A Recession Announced, a Palliative Proposal and a Background Issue Lacking a Solution

The president of the United States of America, George Walker Bush, whose name lately has become a synonym for counter-productivity, has just presented an anti-crisis package to confront the gravity of this country’s economic situation that is poised, according to all the indicators, to enter a recession with global implications.

After a long period of denial, the White House had no other alternative but to accept reality. Not only neomercantilists (wrongly called neoliberals), like Joseph Stiglitz, but also respectable men of the establishment such as Alan Greenspan, the former president of the United States Federal Reserve, saw it coming, yet with different levels of understanding.

In these same newspaper columns, in March 2007, Brazilian economist Ricardo Amorim was one of the first to analyze the American real estate bubble. Along the way, they went on producing confirmatory facts like serious bank crises, including some on the magnitude of Citicorp and Merrill Lynch, and the inviability of debt repayment.

The Federal Reserve, now run by Ben Bernanke, in the face of the manifest reality had to put aside its customary policies of consistently raising interest rates to counter inflation. On the contrary, it reversed this tendency and began to lower the rates to smooth the situation over and alleviate the financial system’s difficulties.

On the other side, the eight-time defeated American presidential candidate Lyndon LaRouche, in a global video conference that given last Thursday, January 17, rejected all financially stimulating policies, such as those that generate greater consistency and asked for, purely and simply, a rescue package for mortgage debtors and creditors. Interestingly enough, it received considerable support from state legislature.

The octogenarian LaRouche demands a return to policies applied in the 1930s, after the Great Recession started in 1929, by then president Franklin Delanor Roosevelt. Roosevelt’s policies were a combination of production investments, like in the Tennessee Valley Authority, and social expenditures which created four million additional jobs.

But in fact the definitive recovery of the American economy was aided by the appearance of diverse European authoritative regimes – specifically by the German Nazis – which ended up in World War II. In a crisis from which very few countries were able to stay removed, one of the most important regimes was China then ruled by the nationalists of Kuo Ming Tang.

It is clear that today also one of the questions is about whether China could be swept away or not by the United States’ crisis. The circumstances back then were very different and they conducted themselves by the golden rule [Editor’s Note: Do unto others as you would have them do to you] so that, consequently, Roosevelt returned the favor during his administration. Today the conditions under which China will overcome the crisis are based on other parameters.

This is a topic that will unfold, but first must be considered how the injection of $145,500 million dollars to reduce that country’s citizens’ taxes will yield the anticipated reviving effect. In principle, the idea seems simplistic. The policy of lowering taxes has been a historic workhorse of G. W. Bush since his presidential campaign against the now Nobel Prize winner Al Gore.

His results in this respect have been catastrophic. The Treasury’s fiscal deficit is the highest in the world, of its own making, and has grown the fastest – not only because of his taxation policies, but also for other reasons such as the imperialist policies in Iraq and Afghanistan and their 737 military bases throughout the whole world. Something similar to this caused the fall of the Roman Empire at the beginning of the second century.

The federal government remains plagued by an unstoppable external debt that is principally financed by Japan, China and Saudi Arabia, in that order. All of these countries, as compensation, are not only great creditors but also have massive monetary reserves. In the case of China their reserves are close to the Unites States’ $1.5 billion, for which they are trying to look for better destinations.

Bush’s administration is characterized by unleashing frantic over-consumption. Something made possible only by the unlimited plunging into debt that has already been mentioned. Within this context, the afore-mentioned real estate bubble often is likely to developed and refinancing is done not only for necessary items but also for various impulse binge buys.

Here then, it can be asked if lowering taxes can now cause a consumer revival, or if debtors, when able to, will opt to reduce their liabilities and save their property. The latter is the most likely because of the unlikelihood of an end to a recession that is already in motion. On the other hand, lowering taxes can increase inflation and give rise to the stagflation that Stiglitz fears.

In addition, one must always take into account the psychological aspects of economics. It is not an exact science and beyond the use of mathematic instruments. The work of the Brazilians Percio Arida and Andre Lara Resende on the impact of psychology on inflation is interesting; and served as the basis for the implementation of the Austral plan in Argentina in 1985.

If a fear of debt was instilled into a good proportion of the inhabitants of the United States, it would be very difficult for, with the blink of an eye, to make it disappear. Then, the little money that they can add to their budgets because of tax deductions would not be likely to be used to take on new credit balances, but rather to pay off the preexisting ones.

In regards to the rest of the world, it is difficult to imagine that they will not suffer consequences, although not in a proportional fashion. China for a long times has been trying, unfruitfully, to limit its growth. They will surely reduce imports from America – maybe even more than they bargained for, but it is not very likely that they will stop growing completely.

China, like India, in recent years, has incorporated some hundreds of millions of peasants into industrial production (mainly in China) and services (mainly in India). These millions are the ones who have increased, more than any others, the high demand for food commodities, causing their prices to rise dramatically, supporting the producers.

As for the rest, the United States still in a consumer recession will surely not be able to abandon the imports on which it is very dependent. It is very unlikely that Americans, among many other things, will get rid of their call-centers in India in order to take on much more costly local employees. It is very unlikely that important transnational businesses would return to concentrate their production there.

The majority agrees that it will be difficult to evade the crisis at any place on the planet, but also there is a general agreement that the effects will be asymmetrical. After decades of being the victims of an impoverishing process, suffering from deterioration in the terms of exchange, in the words of Raul Prebisch, it appears as if the producers of energy and food commodities will not emerge so badly.

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