When an institution of government decides that it is alright to privatize profits on the way up but nationalize subsequent losses on the way down, you know that something deeply undemocratic is playing out. The ideas that have been ventilated this week by Hank Paulson, supported incidentally by the major presidential candidates, are nothing short of a reverse "Robin Hood" scenario where the poor are being robbed to pay for the rich, so that the rich need not pay for their own mistakes.
Many of us non-Americans, looking at this carry on from Europe, are amazed at how few American commentators are questioning the idea of a massive bailout for the housing -- and by extension -- banking sector. But then again, maybe we don't quite appreciate that in a services society, there isn't much more going on than a banking sector financing and extending cheap loans, and a population happy to use their houses as large ATM machines.
Now that this scam has been exposed as little more than a giant Ponzi scheme, how long before the rest of the world refuses to buy U.S. government stock, because holding dollars is one of the quickest way to loose money? Because the Fed continues to print dollars, the dollar, and thus the wealth of the average American, is being embezzled away by the state. This constant erosion of American's wealth went into overdrive in recent days as the Fed accelerated the debasement of the dollar by throwing money at the banking system.
Pretty soon, foreigners are going to reach the end of their patience with this game. They/we will rightly conclude that it might be okay for the U.S. government to rob its own people, it is after all a democracy, but they are not going to rob us anymore. (Those who doubt that countries in long-term decline do not debase their currency to mask their financial feebleness just have to consider the descent of Sterling as Britain ceded global power to the U.S. after WWII).
The same process is happening to America. This week the pension fund of South Korea, the fifth largest pension fund in the world, announced that it would be reducing its exposure to the U.S. dollar and dollar denominated assets. This is part of an on-going trend. As economic power shifts from the U.S. to China, the American government through the Fed will try to mask this by increasing the money supply of dollars. This will simply have the effect of making Americans poorer by stealth.
As the world cottons on to this, the ultimate sanction will be that the U.S. is forced to borrow in a currency that is not the dollar and the exchange rate risk for delinquency is not borne by foreign investors but by American voters. Only then will the average American wake up to the gradual hollowing out of the marrow of the U.S. economy which has been orchestrated by an unholy alliance of the Fed, the White House and Wall Street.
David McWilliams is author of The Pope's Children (John Wiley and Sons), available now.