US Debt Default by Next Election is Required to Climb out of Economic Depression

Obama is well served to use a doomed currency to position strategic industrial sectors to receive foreign investment once US defaults on its debt. He must do so before reactionary political opposition can reorganize



The current high debt can only be resolved through a properly timed debt default, controlled bankruptcy, and mass restructuring in order to create:

1) an industrial base for post-default recovery
2) aggressive drive to court foreign investment

It is highly unlikely that American power elites will be able to successfully restructure while preserving large parts of both the political and economic architecture. That is due to 2009 economic foundations being drastically different than in 1870s, 1930s, or 1950s.

United States debt as % of GDP has been within 15 to 30 percent range from 1917 to 1930. The last time debt got that high was Civil War militarization and the following long recession of 1870s. Before that there was the high debt of political restructuring from colony unification and consolidation into nationhood in the 1780s-1790s period. The long recession of 1870s and the long depression of 1930s were both used by American elites to restructure minimal state capitalism into a more productive expansionary force. American power elites had access to cutting edge industry and used every crisis to expand hard industry and outproduce their European neighbors. Economic reversals in 1870s served to weed out the less efficient oligarchs and consolidate wealth in the hands of those that remained. Contraction in the 1930s resulted in a managed bankruptcy and then rapid filling of idled industrial capacity through mass military exports and production.

The chance to preserve a minimal state capitalism model in roughly the same form as it existed for a hundred years before 1930s was lost as soon as US engaged in a second large scale aggression on the European continent. American leadership's focus shifted from improving structural fundamentals ( and continuing to build minimal state capitalism in one country) to mass wartime economy. Repayment of debt became impossible due to the demands of producing goods (tanks, planes, bombs, artillery shells) that are used up without anything given in return. Once war began, the historically crushing debt ( that began with the banker supported war in 1917 and continued into the 1930s) could no longer be repaid through isolationism, protectionism, and exports to either the German or Soviet victors of European unification. Sustenance of minimal state capitalism now involved forceful expansion and passing down of the debt based pyramid scheme to other peoples of the world.

At the time of the disastrous US involvement in another European conflict there were two mid level state capitalist powers that were on the road that US would undertake from WW2 to the present. They were the forcefully expansionary and indebted economies of Japan and Germany. Both wanted to secure sufficient amount of natural resources and room that England, France, Russia, and America already had. This would allow them to become co-equals on the world stage in terms of pushing their economies, currencies, and exports on others. Japanese leadership knew that the energies of both United States and Soviet Union were heavily focused inwards on reforming and thus preserving their own systems. Just like Americans a world away, Soviets were trying to create domestic demand for its industries while consolidating a hybrid of maximum state capitalism with a decentralized socialist base. Japanese strategists calculated that Soviet Union would not be distracted into a destructive cycle of trying to forcefully impose its still developing system on all of Japan. Thus, they probed into Soviet border colonies around Manchuria in 1939 but were repelled with heavy losses. The mere fact that Soviets signed a gentleman's peace treaty after repulsing a Japanese attack led Tokyo to conclude that indebted isolationist Americans would be equally negotiable and prudent in a colonial skirmish. The rest is history as United States completely overreacted to border pressure on Philippines and Hawaii after only losing a couple thousand men. Thus began a change from Washington's focus on building domestic capitalism at home to internationalist Trotskyist efforts to violently spread it abroad.

The vacuum of imploding Western empires allowed the dollar to become a reserve currency and the Cold War provided a perfect excuse to export arms and further dollars around the world. The exports from American militarism propped industrial base allowed the national debt to actually get reduced by more than half by 1960s. Relentless Soviet pressure and China falling to Mao prevented Americans from being as reckless with their debt as they have become in the 1990s. In 1960s, US leadership actually began large scale provisions for social safety nets and moves towards mid level state capitalism as practiced in France and Western Germany. Many political theorists actually spoke of future convergence between evolution of US and Soviet systems. JFK/Lyndon Johnson's Christian democratic efforts towards reduction of socioeconomic inequality and increased role for the state complemented Nikita Khrushchev's liberalization efforts of restructuring and partial decentralizing. Both efforts got derailed by geopolitical needs of empire and ideological reactionaries.

One society broke first and the other rapidly overextended and actually allowed Trotskyist minimal state capitalist proponents to come to power (Cheney, Wolfowitz). The American debt as % of GDP is as great in 2009 as it was during the mass industrial production of WW2. This time around US does not have the industrial capacity (proportional to the size of its economy) necessary to even attempt managed bankruptcy like in the 1930s. Neither does US have the natural resources the way it did in 1950s and 1960s. It also does not have a Cold War equivalent to continue to distract the world and push the dollar pyramid scheme on smaller nations. The recent attempts to find a motivational ideological replacement for the Cold War (with combination of criminal investigation into religiously motivated organized crime and huffing and puffing over Putin's FDR style policies) is not just a pathetic joke but a worrying development studied in European capitals.

Volatility of the Dow Jones industrial average between 1925 to 1928 was 22%. Volatility of Dow Jones between 2005 to 2008 has been 21%.

Volatility in 2008 alone has been 40% compared to 22% in 1928. The housing bubble has reached its peak in 2005 just as it similarly reached its peak in 1925. Due to the regionally uneven speculation on housing, the inflation as well as deflation of the bubble was uneven and less observed. 2005 seems to have been the furthest extent in influence of the paper tiger superpower that is United States. Figure 1 shows that 2005 was the eye of the storm in terms of stock volatility nested between the events of dot com collapse/911 and the crash of 2008.

An economic depression does not happen overnight as desperate government efforts create repeated sucker's rallies. The high volatility (44%) in the first few years of The Great Depression made sure that the last drops of capital have been purged from the hopeful speculators before true bottom was hit. It's not difficult to imagine the present situation similarly deteriorating over the next few years considering the enormous initial swings that we've had already in the last half a year.

The ease of technological transfer of money and increased access to the stock market by the the masses allows greater pain to continue on longer as foreigners get in on the act of shorting and buying American assets. The globalization following Soviet collapse allows the current economic depression more potential for widespread economic damage than depression of the 1930s. Even China is not completely immune although much better protected than more globalized neighbors.

American leadership is reverting into the mode of trying to salvage parts of US economic and political system through top down restructuring. Unlike with the case of Gorbachev, most of the world's elites want Obama to succeed so US does not become a failed state. There are no rapidly adaptable ideological alternatives other than to have an international cooperative effort by minimal state capitalist countries to work together to make sure US restructuring and bankruptcy is gradual, peaceful, and manageable. US has already been stagnating like Soviet Union for over two decades with real wages not rising for large swaths of the population. Infrastructure is poorly maintained and remains 10-20 years behind more pragmatic hybrid nations. The intelligent and politically connected have already taken advantage of the decades long rot in the form of the finance industry (up to 40% GDP economic growth relying on financial non-producing sector). Cracking down on the money manipulators will be just as futile as Soviet attempts to stamp out the black market in the 1980s. Money manipulation is structurally hard wired into the capitalist system.

Obama is between a rock and a hard place when it comes to options and has very little room to maneuver. The default on debt is coming one way or the other but taking the proper road there can position American economy for long struggle for post-bankruptcy recovery. Obama must restructure the economy from the top down but not rapidly enough to cause a destabilizing reactionary backlash from federal, regional, and military elites. If he restructures too slowly, the stagnation worsens and gradual inflation risks becoming accelerated and then exponential. Obama must strike a balance when using a doomed currency to have the state take control of strategic industrial sectors. Default must occur before 2012 for reasons of social stability. The near future impoverishment of top 20% of educated people (who call themselves middle class) risks election of a leader more willing to dismantle the bonds of federal government rather than make American economy a more hybrid model. The mere fact that American population can be very divided over whether to support their democratic or economic way of life underlines the gentleness with which Obama must approach every step.

The population of the last major ideological power has completely internalized decades of propaganda as well as successfully had millions of foreigners internalize it as well. Even to socially conceptualize alternatives and pragmatic non-ideological approaches provokes instinctive distrust, misunderstanding, and reactionary anger. American people have been lied to and manipulated by their own politicians for so long that they cannot even imagine politicians abroad or at home who speak pragmatically and analytically. The idea of "American way of life" must not become one that borders on the religious since that risks the use of federal government for internationally dangerous purposes like increased militarism. The greatest burden since Gorbachev rests on Obama today and hopefully international leaders realize that they need to take some pressure off for the security of the world.