question. For the United States at least, the recent period of globalization has been characterized by stagnating income, growing government deficits,  worsening wealth disparity and most recently by a deep, and as yet far from ended, economic downturn.

The above is not intended as a call to renewed isolationism, which is a policy both simplistic and impractical. But it is a serious appeal for us to examine the direction in which we are proceeding as a nation. We have always been independent and have taken great pride in it. As this independence and our national sovereignty are now being eroded, we need to ask ourselves some basic questions, and develop satisfactory answers.

Do we want to replace our tradition of national independence with a set of co-dependent global relationships?

If we are to surrender our national sovereignty, to which nation, power or authority do we want to be subject?

If we prefer to buy our essential supplies rather than produce them, where will we find, in the long term, the necessary money?

And if we find it beneficial to export our industries, how will our own population remain gainfully employed?

These are no idle queries, nor are they meant for our government only. The answers will affect us all, and for that reason we need to carefully consider our choices. Will we have independence, or servitude?

Large budget cuts done under the threat of default will inevitably entail major economic and social hardship. Beyond that looms the danger that the cuts made will not be the ones that are needed and possible, while spending both unnecessary and actually harmful will be preserved through politically motivated choices. It is therefore essential to understand beforehand which categories of spending are superfluous or harmful, and which ones are needed and should be preserved.

There are four main types of discretionary government spending, outside of the monies needed simply to maintain government operations. We will rank them in order of decreasing usefulness.

The first and most useful type of state spending is support for scientific research and the development of new technology. This is particularly true of basic research, which, if properly managed, will eventually lead to the greatest advances in applied science and technology. The government’s contribution here is particularly valuable as practical applications cannot be predicted and usually fall beyond the planning horizon of private enterprise. Therefore long-term type of research is unlikely to be financed by the private sector and is best done with government support.

The second category in terms of positive economic impact covers very large investments which due to their size, cost, and duration are beyond the means of the private sector. National defense essentially falls into this category, although it is usually treated separately due to its special requirements. Another example is provided by such complex undertakings as the Tennessee Valley Authority, or the potential development in the future of a synthetic fuel production base. Government funding here not only demonstrates feasibility and viability of a new industrial sector, but leaves behind a working enterprise of significant economic value.

In both above cases government spending and investment, if adequately managed and controlled, is both needed and economically beneficial. The “multiplier”, or the amount of economic activity per tax dollar spent, will be higher, and sometimes much higher, than one.

The opposite is true for the next two categories on the list. It is also not coincidental these are where most government spending is directed today, resulting in uncontrollable cost, lack of accountability, economic inefficiency and political corruption.

First in this class come all forms of subsidy. Under this heading comes spending to fund activities which are not justified on grounds of economic efficiency, but are supported mainly for political or ideological reasons. Subsidies breed technical and scientific stagnation as they favor existing and “safe” technology over potential progress with its attendant risks. They also breed political corruption by creating interest groups and lobbies the goal of which is to maintain and increase their share of tax revenue regardless of the usefulness of the subsidized activity. Since subsidized activities are by definition less efficient, the value obtained per tax dollar is less than what that dollar would produce if left in the private sector.

The last and most wasteful form of government outlay are cash transfers, generally known as entitlements. These are subsidies not for specified activities, but for entire groups or populations. They are politically attractive as they offer a legal way to favor specific voting groups, in other words to purchase their votes. This is most often “justified” by turning a temporary need into a ground for permanent outlays, thereby creating a client group dependent on the state. This confusion between a need that is temporary but real and the fostering of a lasting state of dependence is at the core of the entitlement issue. It also offers, as we shall see in one of the coming planks, an exit path from the entitlement trap.

The multiplier of cash transfers is always negative, since the cost of managing the program must be deducted before the recipients get their “due”.

The above categorization roughly outlines the priorities in reducing government spending. This must be done before the sovereign debt structure collapses, bringing with it economic disaster and potentially immense human suffering and distress. Here it must be said that the reduction of spending and of the activities it supports will not have entirely negative consequences. On the contrary, if properly managed, such a transition will be beneficial from both the social and the economic standpoint, as the money saved can and will be invested in more productive ways.

The above lays the foundation for the shift in our perception of government’s role and functions that the current situation requires. The coming planks will deal in more details with how such a shift can be accomplished.

Greece is a small country, and its economy represents barely 2% of the GDP of the Euro-zone. For Greece to cause such a disturbance there must be something else involved, something much more fundamental than the Greek government’s dubious accounting and the resulting financial difficulties.

At bottom, the crisis really hangs on a simple fact: a government’s ability to borrow is not infinite. In reality the limits are much tighter than has generally been assumed.

This hard reality has been ignored for a couple of generations, for two main reasons. First, the paradigm of continuous economic growth, fueled by abundant energy, assumes that tomorrow’s economy will always be bigger than today’s. Thus future tax revenue will catch up with, and surpass, current borrowing.

Second, financial globalization has created a much larger pool of money for states to dip in. The sale of government bonds is no longer limited to the domestic market, but can be done halfway across the globe, creating the illusion of an unlimited supply of readily available credit.

A loan, however, is still a loan. The creditor wants to be repaid, and if there is a risk of default, the interest rate will rise accordingly, potentially pricing the borrower out of the market.

The global recession has vastly increased government deficits. States have spent enormous sums to keep the global financial system from collapse. At the same time vast amounts of “stimulus” spending have been injected into domestic economies even while tax revenue was dropping. As a result government debt has surged to levels never seen before, outside of wartime.

Greece happens to present a particularly acute case. But in fact many governments are in the same situation, having borrowed more money than they might ever be able to repay. Hence the threat of “contagion”: that the “Greek illness” will spread to other states, such as California, Portugal or even the mighty U.S., creating a growing black hole within world finance. Once such a sinkhole begins to spread, who knows what it will swallow?

States of course have defaulted before, but these were individual cases, each with its own particular reasons: mismanagement, folly, oversized ambitions, war. But today governments are colliding with a mathematical truth: borrowing is limited even for the most powerful. The United States is no exception. Despite the size of its economy and the status of the dollar, the limits of its borrowing are probably much closer than the authorities choose to believe.

An analogy may be drawn from the oil industry. If oil is drawn out of a reservoir slowly, the field will produce for a long time. But if the rate of extraction rises too high, the reservoir can be irretrievably damaged, and it will dry up, with the reserve now locked in the ground.

It is the same with credit. Right now, governments are building up debt much faster than the world can supply it. Greece has been the trigger, but not the cause of the crisis. The problem is that there is not enough money out there to satisfy the current needs for sovereign borrowing.

Since the United States government borrows a large part of its budget from abroad, we are faced with a choice. Either we continue on the present course until the interest rate rises to a level we cannot afford, or we curtail our spending so as to extend our credit horizon. To go back to the oil analogy, we either keep pumping until the reservoir collapses and goes dry, or we reduce the rate of extraction to what the field can support.

Some will say that we cannot cut government spending without causing some kind of economic collapse. This is a handy excuse for inaction, but the prediction is not necessarily true. Cutting spending will cause some hardship, but far less than a catastrophic funding collapse would entail.

We therefore must, finally, get serious about cutting government spending. The next few planks of the platform will deal with this paramount issue.