After 12 years of obscure gibberish from Chairman Greenspan and two years of happy-talk by Chairman Bernanke, listen closely and you can hear a faint note of reality from our leaders about the US economy.  This is progress in tiny steps, but a change in direction from a government addicted to lies.

Chairman Ben S. Bernanke's Semiannual Monetary Policy Report to the Congress  (27 February 2008):

Chairman Frank, Ranking Member Bachus, and other members of the Committee, I am pleased to present the Federal Reserve's Monetary Policy Report to the Congress.  In my testimony this morning I will briefly review the economic situation and outlook, beginning with developments in real activity and inflation, then turn to monetary policy.  I will conclude with a quick update on the Federal Reserve's recent actions to help protect consumers in their financial dealings.

The economic situation has become distinctly less favorable since the time of our July report. ...

As understatements go, this is far from the record set by Emperor Hirohito of Japan in his first radio broadcast (15 August 1945), with " the war situation has developed not necessarily to Japan's advantage."  But this economic downturn has just begun, and we might yet hear Bernanke or our President say that we have worked hard, that unexpected and undeserved events have occurred, and therefore shocking and extraordinary measures must be taken.

While few are aware of the cataracts ahead, they are clearly visible.  Already major figures are calling for reactivating Depression-era measures, such as large-scale government purchases of home mortgages.  What will they be advocating in 2009?

• Senator Chris Dodd advocates creation of a Federal Homeownership Preservation Corporation as part of a large economic stimulus package (22 January 2008)
• "Reestablish the Home Owners' Loan Corporation", Representative Mark Kirk (R- IL), Press Release (23 January 2008)
• "From the New Deal, a Way Out of a Mess", Alan S. Blinder, New York Times (24 February 2008)
• Others, like the Office of Thrift Supervision and former Treasury Secretary Lawrence Summers, advocate radical changes to our home finance and bankruptcy laws.

Hedge fund manager Bill Fleckenstein goes to the heart of matters when describing our situation (27 February 2008):

In any case, the determination to suppress the destructive downside of capitalism and insure permanent prosperity will not work. Permanent prosperity, after all, is what socialism was supposed to be about, and we've all learned that that doesn't work. I continue to find it a sad irony that Wall Street -- the alleged bastion of capitalism -- would cling so dearly to the hope of socialism.

Of course, that's exactly what the Fed is all about. Its central planners think they can pick the right interest rate with which to run the world, even as the evidence indicates that what their efforts over the last 20 years have produced are two epic bubbles. This story would strike any sane person as the stuff of nightmare. Sadly, it's our waking reality.

A full analysis of our situation is beyond the scope of this little note, but here some highlights.

• Politicos will describe the bubble in home prices (and consequent over-building) - like that of commercial real estate in the late 1980's and stock in the late 1990's - as resulting from insufficient government regulation.  This is clearly false.  In all three cases there were large regulatory organizations (many!), with adequate power. 
• The regulators failed to act because too much money was being made by politically powerful groups.  The regulators were "captured" by their subjects.  Anyone familiar with the Department of Defense and its contractors knows how this works.
• This fits nicely into a Marxist analysis (as so many things do, if one throws away Marx's theory and "cures").  In a society run by capitalists (a plutocracy, in classic terms), it does not help to give capitalists' minions governmental power in addition to their economic power (no help, that is, to the wider society).
• There are solutions to this problem, but they are not the kind of policy changes and programs so loved by technocrats.  This is speculative, but I effective reform requires changing the relationship of citizens to the regime.  That is, changes in how we think and act, seeing ourselves as citizens, not consumers.
• Not only might technocratic fixes not work, they might exacerbate the underlying problem.  For I suspect we are sliding in the other direction - from citizens to subjects.  For a look at where that might go, I recommend Christian Meier's "Caesar".  He describes how by late Republic times the Roman people had lost the will to govern themselves.  As always, volunteers appeared to take on the job.

A look at the past in order to see a possible future for America

To our good and loyal subjects:

After pondering deeply on the general trend of the world and the actual conditions pertaining to our Empire today, we have decided to effect a settlement of the present situation by resorting to an extraordinary measure.  

Although the best has been done by everyone -- the gallant fighting of the military and naval forces, the diligence and assiduity of our servants of the state, and the devoted service of our hundred million people -- the war situation has developed not necessarily to Japan's advantage, while the general trends of the world have all turned against her interests.

Emperor Hirohito of Japan speaking to his people for the first time  (15 August 1945)

Please share your comments by posting below (brief and relevant, please), or email me at fabmaximus at hotmail dot com (note the spam-protected spelling). 

For more information about this subject

1. A brief note on the US Dollar. Is this like August 1914?  (8 November 2007) — How the current situation is as unstable financially as was Europe geopolitically in early 1914.
2. The post-WWII geopolitical regime is dying. Chapter One   (21 November 2007) — Why the current geopolitical order is unstable, describing the policy choices that brought us here.
3. We have been warned. Death of the post-WWII geopolitical regime, Chapter II  (28 November 2007) — A long list of the warnings we have ignored, from individual experts and major financial institutions (links included).
4. Death of the post-WWII geopolitical regime, III - death by debt  (8 January 2008) – Origins of the long economic expansion from 1982 to 2006; why the down cycle will be so severe.
5. Geopolitical implications of the current economic downturn  (24 January 2008) – How will this recession end?  With re-balancing of the global economy, so that the US goods and services are again competitive.  No more trade deficit, and we can pay out debts.
6. A happy ending to the current economic recession (12 February 2008) – The political actions which might end this downturn, and their long-term implications.
7. What will America look like after this recession?  (18 March 208)  — More forecasts.  The recession might change so many things, from the distribution of wealth within the US to the ranking of global powers.
8. The most important story in this week’s newspapers   (22 May 2008) — How solvent is the US government? They report the facts to us every year.

To see the all posts on this subject, go to the archive for The End of the Post-WWII Geopolitical Regime.

What comes next in Iraq? Here are some straight-line extrapolations.  Let's move beyond the obvious good bets: collapse of the current government structure in Iraq, civil war, and continued slow erosion of US popular support. All these were discussed at length in my November 30 Forecasts.

What's new, forecast-wise?

I.  The descent of Iraq into civil war will crash American public support for the Iraq War. In this respect, the bombing of the al-Askariya shrine was the TET offensive of the Iraq War.

No more slow erosion, but instead the development of a consensus that our troops should come home now. There is no longer any point to the War, and our troops no longer have a role - unless we wish to incur high casualties putting them on the streets as peacemakers. Not likely. Note that after bombing of the al-Askariya shrine, we pulled our troops back to their forts so that the Iraq people could riot and kill without our meddling.

II.  Unless the Bush Administration moves quickly to withdraw our troops, its support will evaporate as congressional Republicans maneuver to survive the November elections.

Our failure in Iraq ends the dreams of the neo-conservatives and advocates of a "Pax America" More precisely, they can still dream but nobody will pay attention.

Francis Fukuyama's op-ed "After Neoconservatism" deserves close attention (New York Times, 19 February 2006). It opens with one of the greatest understatements since Emperor Hirohito told the Japanese people "the war situation has developed not necessarily to our advantage":

As we approach the third anniversary of the onset of the Iraq war, it seems very unlikely that history will judge either the intervention itself or the ideas animating it kindly ... But it is very hard to see how these developments in themselves justify the blood and treasure that the United States has spent on the project to this point.

With tremendous intellectual honesty - rare in America today - he admits that:

But it is the idealistic effort to use American power to promote democracy and human rights abroad that may suffer the greatest setback. Perceived failure in Iraq has restored the authority of foreign policy "realists" in the tradition of Henry Kissinger ... Indeed, the effort to promote democracy around the world has been attacked as an illegitimate activity both by people on the left like Jeffrey Sachs and by traditional conservatives like Pat Buchanan ...

Those whom Walter Russell Mead labels Jacksonian conservatives -- red-state Americans whose sons and daughters are fighting and dying in the Middle East -- supported the Iraq war because they believed that their children were fighting to defend the United States against nuclear terrorism, not to promote democracy.

The drive for the Iraq War resulted from an alliance of the neo-cons and "Pax America" advocates, both intellectually active but of little political power. The alliance with Jacksonian conservatives made the war possible.  Now that's so much burnt powder. Discussions on how the war could have been waged will go in the books next to similar arguments about Churchill's Dardanelle's gambit.

None of the four major streams of American foreign policy will soon send our troops abroad on an idealistic crusade.

1. Hamiltonians, most concerned with American economic well-being;
2. Wilsonian, strive to promulgate American values;
3. Jeffersonians, focused on protecting American democracy in a perilous world;
4. Jacksonian, committed to preserving American interests and honor

Nor will our allies uncritically accept our intelligence or our leadership into the next war.  We owe much to the neo-cons and "Pax America" advocates. They revitalized thinking about America's Grand Strategy and brought it to the central place it deserves in our debates.

But it's time to move on. Fukuyama must give up his dreams. We must file Thomas Barnett's brilliant books in the library's History Section, next to those about Japan's "Southern Strategy" for WWII. For more on this, at the end are links to my articles outlining A Grand Strategy for America.

IV.  The key factor: how will the Democrats react?

So far their leadership has been cautious on Iraq and Homeland Security issues. Despite intense pressure from their leftist core, they have supported the war - few in Congress are more gung ho than Hillary - and, for example, voted to renew the Patriot Act.

The temptation to change these positions is strong, with so many opportunities to press the Bush Administration as it weakens. Especially if the polls show that opposition to the Iraq War helps them win in November. And if they win, they can unleash their atomic bomb ...

V.  The Impeachment of President Bush

This might be an irresistible treat for the Democrats. Not only sweet retaliation for the impeachment of President Clinton, but also an opportunity to paralyze the Bush Administration and begin the 2008 campaign on favorable terms.  The Democrats can be re-cast as the anti-war party, the civil liberties party - a return to its historic roots, with electoral victory as the reward. It does not get better than this.

Imagine the consequences of this scenario. Among other things, this would create a new Kingmaker in American, the man who could change the shape of American politics for several generations.

VI.  Usama Bin Laden

In this scenario, a large terror strike by Al-Qaeda - or anyone claiming to be them, or even distantly related to them - would have incalculable consequences.  It would wipe the Democratic Party from American game board. Finding a Democrat in post-strike America might be searching for a snake in Ireland, or a Nazi in 1947 Berlin (this does not posit any relationship or similarity between Democrats, snakes, and Nazis - it's just an analogy).

Our tolerance for multi-culturalism is already fraying. Another strike might push America over the tipping point, into some radically different and less pleasant configuration.  The Democratic leadership knows all this, of course. That's why the attack on Bush is led by dispensables like Howard Dean and Al Gore - not John Kerry or Hillary.

Much rides on the ability of the ability of the Democratic leadership to resist the pressure from their base and the temptation of victory.

Please share your comments by posting below.  Brief!  Stay on topic!  Or email me at fabmaximus at hotmail dot com (note the spam-protected spelling).

For more information about the Iraq War

1. My posts about the war
2. Important articles about the Iraq War
3. Our goals and benchmarks, and reports about progress towards them