America's Fiscal Collapse

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America's Fiscal Collapse

DrKrbyLuv Note:

Michel Chossudovsky puts a great perspective on our national cash flow:  (defense spending + bank bail-outs + interest on the national debt) = (the entire 2010 federal government revenue)

Here are some excerpts (Global Research) - Full Article Link


**  The Budget Deficit  **

These three categories of expenditure (Defence, Bank Bailout and Interest on the Public Debt) would virtually swallow up the entire 2010 federal government revenue of 2381.0. billion dollars

Moreover, as a basis of comparison, all the revenue accruing from individual federal income taxes ($1.061 trillion), (FY 2010) namely all the money households across America pay annually in the form of federal taxes, will not suffice to finance the handouts to the banks, which officially are of the order of $1.45 trillion. This amount includes the $700 billion (granted during FY 2009) under the TARP program plus the proposed $750 billion granted by the Obama administration.

Defence including Supplementary allocations; $534 billion (FY 2010), $130 billion supplemental (FY 2010), $75.5 billion emergency funding (FY2009)                                    

*Bank bailout (TARP plus Obama)  1450.0
Net Interest        164.0
TOTAL 2353.5
Total Individual (Federal) Income Tax Revenues (FY 2010) 1061.0 
Total Federal Government Revenue (FY 2010) 2381.0 

While TARP and Obama's proposed bailout are to be disbursed over FY 2009 and 2010, they nonetheless represent almost half of total government expenditure (half of Obama's $3.94 trillion budget for fiscal 2010), which is financed by regular sources of revenue ($2381 billion) plus a staggering $1.75 trillion budget deficit, which ultimately requires the issuing of Treasury Bills and government bonds. 

The feasibility of a large short-term expansion of the public debt at a time of crisis is yet another matter, particularly with interest rates at abysmally low levels.

The budget deficit is of the order of $1.75 trillion. Obama acknowledges a 1.3 trillion-dollar budget deficit, inherited from the Bush administration. In actuality, the budget deficit is much larger. 

The official figures tend to underestimate the seriousness of the budgetary predicament. The $1.75 trillion dollar budget deficit figure is questionable because the various amounts disbursed under TARP and other related bank bailouts including Obama's announced $750 billion aid program to financial institutions are not acknowledged in the government's expenditure accounts.

**  Fiscal Collapse  **

A major crisis of the federal fiscal structure is occurring. The multibillion dollar allocations to the War Budget and to the Wall Street Bank Bailout program backlash on all other categories of public expenditure. 

The Bush administration's $700 billion bailout under the Troubled Asset Relief Program (TARP) was approved by Congress in October. TARP is but the tip of the iceberg. A panoply of bailout allocations in addition to the $ 700 billion were decided upon prior to Obama assuming office. In November, the federal government's bank rescue program was estimated at a staggering 8.5 trillion dollars, an amount equivalent to more than 60% of the US public debt estimated at 14 trillion (2007). (See table 2 below)

Meanwhile, under the Obama budget proposal, 634 billion dollars are allocated to a reserve fund to finance universal health care. At first sight, it appears to be a large amount. But it is to be spent over a ten year period, -- i.e. a modest annual commitment of 63.4 billion. 

Public spending will be slashed with a view to curtailing a spiralling budget deficit. Health and education programs will not only remain heavily underfunded, they will be slashed, revamped and privatized. The likely outcome is the outright privatization of public services and the sale of State assets including public infrastructure, urban services, highways, national parks, etc. Fiscal collapse leads to the privatization of the State. 

The fiscal  crisis is further exacerbated by the compression of tax revenues resulting from decline of the real economy. Unemployed workers do not pay taxes nor do bankrupt firms. The process is cumulative. The solution to the fiscal crisis becomes the cause of further collapse.

**  Spiralling Public Debt Crisis  **

Is  the Treasury in a position to finance this mounting budget deficit officially tagged at 1.75 billion through the emission of Treasury bills and government bonds?  

The largest budget deficit in US history coupled with the lowest interest rates in US history:  With the Fed's " near zero" percent discount rate, the markets for US dollar denominated government bonds and Treasury bills are in straightjacket. Moreover, the essential functions of savings (which is central to the functioning of a national economy) is in crisis. . 

Who wants to invest in US government debt?  What is the demand for Treasury bills at exceedingly low interest rates?

Table 3 Interest Rates in Percent

Treasury securities Updated 2/25/2009
  This week Month ago Year ago
One-Year Treasury Constant Maturity 0.64 0.43 2.10
91-day T-bill auction avg disc rate 0.300 0.150 2.160
182-day T-bill auction avg disc rate 0.495 0.350 2.070
Two-Year Treasury Constant Maturity 0.95 0.77 2.04
Five-Year Treasury Constant Maturity 1.79 1.58 2.89
Ten-Year Treasury Constant Maturity 2.75 2.56 3.85
One-Year MTA 1.633 1.823 4.326
One-Year CMT (Monthly) 0.44 0.49 2.71

Source The market for US dollar denominated debt instruments is potentially at a standstill, which means that the Treasury lacks the ability to finance its mammoth budget deficit through public debt operations, leading the entire budgetary process into a quandary. 

The question is whether China and Japan will continue to purchase US dollar denominated debt instruments. Washington is running a public relations campaign to lure Asian investors into buying T-bills and US government bonds.

With the markets for US dollar denominated debt (both domestically and internationally) in crisis, further pressure will be exerted on the Treasury to slash (civilian) public expenditure to the bone, exact user fees for public services and sell off  public assets, including State infrastructure and institutions. In all likelihood, this crisis is leading us to the privatization of the State, where activities hitherto under government jurisdiction will be transferred into private hands. 

Who will be buying State assets at rock bottom prices? The financial elites, which are also the recipients of the bank bailout.

**  Consolidation of the Banks  **

A massive amount of liquidity has been injected into the financial system, from the bailouts but also from pension funds, individual savings, etc. 

The stated objective of the bank bailout programs is to alleviate the banks' burden of bad debts and non-performing loans. In actuality what is happening is that these massive amounts of money are being used by a handful of institutions to consolidate their position in global banking.     

The  exposure of the banks, largely the result of derivative trade, is estimated in the tens of trillions of dollars, to the extent that the amounts and guarantees granted by the Treasury and the Fed will not resolve the crisis. Nor are they intended to resolve the crisis. 

The mainstream media suggests that the banks are being nationalized as a result of TARP, In fact, it is exactly the opposite: the State is being taken over by the banks, the State is being privatized. The establishment of a Worldwide unipolar financial system is part of the broader project of the Wall Street financial elites to establish the contours of a world government.

**  Circular and Contradictory Relationship  **

The Federal Reserve system is a privately owned central bank. While the Federal Reserve Board is a government body, the process of money creation is controlled by the 12 Federal Reserve Banks, which are privately owned. 

The shareholders of the Federal Reserve banks (with the New York Federal Reserve Bank playing a dominant role) are among America's most powerful financial institutions. 

While the Federal Reserve can create money "out of thin air", the multibillion outlays of the Treasury (including the TARP program) will require the emission of public debt in the form of Treasury Bills and government bonds. Part of these T-Bills will of course also be held by the Fed.

US financial institutions oversee the US public debt. They are involved in the sale of treasury bills and government bonds on financial markets in the US and around the World. But they also hold part of the public debt. In this regard, they are the creditors of the US government. Part of this increased public debt required to rescue the banks will be financed or brokered by the same financial institutions which are the object of the bank rescue plan. 

We are dealing with a pernicious circular relationship. When the banks pressured the Treasury to assist them in the form of a major bank rescue operation, it was understood from the outset that the banks would in turn assist the Treasury in financing the handouts of which they are the recipients. 

To finance the bank bailout, the Treasury needs to run a massive budget deficit, which in turn requires a staggering increase of the US public debt. 

Public opinion has been misled. The US government is in a sense financing its own indebtedness: the money granted to the banks is in part financed by borrowing from the banks. 

The banks lend money to the government and with the money they lend to the government, the Treasury finances the bailout. In turn, the banks impose conditionalities on the management of the US public debt. They dictate how the money should be spent. They impose "fiscal responsibility"; they dictate massive cuts in social expenditures which result in the collapse and/or privatization of  public services. They impose the privatization of urban infrastructure, roads, sewer and water systems, public recreational areas, everything is up for privatization.

**  Concluding Remarks  **

What we are dealing with is the fraudulent transfer and confiscation of lifelong savings and pension funds, the fraudulent appropriation of tax revenues to finance the bank bailouts, etc. To understand what has happened:  follow the money trail of electronic transfers with a view to establishing where the money has gone. What is at stake is the outright criminalization of the financial system: "financial theft" on an unprecedented scale.

[ (c) copyright Michel Chossudovsky, Global Research, 2009.  The url address of this article is]


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