Our leaders were too busy serving financial interests by dismantling regulatory barriers to over-leveraged greed. The extraordinary level of leveraged debt and the fraudulent financial instruments resulted in annual compensation for hedge fund managers and investment bankers larger than a king's ransom.
When the leveraged mortgages went bust, the banksters declared a "crisis" and Congress responded by ripping off the American taxpayers for another trillion dollars.
More is to come. Credit card debt, car loans, and commercial real estate mortgages have been securitized, too. There is little doubt there are derivatives based on this enormous pile of debt. As each "crisis" unfolds, it will mean more bailout rewards for the crooks who deep-sixed the US economy.
It is not implausible that by the end of this year the unemployment rate, honestly measured, will be as high as during the Great Depression.
Few in Washington think there is any cause for alarm. Obama is calling the situation "serious" not because he believes it is but in order to get another trillion dollar "stimulus" package on the taxpayers' books. Stimulus will do the trick, economists say, and, moreover, the Federal Reserve has already extended $2 trillion in loans, but won't say to whom the money has been lent.
This massive expansion of new debt, economists think, is going to fix the economy and put people back to work. They think the solution to excessive debt is more debt.
The federal government budget deficit for the 2009 fiscal year will be $2 trillion at a minimum. That is five times larger than the 2008 budget deficit.
How can the Treasury finance such a massive deficit?
There are three sources of financing. Possibly people will flee from stocks, bank deposits, and money market funds into Treasury "securities." This would require a form of "money illusion" on the part of people. People would have to believe that investments can be printed, and that printing so many new Treasury bonds would not dilute the value of existing bonds or reduce their chance of redemption. They would have to believe that the bonds would be repaid with honest money, not by running the printing presses.
A second source of financing might be America's foreign creditors. So far in our descent into massive debt foreigners have footed the bill. Our foreign creditors now hold very large amounts of US debt and other dollar-denominated "securities." They are likely to develop a case of cold feet when they see a $2 trillion expansion in US debt in one year. Their most likely response will be to start selling their existing holdings.
Who would purchase them? The only way the Treasury can redeem the bonds that come due each year is by selling new bonds. Not only must the Treasury find purchasers for $2 trillion in new debt this year but also must find buyers for the bonds that must be sold in order to redeem old bonds that come due.
If foreigners cease buying and instead start selling from their existing holdings--China alone holds $500 billion in Treasury debt--a deluge will fall on an already flooded market.
The third source of financing is for the Federal Reserve to monetize the debt. In other words, the Treasury prints bonds and the Fed purchases them by printing money. The supply of money thus expands dramatically in relation to goods and services, and high inflation, possibly hyperinflation, would engulf America.
At that point the US dollar, if still on its feet, collapses. The import-dependent American population, dependent on imports for their mobility, their clothes, shoes, manufactured goods, and advanced technology products, no longer will be able to afford these imports.
A scary scenario? Yes. Overdrawn? Perhaps, but perhaps not. The United States has spent the last 7 years in pointless wars that benefited only the military-security complex and Israel's aggression against Palestinians and Lebanon. According to prominent experts, the out-of-pocket cost and already incurred future liabilities of Bush's wars comes to $3 trillion.
The cost of the Bush Regime's wars, together with the 2009 budget deficit that Bush has bequeathed to Obama, equals half of the accumulated national debt of the United States.
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