Like this:

The news record goes something like this:

The current debt talks in the US are acrimonious. And even though President Obama is a master of compromise, the Republicans fail to grasp the immense opportunity. GOP deficit hawks are threatening to shut down government in order to trim government spending even though the economy is still too wobbly to stand on its own. Bush follies redux…

The historical record goes something like this:

In the height of the Republic in Rome, Marius ”created” the health of the Roman economy. Yet he had to fight tooth and nail with Sullas over the economic right of the Plebeians vs the extreme wealth and luxuries of the aristocrats who were then called Patricians. And when he fell — the republic suffered greatly all the way till Julius Caesar came to the scene. And only because he understood how to heal the economy and the Peoples, Julius created prosperity again. Cause most importantly he understood how to win and built an empire like no other the world had ever seen… And he based this on good economic foundations at home. That’s how Pax Romana was created.

Yet he accomplished this in his early political steps in the Roman political service – the Cursus Honorus – in 69 BC, Julius Caesar became Questor and that’s how early he restored sanity in the Republic’s economy. Because then he was the paymaster general, something like Mr Bernanke today… he utilized popular economic measures of spreading the wealth. And he did the right things and that’s how he gained his rightful place in history.

Now pray tell — which way this current President will tilt if he knows the facts and the way history’s wheel turns. Or better yet which way the wheel of Fortune turns. Bella Fortuna as Julius Caesar always prayed to the temple of Good Fortune.

And young Julius master of rhetoric, understood – better than anyone else –  that framing an issue is the way to win the argument. Since this defines only perceptions of its reality. And even though this always wrong, because the term also has an older meaning that implies miscarriage of justice and framing of an innocent – it wins the popular vote in the assemblies. Something which had affected Julius Caesar as a young man when he almost lost his Life in Sulla’s proscriptions. Just because he was framed as a liberal instigator… he was conflicted about lying to the people and thus he never did.

Same as in the debate over the budget deficit and the debt ceiling,where the American people have been ”framed.”  Framed because they were given a misleading picture of the possibilities, and they have somehow accepted the blame for unrealistic attitudes. Serves them right you might say. Maybe. Or maybe with a bit of help from old Benjamin Franklin talking some sense about a well informed populace being the best deterrent against tyranny etc… the tides of August will turn around.

Nominally, the budget debate focuses on spending cuts versus tax increases, with Republicans in one corner and Democrats in the other. However, what I see playing now in the US capital, is a three-way comedic opera tug of war. A free for all game started by the wealthy aristocratic cheerleaders played by the GOP, the diminished middle class half-defended by the President and the completely defenseless poor. A battle to the end, over who should pay the costs of balancing the budget. Socializing the debt and the balancing act is the way of the Patricians to screw the Plebeians.. Two millennia later and they haven’t learned the basics.

You can see how this ends – already – right?

Seems the GOP and the Republican teabaggers will win, with a bit of accidental help from our President because sometimes, he forgets to defend the Plebeians. The poorest of the poor. And that is well and good… until you need them to push the nation to climb out of the recession. Because you always need the Plebeians to move ahead — especially now that You have an economy that is shock still. Because what You are forgetting Mr President, is that if the Aristos succeed, the economy will stop growing and instead start contracting. And in that Great Recession redux, the unemployment naturally will rise making it impossible for you to be reelected…

But why — you might ask.

The answer is as old as the economic policy of Julius Caesar. He gave regular free wheat and cooking oil rations to the poor and he subsidized their health & entertainment, their enfranchisement & education, even their spending & employment by redistributing lands and benefits throughout the Roman empire and by giving the benefit of citizenship to all his subjects — thereby ensuring a strong and growing economy throughout his career. He was a visionary and took care of his people. Because he knew well enough from previous and older Greek economic history lessons, that when you target for economic assassination and violence the poor, the plebeians, the old, the unemployed, the infirm, the retired soldiers and the senior citizens — you destroy the very fabric of national security. And you can’t have a robust economy without national security. Nor can you have public power doing that. Instead the double headed snake of a double dip Great Recession comes back to bite your ass and kills the prospect of whatever green shoots of growth and recovery might have sprung.

And this is true in modern history as well as in ancient empire days, because same as in the past, the observable nature of the present dictates the future. Today’s widespread weakness in recent economic data — makes a double dip recession very likely. Just this May, only 54,000 jobs were added, auto sales declined significantly, retail sales were sluggish even excluding autos, and growth in manufacturing slowed sharply. Meanwhile, house prices continue to decline to new post-bubble lows, home sales have slowed, repossession and foreclosures along with claims for unemployment insurance have all risen sharply, and consumer confidence has weakened. And with both stimulus spending and QE2 are coming to an end, state and local budgets are still a problem, and corporate bond issuance fell to its slowest pace of the years since the crisis began.

And it’s not an accident that today’s Italy has the highest debt and the greatest chance of default in Europe. Being led by a contemporary Nero – the ”Caballero” – this modern shambles republic is slated for loss simply because they forgot the ancient wisdom and the clear dictums of Julius Caesar: ”Always remain loyal to the poor people…”

And of course  the current Caballero – a modern Equites – is forgetting reality same as an Altzheimer’s patient because it serves him thus. But as a result of his daft economic policies favouring only the rich, under Berlusconi, Italy’s cost of borrowing rose to the highest level in modern history, as debt market traders worried that financial problems and a constantly growing debt might not be contained.

Still, in the new economic problems for Europe — that have roiled the markets — a major financial issue in the United States so far has not risen over their computer terminal horizon. That market radar has not picked up the very real inability of Congress and the White House to agree on an increase in the debt ceiling of the United States.

However if such an agreement is not in place by Aug. 2nd,  Tim Geithner the treasury secretary has warned that the government could default on its debt, with catastrophic consequences globally.

So far, Treasury yields remain extremely low and prices, which move in the opposite direction, are quite high, a sign that the markets are convinced that this crisis is not a serious event. We shall soon see whether this is true. I wager ten quids with any of you — the other way…

Because many other serious problems — like the weakness of the United States economy, high unemployment, and a large and growing debt load — are also looming. For the moment, though, a benign summertime mood has prevailed, and domestic stock and bond markets have remained relatively calm watching the news reporters creating the News they report as in the News of the world saga overshadowing the real problems we all face. One has to wonder what’s looming behind the screens and what monsters we’ll have to battle come November?

Because back when this Great Recession started in 2007-8, I saw vigorous action from the Feds and thus was certain that we wouldn’t repeat the mistakes of the past. And it did take a quarter to produce any visible results. Yet now am not so certain anyone is minding the wheel really. One ”century old mistake” in particular looms large right now and scares the hell out of me: That of the deficit reduction and interest rate increases. The same boogeyman that sent the great depression era economy into a tailspin in 1937-38. Many people do not realize that there were two Great Recessions within the Great Depression of 1929. The first, which came in 1929, is well known. This Great Recession lasted until 1933, and then the economy began slowly recovering, much like today. As the recovery continued, people began to worry about the budget deficit and the possibility of inflation – again much like today. In response, fiscal authorities began reducing the deficit and monetary authorities raised interest rates – again much like today – and the result was a second Great Recession in 1937-38. This mistake prolonged the economy’s troubles considerably, and in part was why this people’s wealth and country’s economy destruction became knows as the Great Depression.

And now, regardless of the recent uptick in stock prices, the economy remains mired in a long-term slump. Demand is weak, because wages haven’t kept pace with productivity and because consumers no longer have easy access to credit. When consumers don’t spend, businesses don’t invest. It’s that simple. Big business is currently sitting on nearly $2 trillion for which there are no profitable outlets for investment. Unless investment picks up, the economy will continue to operate below capacity and unemployment will remain high.

Neither the Obama administration nor Congress believe that the government can play a constructive role in easing the business cycle or reducing unemployment. Policymakers still ascribe to a laissez faire orthodoxy which makes a protracted slowdown unavoidable. The only thing keeping the economy from a double dip recession is government spending. When austerity-minded congressmen slash the deficits, the last thread keeping the economy in positive territory will be cut and deflationary pressures will reemerge.

Black Tuesday. On October 29, 1929, the stock market crashed triggering the worst economic collapse in history, the Great Depression. Thousands of banks and businesses failed, shanty towns sprung up across the country, and 15 million Americans (25% of the workforce) lost their jobs. President Herbert Hoover, who believed the turmoil would be over in a matter of weeks, opposed providing aid to the needy and unemployed. He supported the same policies as his GOP heirs in Congress today who seek to deepen the present crisis by cutting unemployment benefits, slashing fiscal stimulus and balancing the budget on the backs of workers. The Hoover Doctrine was summed up by Treasury Secretary Andrew Mellon who famously said, “Liquidate labor, liquidate stocks, liquidate real estate…purge the rottenness out of the system.” Mellon’s views prevailed and by July 8, 1932, the Dow Jones Industrial Average had fallen to 41 points (an 89 percent drop from its peak in 1929) while the economy sunk into a decade-long slump.

Before the crash, stock prices had been propped up by massive amounts of margin debt that melted away in a deflationary inferno when the panic selloff began in late October. The calamity took down 4,000 banks and left the broader economy in ruins.

The great economist John Kenneth Galbraith summed it up like this:  ”Had the economy been fundamentally sound in 1929 the effect of the great stock market crash might have been small. But business in 1929 was not sound. On the contrary it was exceedingly fragile. The economy was vulnerable to the kind of blow it received from Wall Street then again. Those who have emphasized this vulnerability today are obviously on strong ground. Yet when a shambles house succumbs to an earthquake — something more sinister is attributed to the quake. One must accord similar significance to the economic quake which blew out of lower Manhattan in October 1929 and whose tremors demolished exchanges and economies all the way from Shanghai and Honk Kong, to Paris and Tokyo, from Cape Town and London, to Berlin and Moscow and even remote Sydney and Buenos Aires. No financial market around the world was left unmolested thanks to the power of then globalization, telegraph, telephones, global trade and foreign exchange and even most importantly foreign policy. Contagion then was swift and painful. The whole of humanity’s savings was affected and the trade balance showed the greatest wealth destruction in recorded history…

But today things are different right?

The years leading up to the 2008 Great Recession or politely called Financial Crisis, saw similar trends as those before the Great Depression. It was also a period of extreme income inequality, banking regulation fiascos and excessive risk taking. Credit-binging had inflated bubbles in housing and stocks clearing the way for a painful downturn and years of retrenching. The economy was also weak before the crisis, but the weakness was largely masked by the frenzy of credit spending that kept activity high. On August 9, 2007, the mask was stripped away when French-owned bank BNP Paribas suspended withdrawals at three of its funds because the value of the toxic mortgage-backed assets it held could not be determined. News of the incident spread quickly through the markets where trillions of dollars of mortgage-backed securities (MBS) were held by all the major banks and financial institutions. That set off a cascade of downgrades which ate away at bank capital and led to the collapse of Lehman Brothers.

When Lehman failed, all hell broke loose. Major markets plunged, interbank lending stopped, financial transactions slowed to a crawl, and forced liquidations wiped out trillions in capital. Nobody knew who was exposed to whom and at what level of basic risk. The Feds stepped in forcefully and the unwinding of the tangled web of lies and deceit started unraveling. And this unwinding continued for a full 6 months despite Congress’s $700 billion TARP bailout and the Fed’s blanket guarantees on all manner of dodgy financial assets. Finally, in mid-March 2009, the stock market hit rock-bottom and slowly began to recover. But the black box Wall Street mentality remains. The all too fragile too big to fail banks remain today — just that.

And in sharp contrast to the banker wanker bonuses, the real economy remains stuck in a long-term Depression characterized by flagging output, falling housing prices, and high unemployment.

The basic problem facing the economy, is lack of demand. Stagnant wages, high unemployment and gross inequality have made a strong recovery impossible. Working people simply don’t have the purchasing power to generate positive growth. If it wasn’t for monetary and fiscal stimulus, the economy would be in recession right now. Even so, personal consumption has not slipped as much as one would expect. What has dropped off is investment, and, in a growing economy, the gap between consumption and production must be filled by investment if full employment is to be maintained.

So, why aren’t businesses investing?

Because working people are underwater on their mortgages, maxed out on their credit cards, and overdue on their bills. There’s no reason to build more capacity when consumers are struggling just to stay afloat. But that creates a big problem for the economy, because new investment is crucial to keeping things running smoothly.

Because for a capitalist economy to work well the surplus (or savings) that it generates must be invested in new productive capacity. Yet, investment in modern capitalism is at best a risky undertaking since investment decisions that determine the level of output in the present are based on expectations of profits on this investment in the future. Any lessening of investment tends to generate a vicious circle, pulling down employment, income, and spending generating growing financial problems, and negatively affecting the business climate generally — resulting in an economic slowdown.

The recycling of surplus capital has hit a road-bump, so the economy has started to sputter. This situation should persist until household deleveraging ends and consumers regain their footing.

The Fed has tried to offset the lack of investment by inflating an equities bubble, but, so far, the results have been disappointing. The so called “wealth effect” has not boosted investment or trickled down to the broader economy. Demand remains weak and there are no signs of another credit expansion. Unless there’s a surge in borrowing, (which seems unlikely) the financialization process will slow and the economy will languish in a long-term slump. That appears to be what’s happening.

Last week, in his second press conference on the matter, Fed chairman Ben Bernanke claimed victory in his war against deflation. He said, “I think the point I would make about where we are today versus last August, is that then deflation was a non-trivial risk. I don’t think people necessarily appreciate deflation can be very pernicious.”

But do you think chairman Bernanke is right?

Is deflation no longer a threat?

Not likely.

While the consumer price Index (CPI) has been on the rise, the fight against deflation is far from over. Consumers and households are still deleveraging, housing prices are falling and unemployment is stuck at 9 percent with 16.5 percent underemployed. Private sector debt is still at historic levels and will have to come down further. If that process is not eased by increasing the government’s budget deficits, then the economy will shrink even more and lapse back into recession.

And remember that  Nixon raised the debt ceiling 9 times for a total increase of 36%. Ford raised the debt ceiling 5 times for a total increase of 41%. Reagan raised the debt ceiling 18 times for a total increase of 199%. George H.W. Bush raised the debt ceiling 9 times for a total increase of 48%. George W. Bush raised the debt ceiling 7 times for a total increase of 90%.

Apparently that was alright because they were white republicans.

Yours,

Pano

PS:

So how do you feel now about the GOP deficit chicken hawks who are threatening to shut down the US government in order to trim government spending even though the economy is still too wobbly to stand on its own?

Do you feel like a double dip into the icy Hudson or in the East River?

Do you want to relive the Cheney’s bush follies?

Do you think you will live to tell the tale?

PS2:

Because we’re at a point of extreme vulnerability. Bernanke’s bond purchasing program (QE2) may have temporarily lifted stocks and commodities out of the doldrums, but there are no guarantees that the trend will continue.

The question is whether consumers can maintain sufficient demand to power the economy by themselves or if the incoming deflationary pressures will reemerge as soon as the gigantic injections of monetary and fiscal stimulus run out and the Republican cuts against the poor take effect?

PS3:

And You Mr President – do you feel lucky and strong enough to go for broke on this most important issue?

Because methinks:

You should.

Because our economic model has often tolerated that vital security and societal interests be subverted to the interest of personal privilege. But the very Capitalist social Economy is a very different model than the constant socializing of the losses and privatizing the profits thinking prevalent  in this crisis. A new thinking that demands that both social and financial interests are considered is espoused by the strongest of Keynesians as well as the Hayak and De Soto followers of economic doctrine.

Profits may be optimised, but not maximized and the risks of abuse hopefully thereby lessened making the banker wankers a little less profitable but really far more useful to society that pays them in the first instance.