US crisis looms after election

By Dave Lindorff

If the past four years have been a struggle for most Americans, wait until they see the next four.

US President Obama(L) and Mitt Romney(R)

And no, I’m not talking about that “fiscal cliff” that is supposedly giving the stock market a case of the jitters.

The truth is that we’re not going to see an automatic $103-billion across-the-board cut in the discretionary federal budget as threatened. And we’re not going to see some of the other dire warnings that are part of that doomsday scenario come to pass either, like a return of the Alternative Minimum Tax to the 2000 level, or a sharp increase in taxes for the middle class. We won’t see these draconian actions because even though Congress, in August 2011, made them automatic in the event that the White House and Congress couldn’t come up with a plan to cut the budget deficit by $1.2 trillion over the next 10 years, and even though Congress didn’t come up with a plan, Congress will not let the “automatic” cuts occur.

The thing is, the “fiscal cliff” is not an act of God or nature. Congress passed that law, and it can -- and will -- repeal it. It will repeal it because if it didn’t, the people of the United States would descend upon Congress with torches blazing and pitchforks in hand (and this being the US of A, also with heavy weaponry of a more modern type in hand), and Congress members have a strong survival instinct.

So forget the “fiscal cliff.”

But hold on to your seats anyhow. That’s the word from many economists and currency experts. Because the US economy is still on the skids, there is no help coming from the rest of the world, which is also limping badly, the US government will remain dysfunctional whichever party comes out on top in the November election, and the policies of either Obama or Romney are going to make things worse.

Let’s start with some things that probably will happen at year’s end, courtesy of the August, 2011 Budget Control Act. First of all, the temporary reduction of the Social Security Payroll tax from 6.2% to 4.2%, which put an extra $160 billion a year in spending money into the hands of average Americans (while adding that same amount to the budget deficit), will be ended, pulling that $160 billion back out of their hands in 2013. Second, extended unemployment benefits will almost certainly be cancelled. Never mind that the number of long-term unemployed -- people who have been jobless for more than six months and who are unable to find work in an economy where there are six people looking for every available job opening -- has increased. Those unemployment checks from the government that have helped them feed their families, hold on to their homes, and keep spending and propelling the economy, will cease after just 26 weeks of joblessness after Jan. 1. That will withdraw another $44 billion from the 2013 economy, for a total of over $200 billion.

Meanwhile we can be sure that any compromise between lame duck Congressional Republicans and Democrats in the waning days of the current Congress this December to restore the cuts that the 2011 Budget Control Act threatens to make in the military budget, will include cuts in other parts of the federal budget. That means cuts in things like highway repair, education, health care and other key activities of government. All these cuts will further reduce the amount of funds flowing into the economy. The ultimate hit might be less than the $200 billion that would have occurred under the “fiscal cliff” scenario, but the cuts will still be huge, and together with the damage caused by the Social Security and unemployment benefit cuts, will almost certainly throw the US economy back into recession -- only this time there will be no fiscal stimulus plan put forward to turn things back around.

Meanwhile, as Axel Merk, president and chief investment officer of Merk Investments, a fund management firm specializing in foreign currencies, explains, the longer-term budget crisis facing the US will become worse whether Obama or Romney wins the presidential election on Nov. 6. One reason, he says, is that neither candidate is really going to tackle the budget deficit, which, running at about $1 trillion per year now, ultimately threatens the dollar.

Obama is only talking about “slowing the rate of growth” in federal spending. Meanwhile, while Romney is talking about reducing the deficit by cutting budget items that, as the candidate put it in the first debate, “aren’t worth borrowing from China to pay for,” the reality is that Congress will not allow him to do that. As Merk notes, “Romney has already made so many concessions, from continued subsidization of student loans to preserving defense spending, that a Romney/Ryan budget is at risk of looking very much like the sort of budget we see anywhere in the world: one that replaces the faces, cuts ‘wasteful’ spending and replaces it with ‘worthy’ spending; clearly, what is ‘wasteful” ‘and ‘worthy’ is in the eye of the beholder; but don’t worry, as in four years, citizens have the opportunity to vote for change yet again. Unfortunately, we might replace the faces, but the deficits may remain.”

Actually, Romney is talking about hugely increasing military spending by $2 trillion over 10 years, which works out to an extra $200 billion per year -- an amount equal next year to the amount of spending that will be yanked out of the economy by ending the Social Security tax cut and ending extended unemployment benefits.

There is another danger too. Merk points out that, contrary to the claims of many politicians that “socialist” Europe is a financial disaster while the US, that alleged bastion of free enterprise, is in much sounder shape; actually, the US is in far worse shape than Europe. Not only is the US budget deficit, now running at 3% of Gross Domestic Product, worse than the deficits of some of the weaker European economies like Portugal or Italy, but the US also has a whopping current account deficit. That is to say, the US buys a lot more than it sells to the world -- so that the rest of the world that sells stuff to America has to buy US dollar-denominated assets (primarily Treasury bonds) to prevent the dollar from falling or collapsing. The Eurozone doesn’t have this problem -- it sells more than it buys, which is why through all the ups and downs of its current crisis, the Euro has pretty much held its value.

The dollar has been losing value against other currencies, but has not collapsed because of its historic role as the global reserve currency, but Merk worries that the US dollar is simply waiting for a crisis that will lead foreign investors to stop buying US bonds, or just to reduce their buying of those bonds, as China and some other countries have already begun to do. Merk suggests this could happen whether there is a return to “normal” for the US economy, with a reasonable slow growth rate, a strong economic rebound, or a crisis of confidence in US bonds.

A fall in the dollar could be devastating, especially in the short-term, in a country where 70% of the economy is based on consumer spending, and where more than 16% of that spending is for imported goods which would become more expensive -- possible extremely more expensive--were the dollar to fall. While more expensive imported goods might lead Americans to buy fewer imports, the reality is they have no choice in most cases -- the imported goods include oil and critical parts, for example for the auto industry -- and the US has no choice but to buy these goods, whatever the higher price in dollars. Plus, fears of a weaker dollar would likely lead to reduced spending by consumers even on US-made goods and services.

The good news in all this is that it is going to become harder and harder for the US to continue to continue to operate a policy of constant war, and of having its military spread all around the world. Especially if the dollar falls, adding massively to the cost of overseas stationing of US troops, planes and naval vessels.

The danger is that when devaluation of the dollar occurs, it is hard to know how the American public will react.