Monday, September 4, 2006

Landmines in the Political Storm to Come

It is more of a hypothesis than a thesis, but I think that Rove's Grand Strategy for Republican Power ad infinitum has two components: plan A is to use faux populism and control of Big Media to create the propaganda necessary to hold onto Power and to consolidate the Bush building-a-fascist-State project in the near-term.

If Plan A fails, ruined by Bush's personal penchant for total and abject failure in every venture of his life, then Plan B is to dig the country into giant holes with the deficit/tax-cuts and with the Iraq War, and, if the Democrats are pushed by events into Power, to ruthlessly exploit the pain caused by Democratic attempts to get the country out of those holes to discredit the Democratic Party for a generation, returning to Power after a short interval to consolidate their Authoritarian State.

The deficit, and the financing of the deficit with Social Security taxes, is one of those two giant holes.

The obvious "solution" to the problem of the huge national debt is inflation. I think Sterling Newberry is right: Bernanke is an inflationist.

The situation of the U.S. and world economy has assumed a posture of dynamic stability. As everyone knows, it is nowhere near a position of static (i.e. equilibrium) stability. (It has not been my observation that world trade, national economies or even industries customarily assume anything like a static, long-term equilibrium; people, who analyze them as if they do need to get out of the classroom more; a different analysis is necessary to understand whatever stability is observed).

But, I think what is more likely to happen is that the U.S. will embark on an increasingly inflationary course, in order to prolong the stability of the world economy. Bernanke is an expert on the Great Depression, and fears deflation above all things, and as a conservative inflationist, he's sees deflation as a threat to the plutocracy, as it proved to be in 1932, much to Bernanke's evident regret; the U.S. economy is awash in dollar liquidity, and the greatest danger is that vast sums accumulated in the Persian Gulf and China will drive up asset prices in the U.S. while driving down savings so far that a general inflation is triggered by runaway consumer spending. Bernanke will choose inflation to protect the plutocracy, with even the slightest encouragement from whoever occupies the White House in 2009, and has to right Bush's fiscal disaster, while coping with the willy-nilly expiration of numerous tax cuts, constituting a huge, involuntary tax increase designed by Republicans, but exploding under a probable Democratic regime.

To keep the world economy stable on its current dynamic path, U.S. inflation has to be higher than Chinese inflation, to provide the Chinese enough headroom to ensure that China doesn't accidently slip into deflation, while trying to maintain its currency's peg to the dollar. Chinese deflation, triggering a Chinese recession, which could be extremely sharp after such a long and massive growth spurt, would bring the whole house of cards, which is the current pattern of world trade, tumbling down.

Inflation is a classic way out of a debt crisis. But, with the marketed debt primarily in inflation-adjusted and short-term paper, inflation will fall most heavily on Social Security, where the trust fund consists primarily of non-marketable debt, with no inflation protection. Ricardian equivalence will manifest as a giant default on the SS trust fund, by means of inflation, and, of course, an excuse for the Plan B Restoration Republicans of 2012 to finally axe SS altogether.

Sorry to be such a pessimist. But, I think Democrats really need to be more aware and articulate about the extent to which Iraq and the Deficit are the twin landmines of American politics. Getting out of Iraq or staying in Iraq -- either one -- is going to have catastrophic consequences for the U.S. and the Middle East, for which Republicans and Big Media will blame the Democrats.

Getting out of the current economic situation, in which the U.S. standard of living is propped at least 5% to 10% higher than can be sustained, given our negative savings rate, our dwindling manufacturing base and the hollowing out of corporate America, is going to be very painful, and Republicans will both blame the Democrats and do all they can to block or sabotage any policy, which will make the collapse of the Bush economy any less painful for the middle class.

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