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Americans’ Political & Economic Civil War

May 10 , 2011

The US defaulting on its financial obligations is a clear and present danger that is increasing daily because Americans are in the early stages of a political and economic civil war about who wins and loses in America in the 21st century.

Some Chinese observers half a world away from personally experiencing the intensifying economic, social and political crises in America, assume that the US is too big to fail and will eventually do what is necessary to solve the US's problems. But, the leading US political parties may be unable to compromise and solve Americans' relentless economic and employment crises. If US politicians are unable to fix America's economic problems, Chinese policy-makers will have to deal with the US domestic and foreign policy impacts on China and the world.

The New York Times reported on April 9, 2011 that: "The down-to-the-wire partisan struggle over cuts to this year's federal budget has intensified concern in Washington, on Wall Street and among economists about the more consequential clash coming over increasing the government's borrowing limit. Congressional Republicans are vowing that before they will agree to raise the current $14.25 trillion federal debt ceiling – a step that will become necessary in as little as five weeks – President Obama and Senate Democrats will have to agree to far deeper spending cuts for next year and beyond than those contained in the six-month budget deal agreed to late Friday night that cut $38 billion and adverted a government shutdown. Republicans have also signaled that they will again demand fundamental changes in policy on health care, the environment, abortion rights and more, as the price of their support for raising the debt ceiling.

In a letter last week Treasury Secretary Timothy F. Geithner told Congressional leaders the government would hit the limit no later than May 16. He outlined "extraordinary measures"? essentially moving money among federal accounts – that could buy time until July 8. Once the limit is reached, the Treasury Department would not be able to borrow as it does routinely to finance federal operations and roll over existing debt; ultimately it would be unable to pay off maturing debt, putting the United States government – the global standard-setter for creditworthiness – into default. The repercussions in that event would be as much economic as political, rippling from the bond market into the lives of ordinary citizens through higher interest rates and financial uncertainty of the sort that the economy is only now overcoming, more than three years after the onset of the last recession.

Given the short time frame for action and the prospect of an intractable political clash, leaders in both government and business are already moving to avert a crisis that most likely would be 'a recovery-ending event,' as Ben S. Bernanke, the Federal Reserve chairman testified recently in the Senate. He described a sequence of events that 'would cascade through the financial markets,' provoking another credit crisis like that in 2008 and causing interest rates to jump."

The global financial system and economy have precious little further tolerance for crisis. America and China's policymakers will face a shattering escalation of the global economic crisis if the global bond markets collapse, which is expected before the next US presidential election. The New York Times reported on April 23, 2011 that, "The Federal Reserve's experimental effort to spur a recovery by purchasing vast quantities of federal debt has pumped up the stock market, reduced the cost of American exports and allowed companies to borrow money at lower interest rates. But most Americans are not feeling the difference, in part because those benefits have been surprisingly small. The latest estimate from economists, in fact, suggest that the pace of recovery from the global financial crisis has flagged since November, when the Fed started buying $ 600 billion in Treasury securities to push private dollars into investments that create jobs… broad range of economists say that the disappointing results show the limits of the central bank's ability to lift the nation from its economic malaise." America is in danger of breaking down economically, socially and politically.

Americans' political and economic civil war is being deliberately brought to a crisis by what President Washington warned of in his Farewell Address in 1796. He warned of the "pernicious capability" of a "small but artful and enterprising minority of the community…capable of directing, counteracting with the real design… he regular deliberation and action of the Constituted authorities which was… of fatal tendency." In the first two US presidential elections of the 21st century factions of extremely conservative segments of the Republican Party captured the Presidency and control of America's military strategies. Now similar factions have targeted America's domestic policies and are using the American government debt, economic and unemployment crises to seek to force their will on all Americans.

Marx believed that the collapse of capitalism was inevitable because it would create two social classes in profound conflict and more and more poor that become tired of oppression and would revolt. It looked like Marx was absolutely wrong. Then America's Federal Reserve Chairman Bernanke and Secretary of the Treasury Paulson in September 2008 suddenly told a shocked US Congress and world that the US and global financial systems would collapse immediately without massive US government intervention and commitment of taxpayer money.

The modern technology and social networking phenomena that are toppling governments unwilling or unable to meet their people's demands can occur in America if the US political parties cannot solve American's economic crisis. The US' financial, economic and political crises are getting worse, not better, for America's shrinking middle class and growing number of poor. A January/February 2011 book review of Winner-Take-All Politics: How Washington Made the Rich Richer and Turned Its back on the Middle Class in Foreign Affairs, the prestigious publication of America's Council on Foreign Affairs, stated that increasing inequality in the United States generally attributed to unstoppable market forces "is the direct result of congressional policies" which have benefited the rich at the cost of the middle class and poor. "The US economy appears to be coming apart at the seams.

Unemployment remains at nearly 10 percent… foreclosures have forced millions of Americans from their homes; and real incomes have fallen… Many laid off fear that the jobs they have lost – the secure, often unionized, industrial jobs that provided wealth, security, and opportunity – will never return. They are probably right. And yet a curious thing has happened in the midst of all this misery. The wealthiest Americans, among them presumably the very titans of global finance whose misadventures brought about the financial meltdown, got richer… In 2009, the average income of the top five percent of earners went up, while on average everyone else's income went down. This was not an anomaly but rather a continuation of a 40-year trend of ballooning incomes at the very top and stagnant incomes in the middle and at the bottom. The share of total income going to the top one percent has increased from roughly eight percent in the 1960s to more than 20 percent today." This is what is being called a "winner-take-all economy" and it is "not a picture of a healthy society" in which "the financial rewards are increasingly concentrated among a tiny elite and whose risks are borne by an increasingly exposed and unprotected middle class.

Income inequality in the United States is higher than in any other advanced industrial democracy and by conventional measures is comparable to that in countries such as Ghana, Nicaragua and Turkmenistan. It breeds political polarization, mistrust, and resentment between the haves and the have-nots and tends to distort the workings of a democratic political system in which money increasingly confers political voice and power."

Many Americans, including Mr. Bernanke and Mr. Paulson have blamed China for America's economic crisis. The reasoning is that China saved too much, lent the US too much money and refused to copy America's consumer and government spending habits, economic regulation and political system. But, when all is said and done, the US created its economic nightmare and only it can painfully make itself move in a healthy financial direction in the 21st century. Is the US political system capable of doing so? That is the question.

In a way, America's national debt, unemployment, economic, social and political crises are China's problem as well as America's. If America fails economically and politically to solve its crises, culminating in the global financial system and economy's collapse, then China cannot succeed in continuing its stable economic development. It has been suggested that China should help America by cancelling some of America's debt obligations to China. Martin Wolf asserted in "It is in Beijing's interests to lend Geithner a hand" in the Financial Times, June 9, 2009 "China's decision to accumulate roughly $ 2,000 bln in foreign currency reserves was, in my view, a blunder. Now it has a choice. If it wants its claims on the US to be safe, it must facilitate an adjustment in the global balance of payments. If it and other surplus countries wish to run huge surpluses and accumulate vast financial claims, they should expect defaults. They cannot have both safe foreign assets and huge surpluses. They must choose between them. It may seem unfair. But whoever said life was fair?"

The Financial Times in a January 11 2010 article "Bankruptcy could be good for America" suggested the US should default and in effect refuse to pay its debts. The world's richest nation's economic, social and political systems are in unbelievable but absolutely real interacting crisis. Mankind's most advanced nation and wonderful prototype of a large, constitutionally limited, majority-rule-democracy, with a leading edge the rule of law system and a Bill of Rights is in danger of failure in the 21st century. If America fails economically and politically, can any nation succeed economically and politically in the 21st century?

Debt financing of the American Dream has about reached its limits of creditability in the world's fragile capital markets, reeling from too many nations' mismanagement of their economies. A crucial part of Americans' success or failure to be able to rebuild a sustainable US economy and establish a trade balance with China is their ability to create a new economic partnership with China. To do so, Chinese companies need to be able to invest heavily in America's future economic success and employment growth. That is not occurring. Less than 1 percent of China's foreign investments are in US companies. Such investments are not welcome by America.

President Obama announced he was launching a "new era of partnership" with China on May 24, 2009, but his administration's domestic and foreign policies did not do so. Newsweek magazine summed up the situation on May 20, 2009, "Too be blunt, America is out of practice at dealing with an independent source of national power. For two decades the United States has been the undisputed hegemony. For 40 years before that, America was the leader of the free world. As a result, American thinkers and policymakers have become accustomed to having all policy decisions of consequence go through Washington. Our current generation of leaders and thinkers are simply unprepared for the idea of other countries taking the lead in matters of the global economic order." "The United States is now dealing with a global superpower that unlike the Soviet Union is in a position to out-produce it, out-spend it and out-arm it over the next decade and we simply don't know what to do about it," according to John J. Tkacik Jr., a then recently retired State Department official, as quoted in "Obama crosses fingers on China in new year" AFP Jan 7 2010 article.

China's population is five times larger than America's. Only thirty years after beginning the modernization of its economy, China is the world's fastest growing and second largest economy. Yet it is still the 100th poorest nation, with decades of development economically, socially and politically before it. If China succeeds in fully modernizing its economy, the size of its 21st century economy will increasingly correspond to the size of its population relative to America's. On the other hand, if China is not able to continue to be economically successful, how can America, its second largest trading partner and largest debtor nation in the world be?

John is the chairman and Dai Min is the President of Center for America-China Partnership, the" first America- China to provide a win-win solution for America and China.

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