1 August 2011

Origins of the Crisis

Letting one dollar equal a trillion, the total debt of the US Government is roughly $14.27. This divides into $8.32 of public debt, which is held by other nations, individuals, and institutions, and $5.95 of intragovernmental debt, which is owed to programs like Social Security and Medicare, and to the Federal Reserve.

Of the $8.32 of public debt, $4.47 is owed to other countries: $1.15 to China, $0.91 to Japan, $0.36 to the UK, roughly $0.20 each to oil exporters and Brazil, and $1.70 to the rest of the world. $0.63 is due to mutual funds, $0.61 to private pension plans, and $0.31 to depositors like commercial banks, credit institutions, and credit unions. Insurance companies hold $0.25 and savings bonds and state pensions $.018 each, while individuals, brokers and dealers, bank personal trusts and estates, corporate and non-corporate businesses, and other investors are due $1.21.

Intra-governmental debt is something of a misnomer: $4.53 of it is really money owed by the government to the American people. The biggest single number in sight, $2.40, represents what Americans have collectively set aside for retirement, or Social Security. This $2.40 is a surplus, collected over decades, as the total revenues from Social Security payroll taxes have exceeded the total amount being paid to beneficiaries. This surplus has been invested in the government, where it counts towards the total debt. The psychological impact of this language game should be clear. What ought to be celebrated as sound financial planning appears instead as further evidence of reckless profligacy. The more money we save, the poorer we are told we are. There is also $1.68 in savings for health care and $0.40 dedicated to needs such as highways, housing, the disposal of nuclear waste, and unemployment insurance.

The remaining $1.42, the second-largest amount, is owed to the Federal Reserve, a public-private institution born of a compromise a century ago between a familiar set of bankers and a less familiar set of populists. The Fed has bought government debt over the last three years in increasing quantity as part of its quantitative easing programs. Unlike other money owed by the government, this debt has no destination, and in many ways is fictitious. If the money were to be repaid, it would simply cease to exist.


The three primary causes for the rapid expansion of the federal debt from $5.77 in 2000 to over $14.00 today are well known. The first is the Bush tax cuts, which with interest cost $2.39 ($1.30 went to the top 20 percent of earners); the second is $1.47 the wars in Iraq and Afghanistan; and the third is about $1.20 in lost tax revenues due to the recession and a dollar for TARP and other stimulus programs. The Medicare prescription drug benefit cost $0.22 and the health care bill $0.15. Because the federal budget was balanced at the turn of the century, these added costs really do correspond to the size of the current problem, an expansion financed almost entirely by issuing new public debt.

In 2000 total debt was at about  $5.77, split evenly between public and intragovernmental lenders. While intragovernmental debt has slightly more than doubled, helped by the Fed’s holding an additional $1.02 since 2006, public debt has nearly tripled. Here we arrive at the riddle of the center of the debt-ceiling crisis: given the government’s tendency to spend like a drunken sailor on wars of volition and tax breaks for 200,000 of its closest friends, why did its creditors continue to lend to it at such historically low interest rates? And given that such rates show no sign of increasing, why would Congress, its Republicans in particular, potentially elect default rather than continue to borrow? And finally, why does this default threaten to be so costly, not just for Americans, but also for the world system as a whole?


The legislative standoff that has gripped Congress is not, strictly speaking, a debt crisis. The question is not whether the US can pay its debts but whether it will choose to do so. If the country were truly in a debt crisis, its creditors long ago would have ceased to be so numerous and so willing. The fact that interest rates on US debt have remained lodged at historic lows indicates the opposite, that the market for US notes, bills, and securities has never been stronger. In spurning this market, or threatening to, Congress has appeared unable to reconcile the national reality with the role the dollar plays in the international economy. While the situation in Greece is simply the sort of good old-fashioned sovereign debt crisis that the developed world regularly inflicts on its periphery for fun and profit, what is emerging in the US is a much more serious question of hegemony.

Since capitalism is always both parent and child of crisis, there is a vast gulf between describing the circumstances that led to the aggravation of this or that contradiction and prescribing a solution to that contradiction. What makes for a historically or conceptually satisfying description of the economy rarely makes for politically optimal prescriptions, which must be corrected for relative rigidity, narrowness, and simplicity if they are to be implemented on any scale. So the great economic descriptions of Marxism and neoclassicism eventually give way to the insurgent prescriptions of Leninism and neoliberalism, which having secured power degraded into Stalinism and the neoconservative oligarchy we toil under today. To fully understand Congress’ flirtation with maintaining the debt ceiling, we must reckon with the contradiction between insurgent doctrine and governing ideology.

The history of neoliberalism—with its origins in Austrian neoclassical economics, its aggressive patronage by the propertied classes in the form of private think tanks, pseudo-academic institutions, and societies like Mount Pelerin (named for the Swiss spa where its members met), and its ultimate victory following the stagflation of the 1970s—has been well –told, most notably by David Harvey. What concerns us here is the need for neoliberal regimes to liquidate national traditions of social and economic identity, security, and belonging in order to free up capital while obtaining the consent of those whose way of life is being liquidated. Harvey writes that replacing local and class identities with a revived nationalism

is [an] obvious answer, but this is profoundly antagonistic to the neoliberal agenda. This was Margaret Thatcher’s dilemma, for it was only through playing the nationalism card in the Falklands . . . and in the campaign against economic integration with Europe, that she could win re-election and promote further neoliberal reforms internally . . . Nationalist sentiment . . . can be seen as an antidote to the dissolution of former bonds of social solidarity under the impact of neoliberalism.

Obama didn’t say quite as much in a controversial remark made during his 2008 campaign, but the implications were clear: “You go into these small towns in Pennsylvania and, like a lot of small towns in the Midwest, the jobs have been gone now for twenty five years and nothing’s replaced them. And it’s not surprising, then, they get bitter, they cling to guns or religion or antipathy to people who aren’t like them or anti-immigrant sentiment or anti-trade sentiment as a way to explain their frustrations.”

In the US, this process has metastasized in the years since September 11th. The resulting volcano of nationalism and patriotic consumption saw through the implementation of the Bush tax cuts, the wars in Iraq and Afghanistan, and the Fed’s maintenance of extraordinarily low interest rates. Faced with stagnant wages and exploding costs, Americans could either surrender their way of life or buy a house and invest the equity in maintaining it. This quickly gave rise the boom in the housing market, the explosion of predatory lending to minorities, and the securitization and dissemination of these loans throughout the economy.

Almost all of the $8 in added debt since 2000 can be traced to policies enacted under the cover of post-September 11th nationalism; these policies cemented the transition from neoliberalism to full-blown neoconservatism. Nothing more accurately illustrates the contradictory movements of the neoliberal project than the biography of the fundamentalist son of an American-owned autocrat, who spent millions of American dollars expelling the Soviets from Afghanistan, then bankrolled and organized September 11th, then was assassinated by the US and dumped into the ocean.

Today, attacks organized by fundamentalist thugs against their conservative patrons no longer seem so exceptional. The Tea Party has been mocked for its nostalgia for a former America of great freedom and opportunity, but from a solely economic perspective, their diagnosis is not incorrect: the country memorialized endlessly on talk radio, Fox News, and in the steady stream of high-gloss World War II moral pornography—that is, the US before neoliberalism—really was a more equitably prosperous nation, especially, as it happens, for white people. Having fostered a burning desire for the world they helped destroy, the neoconservative patrons of the Tea Party now face blowback of their own. The Tea Party Caucus really believes that government, as such, is the problem, rather than understanding such extremism as a rhetorical position necessary to keep the money moving upwards. In the same way, bin Laden really believed in his version of national self-determination in Afghanistan, Saudi Arabia, and elsewhere, rather than understanding that commitment as a rhetorical position taken by the US in order to defeat the Soviet Union.

While preaching the beauty of small government, neoliberals and conservatives redistributed wealth upwards by expanding the government’s reach, paying for tax cuts with mountains of debt. When they were ostensibly booted from power in 2008, it was not only easy and smart to turn quickly and point to the relative size of the government debt as the source of the problem, but also in some sense correct, in that the majority of government debt was looted from the Treasury by the neoconservative regime and its allies. This strategy has been a brilliant success. Having stolen nearly $5 (that is, $4.53 trillion) while in power, despite controlling only the House, the right has recast retirement and healthcare savings as “entitlements,” outlawed tax increases by fiat, and, as recently as  two weeks ago, found itself perched on the edge of its greatest victory within a living memory full of them.

This was the so-called “grand bargain,” in which Obama offered more than $3 in spending cuts from Medicare, Social Security, and other services in order to secure a $0.80 increase in tax revenues. The deal was so wildly favorable to the Republicans that members of the old neoliberal order couldn’t believe it. The New York Times quoted Mickey Edwards, a House Republican leader under Reagan and Bush I, “If I were there I would say, ‘My God, declare victory.’” The fact that John Boehner walked away shouldn’t obscure the facts: A Democratic president offered to pay for the Bush tax cuts by handing over the health care, education, safety, and savings of the American people. (The deal he eventually reached was not radically different, except that it contains no new revenues at all and strip-mines government agencies in the short term, with the distinct possibility of the big name programs again facing cuts in the near future.)


After Boehner walked out, we saw some black comedy, as high finance grew increasingly desperate to rein in its servants. On Tuesday, July 26, the New York Times reported that “the US Chamber of Commerce, which spent millions of dollars last year helping elect Republicans to Congressional seats, is struggling to convince the House it helped to build that the debt ceiling must be increased . . . They have cataloged the consequences of default at meetings, parties and dinners and over drinks.”

Four days later, the temperature picked up again with “A Mobilization in Washington by Wall Street”: “After a year of clashing with Washington over new financial reforms, the country’s most powerful bankers have found common ground with regulators in the hard-fought effort to lift the debt ceiling and avoid a default. Wall Street is no longer watching from the sidelines as the most polarizing political fight in years plays out on Capitol Hill. In the last few days, top executives have been in close contact with Washington in a last-ditch attempt to prod lawmakers toward a compromise by Tuesday. . . .”

If the House Republicans’ preference for demolishing the world economy can be seen as actualizing a useful political fiction—that tax increases are equivalent to demolishing the economy—an actual default would have involved the fictionalization of an equally useful political reality. This is the belief that the phrase ”Full Faith and Credit of the United States Government” indicates not only the existence of value, but is value itself.

Despite having been decoupled from all other currencies, the dollar has maintained its status as the preferred form of reserve currency throughout the world. And despite being backed by nothing other than a nine-word pledge, US debt is considered the safest investment going, and this absolute safety has a value separate from its relative rate of return. Once again hypocrisy comes into focus: the neoliberal effort to convince the American electorate of its democracy’s untrustworthiness has effectively provided the world with fourteen trillion reasons to believe the opposite. Considered against the great encyclopedia of human promises, no religious gospel nor philosophical ideal, no scientific theory nor legal precedent, no testimony of love nor vow of hatred has ever been so widely or deeply believed as the full faith and credit of the United States Government today.

This is what makes the debt-ceiling debate a crisis of hegemony or identity rather than one of debt itself. If Congress were to default, and in such a way that truly convinced the markets of the situation’s hopelessness, all the fables about “the death of god” and “the end of meta-narratives” would became material realities overnight. A US default would be an epic act of deconstruction that would throw the truth of all those holdings enumerated at the outset into radical question. The consensus that this would be a world-historical disaster cannot be seriously contested, especially by those of us who stand to suffer significantly less than others. That said, here are three points in conclusion.

1. It is worth remembering what drove us to the edge of the cliff: the right’s absolute commitment to the further robbery of the American people for the benefit of unproductive wealth. If anyone should have delayed the increase in the debt ceiling, it ought to have been the left, which had a simple and compelling case to make: restore what you have taken from us by raising taxes, canceling the debt owed the Federal Reserve, and re-regulating the banks.

2. Nowhere in the wildest dreams of the most militant revolutionary could an attack more powerful and effective than default be imagined. If we are to speak of endemic injustice on the one hand and raising the debt ceiling on the other, the burden falls to us to articulate at least a faintly plausible scenario whereby the salvation of the system also somehow includes real plans for its imminent progressive transformation.

3. In formulating such plans, we ought to be concerned not only with economic justice but also with ecological sustainability. If we take seriously the scientific consensus concerning the environmental impact of the consumption model we are fervidly trying to resurrect, we are again forced to ask why the debt ceiling is not being held hostage to secure lasting changes in our relationship with the natural world. Again, the case is simple: even if we could go on borrowing this way, we certainly can’t go on living this way.

What finally prevents the adoption of the defeatist position is, of course, a sober appraisal of the state of international organization. The current state of progressive or leftist power—be it institutional or spontaneous, national or international, theoretical or cultural—gives absolutely no indication that it possesses the resources to triumph in the throes of crisis, or even what that would mean. It is not that victory is impossible, only that it would be irresponsible to assume it. We’d pray for order under heaven even as the last remaining bridge melts beneath us, and we fall, finally, into air.

Image: US Treasury Bonds. From http://blog.turbotax.intuit.com.

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  • Stephen Squibb
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