Obama’s ‘Cure’

Obama’s Cure May Be Worse Than the Ailment

by Eric Margolis by Eric Margolis

PARIS — What is the Kremlin up to? These past two weeks have produced seemingly contradictory and certainly confusing messages from Moscow.

First, those who relish irony would have loved the recent economic forum in the ugly little Swiss ski resort of Davos. Don’t get me wrong. Switzerland is the world’s most beautiful country. It’s just Davos that is an eyesore.

There, former Soviet KGB chief and ber-Communist Vladimir Putin, now prime minister of Russia, rebuked attending western capitalist bigwigs for causing the current global financial disaster and making a hash out of capitalism.

Putin took special aim at the United States for allowing Wall Street fraudsters to erect a financial house of cards that finally collapsed, causing the worst economic crisis since the 1930’s.

But at last weekend in Munich, Russia’s deputy prime minister, Sergei Ivanov, a former close KGB colleague of Putin, made nice to US Vice President Joe Biden, offering conciliatory gestures and speaking of a new era in American-Russian relations. Good cop, bad cop?

Meanwhile, social unrest was simmering across Europe as unemployment surges and government handouts fall sharply. Britain, whose capital had become a haven for every sort of financial piracy, is in particularly bad shape. A recent visit to Canary Wharf, London’s new financial center, showed a dreary spectacle of mass firings of financial workers and entire floors in banks gone dark.

European and Asian governments are now increasingly concerned that President Barack Obama’s multi-trillion dollar economic rescue package may prove far worse than the sickness it is meant to cure.

Politicians everywhere are panicking as voters demand they do something to keep their debt-driven economies running in high gear. This is impossible. The debt bubble has burst. But politicians are afraid to tell voters the hard truth: the party is over. Retrench, stop borrowing, cut spending, start saving, live smaller.

The US economy, 25% of the world’s total, was fatally addicted to the steroid of debt. Consider this: America’s total national debt (liabilities) amounted to 3.5 times its gross domestic product (assets). The US Treasury kept running on loans from China and Japan.

Now, Obama and his team of Democratic Keynesian economists hope to spend the US out of deep recession by dishing out US $2.2 trillion in freshly printed money.

The famed 1930’s economist Lord Keynes claimed governments could correct recessions by massive deficit spending which would be repaid when boom times returned. His theories have become a state religion for liberals on the left of the Democratic Party.

But massive deficit spending is like treating a poison victim with more big doses of poison. This kind of economic voodoo reminds me of medieval medicine: try every kind of dangerous procedure until you either kill the patient or he somehow survives the doctors.

The current crisis was caused by runaway borrowing by the Bush administration, individuals, hedge funds, and the unregulated "shadow" financial industry in New York and London. Obama’s remedy: borrow and spend trillions more.

Europeans are gravely concerned that Obama’s planned spending orgy will eventually ignite worldwide inflation, undermine the US dollar, and raise US interest rates. Since the US runs on borrowed money, any decline in the value of its currency will require higher interest rates to be paid to foreign investors to make up for their added risk.

Europeans have a well-justified horror of inflation. The storm of inflation during the 1930’s Depression was the financial equivalent of the Black Death, and led directly to fascism. Europe fears the US is stoking inflation in hopes its vast foreign debts (about $1.2 trillion to Japan and China alone) can be repaid in depreciated dollars. We’ve seen such financial chicanery before, and it leads to disaster.

As one involved for nearly 50 years in business and investments, my advice to the young president is to tell Americans to patiently accept a long period of hardship and hangover, tighten their belts, and start living within their means. After eight years of untruths from the Bush administration, many Americans are ready to hear the facts, however unpleasant.

While aiding the financial system, the government should investigate all the bankers, realtors, money managers and financial alchemists who created America’s bubble economy of debt. Fraudster Bernie Madoff was not alone. Time for handcuffs, not golden handshakes.

The best way to stimulate the ailing economy is to cut taxes. Let people decide how to spend their money. Washington’s plans for new bridges and day care centers may win votes, but won’t revive the economy. Japan tried this and it failed. The US needs productive industrial investments.

Obama should cut government spending and half the Pentagon’s bloated budget (50% of world military spending when there are no enemy regular military forces left to fight).

President Roosevelt launched mass social welfare schemes in the 1930’s similar to ones that Obama now proposes. Roosevelt’s New Deal may have staved off popular revolution, but it did not revive the economy. It took goading Japan into war to end the Depression. Let’s hope President Obama does not intend to follow this example in Afghanistan.

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