"You Know What Would be a Great Idea? Printing Money."

I wasn't one of those folks that flipped the fuck out over the 2008 bank bailouts for the simple reason that no one has ever properly explained to me how you maintain a modern society without a financial system. By September of '08, the banks' indebtedness to one another was so interconnected through AIG, and the lack of liquidity so all-encompassing that you wouldn't have had one or two of the big banks go down (as most Republicans now say that they would have preferred), they all would have collapsed and they would have done so rapidly.

That's the legacy of the deregulation of the late '90s that repealed Glass-Stegall, left derivatives unregulated and led to the securitization of everything. When you create an atmosphere where people can do whatever they want - regardless of how reckless or stupid it may be - they usually will, especially if there's short-term profit involved.

It is my considered opinion that, given the situation that they faced, combined with the fact that they acted counter to their ideological instincts, that Federal Reserve Chairman Ben Bernanke and then-Treasury Secretary Henry Paulson will be remembered by history as Legends of the Fall. President Bush's acceptance of the resulting political damage may be the smartest and bravest thing thing he did in his eight years in office.

Here in Canada, people like me went insane when the Chretien government denied our banks the permission to merge because we thought it would hamper international competition. Well, it turns out that people like me were wrong. Because Canada maintained traditional banking regulation, our institutions stayed healthy as those in the United States and Western Europe veered dangerously close to insolvency.

Consequently, the Canadian econmy is in much better shape than most. There's an informative article about that in last month's issue of Esquire. Our economy is projected to grow at 3% next year, compared to America's 2.3% and Europe's 1.8%. Our dollar is currently at parity with its American counterpart and I expect it surpass it significantly in the coming months, although I'm hardly an expert on these things.

Over the last several months, I've become an admirer of the Washington Post's Robert Samuelson whose book, The Great Inflation and Its Aftermath: The Past and Future of American Affluence, I heartily recommend to everyone. Mr. Samuelson's latest column, dated Monday October 11, deals with the coming austerity that most Western countries are going face.
While Samuelson doesn't come right and say that debt reduction should take priority over economic recovery, he implies it to the point that he doesn't really need to.

Clearly, most European nations waited too long to overhaul their welfare states. (The same is true of the United States.) The added costs of the global recession have now forced them to do the politically unthinkable: chop social spending and raise taxes in trying economic times. They have little choice, but it may be a mission impossible.

On the one hand, huge deficits and debts -- the sum of past deficits -- mean some countries can no longer borrow at reasonable interest rates. Last week, rates were about 10 percent on Greek 10-year government bonds and more than 6 percent on Irish and Portuguese bonds. Even these rates would be higher if these countries hadn't acted to cut long-term budget deficits. By contrast, rates are about 2.3 percent on 10-year German government bonds and 2.4 percent on 10-year U.S. Treasuries.

On the other hand, abrupt tax increases and spending cuts threaten deeper recessions. In Greece, the value-added tax (a national sales tax) was increased four percentage points; the normal retirement age is also being raised. Portugal approved a VAT increase of two percentage points. In Ireland, government workers' salaries were cut an average of 7 percent. In Spain, grants for new children are being abolished. Unemployment rates are already about 11 percent in Portugal, 12 percent in Greece and 14 percent in Ireland.

To some economists, this is folly. Desmond Lachman of the American Enterprise Institute foresees a futile downward economic spiral. As recessions worsen, losses in tax revenue and higher jobless spending will offset some projected improvements to budget deficits. So, more tax increases and spending cuts will be needed.

That's a helluva bad choice, but the more adult countries of the world have already made their decision. The English government of David Cameron will soon be presenting an austerity budget far more radical than anything ever envisioned by Margaret Thatcher or Ronald Reagan. Most government departments, including national defense, are facing cuts of between 20-30% and taxes are going to rise in painful ways. Cameron is also expected to propose a major decentralization of authority from London to the lower levels of government.

The British plan, if enacted by Parliament, is going to be nothing less than brutal on the English economy in the short term. But so will continued stimulus spending, or merely maintaining the status quo, which will widen already terrifying deficits and nudge London ever closer to the Greek dilemma. However, it is the only rational way to ensure Great Britain's long-term survival as a major economy. Chemotherapy and radiation are almost as bad as cancer, but there are no other realistic ways to treat an aggressively malignant cancer, which the debt crisis is fast becoming.

Granted, Cameron's Conservatives have the cover of their coalition partners, the leftist Liberal Democrats, that will make austerity a far more politically acceptable choice. That consensus doesn't exist in Washington, where the Tea Party Republicans and the Obama administration both want to destroy the U.S economy, only in different ways. Neither is facing reality or even making the feeblest attempts at seriousness. The Tea Party Republicans are pretending this is 1980 and the Democrats are pretending it's 1993.

And the Federal Reserve under Bernanke is about to make things indescribably worse.

The Federal Reserve chairman, Ben S. Bernanke, appeared to remove any lingering doubt Friday that the central bank would take new actions to fortify the torpid recovery and fight low inflation and high unemployment.

The impact of the Fed’s most likely action – resuming vast purchases of government debt to lower long-term interest rates – would ripple far beyond American shores. The new actions could contribute to the weakening of the dollar and complicate a festering currency dispute that threatens to disrupt global trade relations.

For most Americans, additional Fed action will likely mean that already low 30-year mortgage rates will fall even further. The action will not help savers, as yields on certificates of deposit and savings bonds will probably fall. But the Fed hopes that by making credit even cheaper it will encourage businesses and consumers to borrow and spend, a move that could eventually bring relief to jobless workers.

The Fed's "purchasing government debt" is a cute way of saying that it's going to start printing money. That's incredibly inflationary and, once inflation starts, it's extremely hard to contain, as anyone who lived through the 1970s can tell you. Inflation, while it reduces the real cost of the debt by devaluing the dollar, also discourages saving, which precipitates further inflation, to say nothing of the personal debt brought on by unrealistic standards of living. As inflation accelerates, it also drives everyone into higher tax brackets without bringing the government increased revenue in real terms.

And none of that factors in the inflationary pressures that the tax cuts a Republican House majority are almost certain to demand to avoid a government shutdown. President Obama is going to want to spend on further stimulus, the GOP is going to demand spending on tax cuts and Bernanke is going start printing money.

While all of this happens, no one in the government is thinking of cutting spending in any real way. Remember, the current Republican pledge only brings spending down to 2008 levels, which still had large deficits, and they don't even explain how they intend to accomplish that because they're almost certainly lying. If the GOP can't maintain a consistent line in something as insignificant as earmarks, they can't be believed about anything.

Worse, if the inflation fails to spur the economy enough, you wind up with the stagflation of the Carter years combined with the massive deficits of the Reagan, Bush 43 and Obama administrations. As President Reagan's first term teaches us, the only way to stop stagflation is by intentionally inflicting an even worse recession than the one the United States is in now.

No one is laying the political groundwork for any of this by explaining to the voters what the consequences of either massive government debt or runaway inflation are. And they certainly aren't explaining the virtues or dangers of austerity budgeting because both parties and the Tea movement are burying their heads in the sand as deeply as they possibly can.

I'm not sure that the American political system can withstand that. If you think that the rioting in Greece is bad, consider that Greeks don't have very many guns and Americans do. A fiscal and economic Katrina might be visiting the most heavily armed country in the industrialized world.

Folks, we just might be witness the beginning of the self-destruction of the American economy.