We shouldn’t, however, join the camp of the deluded. So let’s set aside Obama’s prevarications and follow his actions to try and determine where he’s taking us. During his first two years in office, Obama went on a massive spending spree: first a $700 billion bailout; then a $787 billion stimulus program; then Obamacare, estimated by the Congressional Budget Office to cost $1.76 trillion over the next decade. In 2010, Obama and the Democrats suffered a serious rebuke in the midterm election. This, however, has not changed Obama’s priorities in the slightest. If he had the power, he would keep spending with reckless abandon. The Republicans, however, now control the House of Representatives and they have been blocking Obama. Under pressure to address the deficit, Obama set up the Bowles-Simpson deficit reduction commission. The commission released a report that showed how to remove $4 trillion in red ink over the coming decade. It bowed neither to the orthodoxy of left nor right, advocating Social Security and Medicare cuts (while protecting low-income beneficiaries), trimming defense and social programs, and raising tax revenues by reforming the tax code, closing loopholes, and lowering rates. Obama’s reaction? He ignored the commission’s findings, even though they could have provided bipartisan political cover for him to do things that would make a real dent in the national debt. The commission offered Obama the chance to strike a “grand bargain” with the Republicans, but Obama declined the offer.
In August 2011, the credit rating of the United States was lowered by Standard & Poor’s from AAA to AA+. This is the first time the United States had lost its AAA rating since the agency first granted it in 1917. The S & P, along with other credit agencies like Fitch and Moody’s, had all warned the Obama administration and Congress that without a serious approach to reducing the deficit, the country faced a downgrade. Instead of taking this chastening advice, Obama officials attacked the S & P. Obama fatuously said that no matter what “some agency” might say, “we’ve been and always will be a triple-A country.”
7
So Obama has yet to show any real concern with the debt. In an election year, admittedly, he realizes he must appear to be concerned. Thus Obama offers deficit reduction measures that are largely symbolic and almost comically ineffective. His Buffett Rule, for example, would only cover a small number of wealthy Americans and raise, according to the Tax Foundation, “insignificant revenue.”
8
How, then, could America erase its annual deficit if the president and Congress were serious about doing it? One way is through tax increases. The Tax Foundation is blunt about how severe these would have to be. In order to balance the budget next year, the government would have to impose on all Americans earning $200,000 a year or more the Barack Obama Sr. tax rate: 100 percent. The Tax Foundation says this would raise $1.5 trillion and balance the budget: “It may be economically ruinous, but at least this proposal would solve the problem.”
9
The other way is to reduce government spending. Here the government would have to impose a one-third across the board spending cut. It’s drastic, but businesses do it all the time when they are in comparable straits. Certainly a family facing debt proportionate to that of the United States would have no choice but to alter its spending habits and modify its lifestyle.
Of course, neither of these two drastic approaches—the 100 percent tax rate or the 30 percent spending cut—is likely to be adopted, no matter who is elected this year. Deficits, therefore, are likely to continue and the only questions are: How big? And with what effect? America could afford to run deficits of the Reagan and even Bush magnitude as long as the economy was growing at a steady pace. But Obama’s economy is virtually stagnant; its growth is anemic at best. Moreover, Obama’s deficits are unsustainable, even as Obama jubilantly tells donors, “We’re not even halfway there yet,” with his promise of yet more big spending programs. Not even halfway there? Obama seems to be saying that he intends to keep going the same way he has been; indeed, he wants to speed up the pace. Thus we have the unpleasant task of considering what deficits of the Obama magnitude will do to the American economy over the next four years.
First, a $20 trillion national debt will force the government to print vast quantities of new money. Running the presses at the national mint is not exactly how the government does it—the Federal Reserve has more sophisticated techniques to achieve the same result—but printing money is a perfectly reasonable way to summarize what the government is actually doing. It is solving the problem through inflation. So imagine that the government prints $20 trillion. Hey, now we can pay off the national debt! Yes, but we have also put $20 trillion of new money into circulation. This will dramatically raise prices, causing inflation rates far worse than anything America endured in the mid to late 1970s.
“We haven’t experienced real inflation,” Nina Easton writes in
Fortune
, “in more than a generation.”
10
Only older Americans are likely to recall grocery items with multiple stickers because the prices kept going up from month to month. Still, we may recall the double-digit inflation of the 1970s with fond nostalgia. Our debt levels suggest that in the future we may be facing banana republic levels of inflation—the kind of triple-digit runaway inflation typically experienced in countries like Peru and Argentina—except that today the banana republics are doing far better than we are, with higher growth rates and lower inflation risks. Today the only countries that have runaway inflation are places like Haiti and Zimbabwe, and how humiliating it would be for us to be in their position. Inflation not only drives up prices, it also reduces the value of work and savings. It also wipes out the value of the dollar, making dollar bills worth less and less. A high rate of inflation makes the dollar essentially worthless, just as Third World currencies used to be, just as Confederate money had little or no purchasing power after the Civil War.
Second, debts in the $20 trillion range will force upon foreign lenders two separate recognitions: the recognition that they can now push us around, and the recognition that the United States is never going to pay that money back. Consider what would happen if we owe China several trillion dollars, and the Chinese decide to take over Taiwan. Sure, we can fight, but as one wag put it, “We’d have to borrow the money from China to wage that war.” But in reality there might not be a war. Both the Chinese and the Americans know that the international game has changed. We are no longer indisputably in charge; we can object, but it’s no longer the case that what America says goes. In fact, America now has to keep China happy instead of China having to keep America happy. Debtors are the ones who have to kowtow to creditors, not the other way around. Thus we may be headed for a world in which America has to reluctantly accept a lot of bad outcomes over the next several decades because we are no longer the economic superpower that we used to be.
It will also become clear to countries like China that America just doesn’t have the funds to pay back the debt. We can print money and give the foreigners more of our dollars, but they are smart enough to realize that these dollars are buying them less and less. So they are going to start by demanding much higher interest rates on the money they are lending us. That’s not good, because it means that the government is going to have to pay more interest to service the debt; that drives the annual deficit up even further. Moreover, at some point not long from now, foreign countries are going to dispense with the dollar as the universal currency and pick an alternative: perhaps the Chinese yuan, or more likely a basket of currencies that hold their value better than the currency of the United States. Already China is taking steps in this direction. The Chinese government has encouraged its exporters and foreign firms exporting to China to move away from dollar transactions and start pricing their goods in yuan. On December 25, 2011, China and Japan reached an agreement to stop using dollars and instead use their own currencies in trade and financial transactions. Economist Arvind Subramanian predicts that the yuan “could become the premier reserve currency by the end of this decade, or early next decade.”
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Once the dollar ceases to be the international currency, then we are in trouble. Now it’s no use printing more dollars to pay the foreigners, since the foreigners won’t be willing to accept dollars as payment. They will demand to be paid in the new currency, and America will have to turn over assets, goods, and services in order to obtain sufficient amounts of the new currency. This is the point at which the lenders can say: if you can’t pay, then we are going to demand that you sell us your major companies, or give us a portion of the real estate in the country, or sell us the national parks.
Third, with $20 trillion in debt, Americans are going to see a sharp decline in their standard of living. We will become poorer as other nations become richer. Our stock market will keep falling as theirs keeps rising. And the effects will be felt across the country. People who are used to going on vacation to Europe are going to have to vacation near their homes, or camp in the backyard. Indeed, it will be more common to see foreigners vacationing in America than to see Americans vacationing abroad. Americans will have to become accustomed to eating at home rather than eating out. If things get bad enough, families may have to ration how often they eat meat. Indeed, Americans will have to endure the unfamiliar sight of Chinese, Brazilian, and Indian visitors occupying the best tables in the best American restaurants. Designers won’t bother to have stores in New York or Los Angeles, preferring venues like Rio de Janeiro, Seoul, and Beijing. Americans will start going abroad to study, and find that they may have to learn Mandarin Chinese or Hindi in order to improve their job prospects; the best jobs, after all, will be found elsewhere. Moreover, American popular culture will lose its global appeal, since America will cease to be associated with what is new and rich and cool. Even more significant, the average size of the American home, which has been growing since World War II, is likely to start shrinking. Homeownership will become a luxury, even for one and two-bedroom homes. Renting will become the norm. We may even see families have to share apartments and living spaces, the way that they did when I was growing up in India. The number of homeless may surge, and the government may no longer be able to afford facilities to shelter or feed them. Beggars and panhandlers, who are now a rare sight in a few cities, may begin to appear all over the country. Unemployment will reach levels not seen since the Great Depression, and Americans will be accustomed to seeing what we now see mainly in foreign countries: lots of people with nothing to do, just standing around. For the first time in American history, children will grow up and be worse off than their parents. How can they not be? They are saddled with $20 trillion in debt with no benefits to show for it, and this is money they will have to pay back.
All of this may seem like a nightmare scenario, yet there is nothing dreamlike or imaginary about it. Some of it is already happening, as suggested by a recent headline in the
Wall Street Journal
, “Foreigners Snap Up Properties in the U.S.” The newspaper reports that America is seeing “a property buying binge by Asians, Canadians, Europeans, and Latin Americans” who are increasingly convinced that “America is on sale.” We read that “in Manhattan, foreign buyers, led by Russians and Ukranians, are setting records by buying apartments at some of the city’s high-end addresses. In Miami, Brazilians and Venezuelans have helped soak a glut of condos in glass towers overlooking Biscayne Bay, while in Arizona, Canadians are snapping up foreclosed properties they hope to rent out at a profit.”
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Expect all of this to accelerate; it is the logical outcome of continuing down the Obama path. Now, one might say, Obama can’t be this stupid. Surely he recognizes that debt of this magnitude cannot go on forever, and as economist Herbert Stein once put it, “If something cannot go on forever, it will stop.” There may be some who hold that Obama will correct his course in the second term, and his irresponsible spending will then stop. One reason for thinking this is that if America goes down, it won’t be the rich alone who suffer. It will also be the middle class and the poor. Therefore whatever his anti-colonial philosophy, why would Obama pursue policies that harm ordinary and even poor people in America?
The answer to this question is provided in a recent article in
Foreign Policy
, revealingly titled, “We Are the 1 Percent.” The article points out that there is indeed a large discrepancy in America between the rich and the poor. But there is an equally large discrepancy between the American standard of living and that of the rest of the world. In other words, Americans who are middle class or even poor by our standards are well-off by world standards. Consider this: the average American household is, according to the article, “scraping by on $55 per person per day.” But the global average “is about a fifth of that,” about $10 a day. To be in the top 1 percent globally, all you need is an income of $34,000 a year.
We find in the article a supreme irony. Many of Obama’s supporters rail against the top 1 percent, fancying themselves in the lowly 99 percent, and this may be true as far as they are concerned. But it is not true as far as Obama is concerned. When he talks about the 1 percent and the 99 percent, he is using a global basis of comparison. So by Obama’s measure, the vast majority of Americans are counted as rich; indeed, as the
Foreign Policy
article accurately points out, “if you live in the West, you probably are that 1 percent.”
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Given his anti-colonial mindset, Obama might be supremely indifferent if middle class, lower middle class, and even poor Americans are hurt by his policies, because they too are part of the neocolonial affluent class; they too owe global reparations; and therefore they too must pay their fair share to achieve global justice through economic leveling.