War—after all, what is it that the people get?
Why—widows, taxes, wooden legs and debt.

Samuel B. Pettengill
"Armies, and debts, and taxes are the known
instruments for bringing the many under the domination
of the few.

James Madison, 4th U.S. President (April 20, 1795)
"Let me issue and control a nation's currency and I
care not who makes its laws".

Nathan Rothschild, 1791
***
Last summer, I observed that there was a ["solvency
crisis"
->http://www.TheNewAmericanEmpire.com/tremblay=1073]
underneath the ongoing subprime mortgage liquidity
squeeze. Central banks can alleviate a ["liquidity
crisis",
->http://academic.uofs.edu/faculty/gramborw/tucrisis.html],
but they cannot solve a solvency crisis. Last year
also, before the events, I warned that the U.S. was
heading toward stagflation.
This was due to three fundamental factors. First, the
structural fiscal imbalances of the federal budget in
a period of prosperity, as a result of the Bush-Cheney
administration's continuous deficit spending linked to
the Iraq and Afghanistan wars and to its large tax
cuts; second, the over-indebtedness of the overall
U.S. economy coupled with an overall saving rate close
to zero (in 1981, it was 12 percent), and, as a
consequence, the rapidly increasing foreign debt of
the U.S.; and, third, the required decline in the U.S.
dollar to reverse and correct the deteriorating
American balance of payments. The second factor was a
harbinger of less consumer spending in the coming
months while the third factor would stoke the fire of
overall inflation. And with already high budget
deficits, there would be less leeway for an aggressive
fiscal policy to sustain economic activity. The table
was thus set for a bout of stagflation, i.e. slow
growth and rising inflation.
Now, stagflation is here. — [Economic growth is slowing
down, M3 money supply
->http://www.nowandfutures.com/key_stats.html] numbers,
as a measure of overall liquidity in the economy, are
in the double digits range, the yield curve
has inverted and become negative (short term rates
higher than longer term rates) and the U.S. dollar has
become one the weakest currencies in the world. All
this as American twin deficits (balance of trade and
federal government budget deficits) are at record
levels. — As I pointed out last year, " A lower
currency translates into more imported inflation and
makes it difficult to maintain low interest rates,"
even if, in due time, it will improve the trade
balance. This means that, for all practical purposes,
monetary policy is also severely constrained in what
it can now accomplish. For all of 2007, inflation hit 4.1
percent, which is two-thirds more than in 2006 when
inflation registered at 2.5 percent. Moreover, the
surge in wholesale prices announces even higher
inflation in the months ahead.
With inflation being on [the rise and real interest
rates
->http://www.investopedia.com/terms/r/realinterestrate.asp]
already in negative territory, aggressive monetary
stimulus would likely be counterproductive, because
too low interest rates would encourage capital
outflows, pushing the dollar further down, and
translating into more imported inflation. On top of
that, one has to remember that monetary policy shifts
take at least nine to twelve months before impacting
the real economy. One has also to keep in mind that
the U.S. operates, more and more, in an international
environment, and is less and less capable of
influencing the domestic economy by manipulating one
variable only, such as the interest rate.
Of course, the Fed could have played a better
preventive regulatory role if it had intervened in
2003-04 to reign in the unsound banking lending
practices that have led to the subprime debacle. But
the milk is out of the bottle now, and nothing can
erase the damage done to the housing construction
sector and other parts of the economy because of this
lack of oversight.
After seven years of continuous indulging, of
borrowing and debt building, the U.S. federal
government is also in a fiscal bind and will find it
difficult to effectively counteract the slowdown in
the economy. Indeed, over the last seven years, the
Bush-Cheney administration has run fiscal deficits on
the average of $461.29 billion each year, for a [grand
total of $3,229 billion of cumulative of on-budget
deficits.
->http://www.whitehouse.gov/omb/budget/fy2008/pdf/hist.pdf]

This makes it harder to embark upon a new round of
deficit spending to stimulate the economy. For one,
fiscal policy shifts
have even a longer time horizon before impacting the
real economy. Secondly, the coming slowdown and
recession will worsen an already high federal
government deficit, as government receipts decline
with the rise in unemployment and the drop in income
growth. On the spending side, the Iraq war, in
particular, is a black hole that siphons off more than
$100 billion each year, with no end in sight. Oil
prices are also very high, partly because of high
world demand, partly because of geopolitical
instability and partly because of the lowered dollar.
After seven years of foreign policy madness and of
empire building on a mountain of debt, and of public
indulging and private gouging, the financial crisis
and credit crunch, the plummeting dollar, the high
price for oil will all contribute to the 2008 economic
slowdown, which is likely to turn into a recession,
during the first half of the year, if it is not
already into one since last December. [The downturn in
the world stock markets
->http://www.tdd.lt/slnews/Stock_Exchanges/Stock.Exchanges.htm]
during this month is another clear indication that
something is wrong, not only with the U.S. economy,
but also with the world economy.
All that would seem to be very bad news for George W.
Bush's Republicans, just as it was bad news for the
Democratic Carter administration in the late '70s.
Indeed, over the last century, the U.S. economy has
been in a recession four times in the early part of a
presidential election year, according to the National
Bureau of Economic Research. In each of those years —
1920, 1932, 1960 and 1980 — the party of the incumbent
president lost the election.