227 US will lose ability to pay for its imports with its own currency - Paul Craig Roberts

US will lose ability to pay for its imports with its own currency - Paul Craig Roberts

(1) AIG-Gate: The World's Greatest Insurance Heist
(2) Threat to City of London as EU Parliament seeks to whittle away power to veto
(3) Australian Government withdraws bank guarantee
(4) America slides deeper into depression as Wall Street revels
(5) Deficits eroding US ability to wage war
(6) US will lose ability to pay for its imports with its own currency - Paul Craig Roberts

(1) AIG-Gate: The World's Greatest Insurance Heist

From: Ellen Brown <ellenhbrown@gmail.com> Date: 07.02.2010 12:06 AM

February 6, 2010 09:15 PM

Ellen Brown

http://www.huffingtonpost.com/ellen-brown/aig-gate-the-worlds-great_b_451445.html

Rumor has it that Timothy Geithner is on his way out as Treasury Secretary, due to his involvement in the AIG scandal that is now unraveling in hearings before the House Oversight and Reform Committee. Bob Chapman writes in The International Forecaster:

Each day brings more revelations of efforts of the NY Fed and Goldman Sachs to hide the details of the criminal conspiracy of the AIG bailout ... This is a real crisis on the scale of Watergate. Corruption at its finest.

But unlike the perpetrators of the Watergate scandal, who wound up facing jail time, Geithner evidently has a golden parachute waiting at Goldman Sachs, not coincidentally the largest recipient of the AIG bailout. At least that is the rumor sparked by an article by Caroline Baum on Bloomberg News, titled "Goldman Parachute Awaits Geithner to Ease Fall." Hank Paulson, Geithner's predecessor, was CEO of Goldman Sachs before coming to the Treasury. Geithner, who has come up through the ranks of government, could be walking through the revolving door in the other direction.

Geithner has been under the House microscope for the decision of the New York Fed, made while he headed it, to buy out about $30 billion in credit default swaps (over-the-counter derivative insurance contracts) that AIG sold on toxic debt securities. The chief recipients of this payout were Goldman Sachs, Merrill Lynch, Societe Generale, and Deutsche Bank. Goldman got $13 billion, roughly equivalent to its bonus pool for the first 9 months of 2009. Critics are calling the New York Fed's decision a back-door bailout for the banks, which received 100 cents on the dollar for contracts that would have been worth far less had AIG been put through bankruptcy proceedings in the ordinary way. In a Bloomberg article provocatively titled "Secret Banking Cabal Emerges from AIG Shadows," David Reilly writes:

[T]he New York Fed is a quasi-governmental institution that isn't subject to citizen intrusions such as freedom of information requests, unlike the Federal Reserve. This impenetrability comes in handy since the bank is the preferred vehicle for many of the Fed's bailout programs. It's as though the New York Fed was a black-ops outfit for the nation's central bank.

The beneficiaries of the New York Fed's largesse got paid in full although they had agreed to take much less. In a November 2009 article titled "It's Time to Fire Tim Geithner," Dylan Ratigan wrote:

[L]ast November . . . New York Federal Reserve Governor Tim Geithner decided to deliver 100 cents on the dollar, in secret no less, to pay off the counter parties to the world's largest (and still un-investigated) insurance fraud -- AIG. This full payoff with taxpayer dollars was carried out by Geithner after AIG's bank customers, such as Goldman Sachs, Deutsche Bank and Societe Generale, had already previously agreed to taking as little as 40 cents on the dollar. Even after the GM autoworkers, bondholders and vendors all received a government-enforced haircut on their contracts, he still had the audacity to claim the "sanctity of contracts" in the dealings with these companies like AIG.

Geithner testified that the Fed's hands were tied and that the bank could not "selectively default on contractual obligations without courting collapse." But if it was all on the up and up, why all the secrecy? The contention that the Fed had no choice is also belied by a recent holding in the Lehman Brothers bankruptcy, in which New York Bankruptcy Judge James Peck set aside the same type of investment contracts that Secretaries Paulson and Geithner repeatedly swore under oath had to be paid in full in the case of AIG. The judge declared that clauses in those contracts subordinating other claims to the holders' claims were null and void in bankruptcy.

"And notice," comments bank analyst Chris Whalen, "that the world has not ended when the holders of [derivative] contracts are treated like everyone else." He calls the AIG bailout "a hideous political contrivance that ranks with the great acts of political corruption and thievery in the history of the United States."

If you tell a lie big enough and keep repeating it, said Joseph Goebbels, people will eventually come to believe it. The bailout of Wall Street initiated in September 2008 was premised on the dire prediction that if major counterparties in the massive edifice of derivative contracts were allowed to fall, the whole interlocking house of cards would collapse and take the economy with it. A hijacked Congress dutifully protected the derivatives game with taxpayer money while the real economy proceeded to collapse, the financial sector choosing to put their money into this protected form of speculative betting rather than into the more mundane and risky business of making loans to struggling businesses and homeowners. In the end, $170 billion of federal funds went to AIG and the banks feeding at its trough. Meanwhile, a survey of state finances by the Center on Budget and Policy Priorities think tank found that state governments face a collective $168 billion budget shortfall for fiscal 2010. If the money used to bail out AIG and the banks had been used to bail out the states instead, the states would not be facing insolvency today.

There is no law against gambling, but there is a law against fraud. In Watergate, a special prosecutor was appointed to bring criminal charges; but times seem to have changed.

(2) Threat to City of London as EU Parliament seeks to whittle away power to veto

Key members of the European Parliament are drawing up plans to whittle away Britain's power to veto decisions by the EU's new apparatus of financial super regulators, a move that may leave the City of London without defence against threatening proposals.

By Ambrose Evans-Pritchard
Published: 5:25PM GMT 02 Feb 2010

http://www.telegraph.co.uk/finance/comment/ambroseevans_pritchard/7139497/Threat-to-City-of-London-as-EU-Parliament-seeks-to-whittle-away-power-to-veto.html

The Euro-MPs in charge of drafting the rules for oversight bodies covering banking and markets aim to make it much harder for Britain or other states to use an "emergency brake" to block decisions on regulation, and perhaps to strip them of their veto altogether.

Alistair Darling, the Chancellor, thought he had secured a safeguard clause in a deal with fellow EU ministers late last year. The agreement stipulates that states can take their case to the European Council - the supreme EU body made up by heads of government - where decisions are taken by unanimity, if they think that a ruling by a trio of EU supervisory authorities "impinges on in any way on the fiscal responsibilities of the member states."

That is not end of the matter, however, since the European Parliament has broad legislative powers and can rewrite the text. All the major blocs in the assembly vowed last November that they would not agree to "water down" the original plans for the new bodies, which are to have "binding powers" to impose decisions.

Sven Giegold, a German Green MEP and 'rapporteur' in charge of markets regulation, said the veto on fiscal matters is so vague and sweeping that it enables states to block almost anything. "A European supervisory system in which each government could veto decisions would be rather silly. This veto - as defined - has to go," he said.

While the drafting process is confidential, it is understood that the Spanish 'rapporteur' in charge on banking regulation, also favours limiting the veto.

The Parliament is drawing up its version for a planned 'First Reading' by early summer. If the text clashes with Mr Darling's Council version - as it undoubtedly will - the two sides must thrash out a final compromise.

Mats Persson, director of the think tank Open Europe, said the move by Euro-MPs to unpick Mr Darling's deal is a threat to Britain's financial industry. "If MEPs manage to win support for this plan, it will add further momentum to what is already a significant transfer of powers from national regulators to the EU level. These plans will leave the UK Government completely without safeguards against proposals which could hurt the City of London. Crucially, accountability will fall into a black hole between EU regulators and the states. If the crisis taught us anything, it is the importance of holding both regulators and finance ministers to account," he said.

Mr Persson added that even if the veto survives for "crisis decisions" the proposals still allow the three regulatory bodies to make binding decision on day-to-day matters by simple majority vote (SMP), with an appeals process also by majority vote. Whatever happens, the EU apparatus will have the final say on how the City runs itself, ending a 300-hundred year tradition of self-rule at a single stroke.

Peter Skinner, a UK Labour MEP drafting a report on the insurance part of the three-legged structure, said he doubted that matters would ever reach the point where Britain would be overruled, adding that it would be absurd if a majority of states with no real financial industry were to impose decisions on a global financial hub such as London.

Mr Skinner is pushing for a system that gives the Financial Service Authority and other regulators a stronger say, but ultimately the conclusions of all the MEPS involved in the process will be moulded together into one position that must reflect the will of European Parliament. That body is in no mood to do favours for Britain or the City of London.

(3) Australian Government withdraws bank guarantee

Government decides to call time on bank guarantee, and now the game is on

February 8, 2010

http://www.smh.com.au/business/government-decides-to-call-time-on-bank-guarantee-and-now-the-game-is-on-20100207-nkvv.html

The federal government decision to prematurely withdraw its deposit and wholesale guarantee scheme for banks will ignite competition in financial services and intensify the need for banks to diversify their revenue base.

The guarantee has been vital to the stability of Australia's financial system as others were collapsing, but a nasty side effect was diminishing competition in Australian banking as the big four grabbed bigger slices of home loans, small-business loans, credit cards and deposits.

Recent figures show that the big four banks now hold more than three-quarters of outstanding mortgages; two years ago the figure was 56.8 per cent. With deposits the story is similar, particularly as the banks slug it out for them.

The decision by the government to withdraw the guarantee on March 31 is gutsy, given the recent fears of sovereign debt contagion across the eurozone, which is a chilling reminder that global growth - and confidence - is fragile, sovereign debt is a time-bomb, and the Chinese economic miracle could falter.

For Australia, whose reporting season moves into top gear this week, all eyes will be on the Commonwealth Bank, particularly any statements from its boss, Ralph Norris, about the economy, interest rates and the impact of the removal on the government guarantee.

Put simply, the banks have been a protected species for the past 18 months. This will change once the guarantee is lifted and competition returns, all of which will make the banks more resolute about finding new areas to grow.

Banks have been laying the groundwork for this day. They have been charging big rates for corporate loans, demanding a lot of collateral, putting up rates more quickly than the Reserve Bank, and raising more capital than needed to fund acquisitions for growth.

They are also aware how fragile the global credit markets are, and to this end have been trying to beef up their deposit base. As a result, retail deposit interest rates - particularly for longer-term deposits - are higher than wholesale interest rates. Official rates stand at 3.75 per cent, but one-year term deposits pay more than 5.5 per cent.

The financial crisis showed the banks just how quickly capital markets can dry up, leaving borrowers struggling to raise funding. Deposits - with the help of a government guarantee - are there in the good times and the bad. This scare with the credit markets also explains why the banks have been looking at other business opportunities.

NAB has been at the vanguard. It fired the first salvo when it pipped AMP last year to buy Aviva, and now it is trying to pip AMP again with a counter-bid for AXA. A group of senior executives are believed to be in Paris talking to AXA's parent, AXA SA, about doing a deal to carve up AXA Asia Pacific. (Both AMP and NAB's takeover offers for AXA involve splitting off AXA's Asian assets and selling them to the French AXA SA, which owns 54 per cent of the Australian company.) Also, NAB is believed to be looking at opportunities in Britain, including buying Royal Bank of Scotland assets. But NAB is not alone. With the battle for AXA's Australian business far from over, the banks are on the prowl.

In a new report, Now for Plan B: the ongoing search for fifth pillar status, Brett Le Mesurier, an analyst with Axiome Equities, boldly writes that AMP is expected to lose the bidding contest for AXA to NAB.

It is game on. The $1 trillion wealth management industry is screaming out for consolidation, and with prices still low, the big will get bigger, the small will be crushed, and the banks will be at the forefront of the consolidation. The report runs the numbers over a series of scenarios, the most interesting being a bid by AMP for Bank of Queensland. Pitched at a 27 per cent premium to BoQ's 30-day volume-weighted average price, earnings per share would be diluted this year.

Such a merger is not as crazy as it seems: AMP has a bank with a better credit rating than BoQ and so would improve BoQ's credit rating; and culturally both companies are based on franchise models for retail financial service distribution. Other options include AMP buying IOOF Holdings or Suncorp's Life business.

If AMP does nothing it becomes a sitting duck. The report speculates that ANZ and CBA are the most likely suitors, as they look to beef up their wealth management operations.

Whatever happens, the break-up of AXA is a done deal, and the role of the ACCC in the future landscape of the country's wealth management sector cannot be underestimated.

With the government guarantee ending, the banks will soon be operating in a new world order, and the sovereign default risk in Europe could well be a harbinger of more to come. They will use any chance to use their excess capital, particularly at a time when they are seeing a land-grab in wealth management that will not be repeated.

(4) America slides deeper into depression as Wall Street revels

December was the worst month for US unemployment since the Great Recession began.

By Ambrose Evans-Pritchard

Published: 6:35PM GMT 10 Jan 2010

http://www.telegraph.co.uk/finance/comment/ambroseevans_pritchard/6962632/America-slides-deeper-into-depression-as-Wall-Street-revels.html

The labour force contracted by 661,000. This did not show up in the headline jobless rate because so many Americans dropped out of the system. The broad U6 category of unemployment rose to 17.3pc. That is the one that matters.

Wall Street rallied. Bulls hope that weak jobs data will postpone monetary tightening: a silver lining in every catastrophe, or perhaps a further exhibit of market infantilism.

The home foreclosure guillotine usually drops a year or so after people lose their job, and exhaust their savings. The local sheriff will escort them out of the door, often with some sympathy –– just like the police in 1932, mostly Irish Catholics who tithed 1pc of their pay for soup kitchens.

Realtytrac says defaults and repossessions have been running at over 300,000 a month since February. One million American families lost their homes in the fourth quarter. Moody's Economy.com expects another 2.4m homes to go this year. Taken together, this looks awfully like Steinbeck's Grapes of Wrath.

Judges are finding ways to block evictions. One magistrate in Minnesota halted a case calling the creditor "harsh, repugnant, shocking and repulsive". We are not far from a de facto moratorium in some areas.

This is how it ended between 1932 and 1934, when half the US states declared moratoria or "Farm Holidays". Such flexibility innoculated America's democracy against the appeal of Red Unions and Coughlin Fascists. The home siezures are occurring despite frantic efforts by the Obama administration to delay the process.

This policy is entirely justified given the scale of the social crisis. But it also masks the continued rot in the housing market, allows lenders to hide losses, and stores up an ever larger overhang of unsold properties. It takes heroic naivety to think the US housing market has turned the corner (apologies to Goldman Sachs, as always). The fuse has yet to detonate on the next mortgage bomb, $134bn (£83bn) of "option ARM" contracts due to reset violently upwards this year and next.

US house prices have eked out five months of gains on the Case-Shiller index, but momentum stalled in October in half the cities even before the latest surge of 40 basis points in mortgage rates. Karl Case (of the index) says prices may sink another 15pc. "If the 2008 and 2009 loans go bad, then we're back where we were before – in a nightmare."

David Rosenberg from Gluskin Sheff said it is remarkable how little traction has been achieved by zero rates and the greatest fiscal blitz of all time. The US economy grew at a 2.2pc rate in the third quarter (entirely due to Obama stimulus). This compares to an average of 7.3pc in the first quarter of every recovery since the Second World War.

Fed hawks are playing with fire by talking up about exit strategies, not for the first time. This is what they did in June 2008. We know what happened three months later. For the record, manufacturing capacity use at 67.2pc, and "auto-buying intentions" are the lowest ever.

The Fed's own Monetary Multiplier crashed to an all-time low of 0.809 in mid-December. Commercial paper has shrunk by $280bn ($175bn) in since October. Bank credit has been racing down a hair-raising black run since June. It has dropped from $10.844 trillion to $9.013 trillion since November 25. The MZM money supply is contracting at a 3pc annual rate. Broad M3 money is contracting at over 5pc.

Professor Tim Congdon from International Monetary Research said the Fed is baking deflation into the pie later this year, and perhaps a double-dip recession. Europe is even worse.

This has not stopped an army of commentators is trying to bounce the Fed into early rate rises. They accuse Ben Bernanke of repeating the error of 2004 when the Fed waited too long. Sometimes you just want to scream. In 2004 there was no housing collapse, unemployment was 5.5pc, banks were in rude good health, and the Fed Multiplier was 1.73.

How anybody can see imminent inflation in the dying embers of core PCE, just 0.1pc in November, is beyond me.

Mr Rosenberg is asked by clients why Wall Street does not seem to agree with his grim analysis.

His answer is that this is the same Mr Market that bought stocks in October 1987 when they were 25pc overvalued on Shiller "10-year normalized earnings basis" – exactly as they are today – and bought them at even more overvalued prices in 2007, long after the property crash had begun, Bear Stearns funds had imploded, and credit had its August heart attack. The stock market has become a lagging indicator. Tear up the textbooks.

(5) Deficits eroding US ability to wage war

From: IHR News <news@ihr.org> Date: 08.02.2010 04:00 PM

http://www.nytimes.com/2010/02/02/us/politics/02deficit.html

Deficits May Alter U.S. Politics and Global Power

By DAVID E. SANGER

Published: February 1, 2010

WASHINGTON — In a federal budget filled with mind-boggling statistics, two numbers stand out as particularly stunning, for the way they may change American politics and American power.

The first is the projected deficit in the coming year, nearly 11 percent of the country’s entire economic output. That is not unprecedented: During the Civil War, World War I and World War II, the United States ran soaring deficits, but usually with the expectation that they would come back down once peace was restored and war spending abated.

But the second number, buried deeper in the budget’s projections, is the one that really commands attention: By President Obama’s own optimistic projections, American deficits will not return to what are widely considered sustainable levels over the next 10 years. In fact, in 2019 and 2020 — years after Mr. Obama has left the political scene, even if he serves two terms — they start rising again sharply, to more than 5 percent of gross domestic product. His budget draws a picture of a nation that like many American homeowners simply cannot get above water.

For Mr. Obama and his successors, the effect of those projections is clear: Unless miraculous growth, or miraculous political compromises, creates some unforeseen change over the next decade, there is virtually no room for new domestic initiatives for Mr. Obama or his successors. Beyond that lies the possibility that the United States could begin to suffer the same disease that has afflicted Japan over the past decade. As debt grew more rapidly than income, that country’s influence around the world eroded.

Or, as Mr. Obama’s chief economic adviser, Lawrence H. Summers, used to ask before he entered government a year ago, “How long can the world’s biggest borrower remain the world’s biggest power?”

The Chinese leadership, which is lending much of the money to finance the American government’s spending, and which asked pointed questions about Mr. Obama’s budget when members visited Washington last summer, says it thinks the long-term answer to Mr. Summers’s question is self-evident. The Europeans will also tell you that this is a big worry about the next decade.

Mr. Obama himself hinted at his own concern when he announced in early December that he planned to send 30,000 American troops to Afghanistan, but insisted that the United States could not afford to stay for long.

“Our prosperity provides a foundation for our power,” he told cadets at West Point. “It pays for our military. It underwrites our diplomacy. It taps the potential of our people, and allows investment in new industry.”

And then he explained why even a “war of necessity,” as he called Afghanistan last summer, could not last for long.

“That’s why our troop commitment in Afghanistan cannot be open-ended,” he said then, “because the nation that I’m most interested in building is our own.”

Mr. Obama’s budget deserves credit for its candor. It does not sugarcoat, at least excessively, the potential magnitude of the problem. President George W. Bush kept claiming, until near the end of his presidency, that he would leave office with a balanced budget. He never got close; in fact, the deficits soared in his last years.

Mr. Obama has published the 10-year numbers in part, it seems, to make the point that the political gridlock of the past few years, in which most Republicans refuse to talk about tax increases and Democrats refuse to talk about cutting entitlement programs, is unsustainable. His prescription is that the problem has to be made worse, with intense deficit spending to lower the unemployment rate, before the deficits can come down.

Mr. Summers, in an interview on Monday afternoon, said, “The budget recognizes the imperatives of job creation and growth in the short run, and takes significant measures to increase confidence in the medium term.”

He was referring to the freeze on domestic, non-national-security-related spending, the troubled effort to cut health care costs, and the decision to let expire Bush-era tax cuts for corporations and families earning more than $250,000.

But Mr. Summers said that “through the budget and fiscal commission, the president has sought to provide maximum room for making further adjustments as necessary before any kind of crisis arrives.”

Turning that thought into political action, however, has proved harder and harder for the Washington establishment. Republicans stayed largely silent about the debt during the Bush years. Democrats have described it as a necessary evil during the economic crisis that defined Mr. Obama’s first year. Interest in a long-term solution seems limited. Or, as Isabel V. Sawhill of the Brookings Institution put it Monday on MSNBC, “The problem here is not honesty, but political will.”

One source of that absence of will is that the political warnings are contradicted by the market signals. The Treasury has borrowed money to finance the government’s deficits at remarkably low rates, the strongest indicator that the markets believe they will be paid back on time and in full.

The absence of political will is also facilitated by the fact that, as Prof. James K. Galbraith of the University of Texas puts it, “Forecasts 10 years out have no credibility.”

He is right. In the early years of the Clinton administration, government projections indicated huge deficits — over the “sustainable” level of 3 percent — by 2000. But by then, Mr. Clinton was running a modest surplus of about $200 billion, a point Mr. Obama made Monday as he tried anew to remind the country that the moment was squandered when “the previous administration and previous Congresses created an expensive new drug program, passed massive tax cuts for the wealthy, and funded two wars without paying for any of it.”

But with this budget, Mr. Obama now owns this deficit. And as Mr. Galbraith pointed out, it is possible that the gloomy projections for 2020 are equally flawed.

Simply projecting that health care costs will rise unabated is dangerous business.

“Much may depend on whether we put in place the financial reforms that can rebuild a functional financial system,” Mr. Galbraith said, to finance growth in the private sector — the kind of growth that ultimately saved Mr. Clinton from his own deficit projections.

His greatest hope, Mr. Galbraith said, was Stein’s law, named for Herbert Stein, chairman of the Council of Economic Advisers under Presidents Richard M. Nixon and Gerald R. Ford.

Stein’s law has been recited in many different versions. But all have a common theme: If a trend cannot continue, it will stop.

(6) US will lose ability to pay for its imports with its own currency - Paul Craig Roberts

From: IHR News <news@ihr.org> Date: 08.02.2010 04:00 PM

http://www.countercurrents.org/roberts030210.htm

The Crisis Is Not Over

By Paul Craig Roberts

23 January, 2010
Vdare.com

Readers ask if the financial crisis is over, if the recovery is for real and, if not, what are Americans’ prospects. The short answer is that the financial crisis is not over, the recovery is not real, and the U.S. faces a far worse crisis than the financial one. Here is the situation as I understand it:

The global crisis is understood as a banking crisis brought on by the mindless deregulation of the U.S. financial arena. Investment banks leveraged assets to highly irresponsible levels, issued questionable financial instruments with fraudulent investment grade ratings, and issued the instruments through direct sales to customers rather than through markets.

The crisis was initiated when the U.S. allowed Lehman Brothers to fail, thus threatening money market funds everywhere. The crisis was used by the investment banks, which controlled U.S. economic policy, to secure massive subsidies to their profits from a taxpayer bailout and from the Federal Reserve. How much of the crisis was real and how much was hype is not known at this time.

As most of the derivative instruments had never been priced in the market, and as their exact composition between good and bad loans was unknown (the instruments are based on packages of securitized loans), the mark-to-market rule drove the values very low, thus threatening the solvency of many financial institutions. Also, the rule prohibiting continuous shorting had been removed, making it possible for hedge funds and speculators to destroy the market capitalization of targeted firms by driving down their share prices.

The obvious solution was to suspend the mark-to-market rule until some better idea of the values of the derivative instruments could be established and to prevent the abuse of shorting that was destroying market capitalization. Instead, the Goldman Sachs people in charge of the U.S. Treasury and, perhaps, the Federal Reserve as well, used the crisis to secure subsidies for the banks from U.S. taxpayers and from the Federal Reserve. It looks like a manipulated crisis as well as a real one due to greed unleashed by financial deregulation.

The crisis will not be over until financial regulation is restored, but Wall Street has been able to block re-regulation. Moreover, the response to the crisis has planted seeds for new crises. Government budget deficits have exploded. In the U.S. the fiscal year 2009 federal budget deficit was $1.4 trillion, three times higher than the 2008 deficit. President Obama’s budget deficits for 2010 and 2011, according to the latest report, will total $2.9 trillion, and this estimate is based on the assumption that the Great Recession is over. Where is the U.S. Treasury to borrow $4.3 trillion in three years?

This sum greatly exceeds the combined trade surpluses of America’s trading partners, the recycling of which has financed past U.S. budget deficits, and perhaps exceeds total world savings.

It is unclear how the 2009 budget deficit was financed. A likely source was the bank reserves created for financial institutions by the Federal Reserve when it purchased their toxic financial instruments. These reserves were then used to purchase the new Treasury debt. In other words, the budget deficit was financed by deterioration in the balance sheet of the Federal Reserve. How long can such an exchange of assets continue before the Federal Reserve has to finance the government’s deficit by creating new money?

Similar deficits and financing problems have affected the EU, particularly its financially weaker members. To conclude: the initial crisis has planted seeds for two new crises: rising government debt and inflation.

A third crisis is also in place. This crisis will occur when confidence is lost in the U.S. dollar as world reserve currency. This crisis will disrupt the international payments mechanism. It will be especially difficult for the U.S. as the country will lose the ability to pay for its imports with its own currency. U.S. living standards will decline as the ability to import declines.

The financial crisis is essentially a U.S. crisis, spread abroad by the sale of toxic financial instruments. The rest of the world got into trouble by trusting Wall Street. The real American crisis is much worse than the financial crisis. The real American crisis is the offshoring of U.S. manufacturing, industrial, and professional service jobs such as software engineering and information technology.

Jobs offshoring was initiated by Wall Street pressures on corporations for higher earnings and by performance-related bonuses becoming the main form of managerial compensation. Corporate executives increased profits and obtained bonuses by substituting cheaper foreign labor for U.S. labor in the production of goods and services marketed in the U.S.

Jobs offshoring is destroying the ladders of upward mobility that made the U.S. an opportunity society and eroding the value of a university education. For the first decade of the 21st century, the U.S. economy has been able to create net new jobs only in domestic nontradable services, such as waitresses, bartenders, sales, health and social assistance and, prior to the real estate collapse, construction. These jobs are lower paid than the jobs were that have been offshored, and these jobs do not produce goods and services for export.

Jobs offshoring has increased the U.S. trade deficit, putting more pressure on the dollar’s role as reserve currency. When offshored goods and services return to the U.S., they add to imports, thus worsening the trade imbalance.

The policy of jobs offshoring is insane. It is shifting U.S. GDP growth to the offshored locations, such as China, thus halting growth in U.S. consumer incomes. For the past decade, U.S. households substituted an increase in indebtedness for the lack of growth in income in order to continue increasing their consumption. With their home equity refinanced and spent, real estate values down, and credit card debt at unsustainable levels, it is no longer possible for the U.S. economy to base its growth on a rise in consumer debt. This fact is a brake on U.S. economic recovery.

Stimulus packages cannot substitute for the growth in real income. As so many high value-added, high productivity U.S. jobs have been offshored, there is no way to achieve real growth in U.S. personal incomes. Stimulus spending simply adds to government debt and pressure on the dollar, and sows seeds for high inflation.

The U.S. dollar survives as reserve currency because there is no apparent substitute. The euro has its own problems. Moreover, the euro is the currency of a non-existent political entity. National sovereignty continues despite the existence of a common currency on the continent (but not in Great Britain). If the dollar is abandoned, then the result is likely to be bilateral settlements in countries’ own currencies, as Brazil and China now are doing. Alternatively, John Maynard Keynes’ bancor scheme could be implemented, as it does not require a reserve currency country. Keynes’ plan is designed to maintain a country’s trade balance. Only a reserve currency country can get its trade and budget deficits so out of balance as the U.S. has done. The prospect of U.S. default and/or inflation and decline in the dollar’s exchange value is a threat to the reserve system.

The threats to the U.S. economy are extreme. Yet, neither the Obama administration, the Republican opposition, economists, Wall Street, nor the media show any awareness. Instead, the public is provided with spin about recovery and with higher spending on pointless wars that are hastening America’s economic and financial ruin.

Paul Craig Roberts was Assistant Secretary of the Treasury during President Reagan’s first term. He was Associate Editor of the Wall Street Journal. He can be reached at paulcraigroberts@yahoo.com.