"Black Swan" theories posit the occurrence of outlandish, seemingly impossible events in the financial world which, despite all risk-hedging mechanisms, show up and knock all prior assumptions concerning safety asunder. The failure of Long-Term Capital Management in 1998 was one such Black Swan. The mathematical algorithms which guided LTCM's investment strategies, as amazingly complex and sophisticated as they were, failed to take into account all the permutations in international finance which could set into motion a series of cascading failures.
The possibility of the bankruptcy of the United States, and its default on its Treasury-security obligations, is not, unfortunately, classifiable as a Black Swan. Maybe a little off-white, or with distinctive markings on its bill, but not wholly anomalous. The truth of the matter is that the U.S. government's fate, and the fate of the American economy, is not really completely, or even mostly, within our control any longer. It is indeed fairly easy to picture scenarios in which the American economy is simply rolled up.
The bailout programs unleashed on the private sector by Henry Paulson and Ben Bernanke depend on the manufacture of money which the United States does not actually have. It's all very well and good to promise $700 billion to rescue distressed assets from banks and investment houses, or to pledge $550 billion to relieve money market funds from the stresses of redemptions, or to buy huge insurance companies like AIG, or to keep throwing colossal amounts of money in every direction in an effort to restore the U.S. economy to exactly its perceived condition in about July, 2007. But a moment's reflection tells you that the U.S. cannot possibly have all this money available. The federal government, every year that Bush has been in office, has run deficits of about 1/2 trillion dollars. Part of these deficits are the result of borrowing the "excess" from the Social Security and other trust funds, which simply delays the moment of truth to the date that such funds become insolvent. When that happens (and it will happen within a decade), the United States is simply going to declare the Social Security and Medicare entitlement programs bankrupt and that will be that. But about half represents real debt owed to real, and mostly foreign, creditors who buy U.S. Treasury bonds.
The entire sustainability of the dollar as the world's reserve currency depends on the willingness of foreign creditors to keep funding our (1) federal budget deficit and (2) our current account deficit (trade deficit), which runs about $55 billion per month. The problem is that foreigners are losing interest in doing so. While large foreign banks (and sovereign wealth funds) are propping up the dollar by buying large amounts of Federal Treasuries (to protect their own large holdings of dollars), foreign private investors are barely buying any Treasury securities at all. The influx of money into the Treasury recently simply reflects the redistribution of investment from terrified investors who are bailing out of the stock market. That won't last.
So where's the money going to come from to fund all this "restructuring" and social engineering? Asked another way, if the U.S. consumer is tapped out, which s/he is, and cannot afford to buy all those imports from China or all that oil from Saudi Arabia, what is the motivation for these countries, and many others, to continue to buy U.S. Treasury bonds which, after inflation, actually return less than zero? And a related question: if the United States continues its bellicose posturing, threatening this country and that, including many of our creditor countries (Russia, e.g.) and energy suppliers (Venezuela, e.g.), why would the targets of U.S. aggression continue to finance their own insecurity?
We're not used to asking such questions, but that is all going to change. We continue to regard our standard of living as "nonnegotiable" (D. Cheney), and it is certainly higher than that found in Russia or China. The problem for us is: there is nothing fundamentally different that we are doing here in the U.S. which assures that will continue to be the case. We began with a huge head start, but we've been coasting without the necessary investment in education, infrastructure or energy innovation necessary to sustain our standard of living without massive borrowing on highly favorable, impossible-to-maintain terms.
That's the fundamental reason I don't want John McCain to be president. I think he's completely locked into a business-as-usual approach to this enormous challenge. He simply cannot see America in any terms other than as a world-dominant superpower which can impose its will on the rest of the world simply by dint of historical momentum. But that's actually gone. That's what the current financial crisis is really all about. These are the first, very ominous signs that the American system is fracturing apart. We are completely dependent on massive borrowing to "fund" our way out of it.
Some people see this clearly, and that is the reason you have seen an unprecedented number of defections from Republican ranks toward Obama. Much is being loaded on the slender shoulders of this young man. In truth, I think his qualities are being exaggerated by the desperate hopefulness of those who see him as some sort of savior. The editorial boards of all the major newspapers, "traitors" like Colin Powell, Scott McClellan, Christopher Buckley (and the closet traitors like David Brooks and George Will), all of them fear John McCain and his robust nationalism because they know it will lead to perdition. I think this dread, this unease has an inchoate quality in which the underlying reasons for the fear are not always completely understood by those drawn to Obama. They're too blinded by their own jingoism to admit it even to themselves. But this election could very well be it. This is the All In moment. This might be the last chance.
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