Revenge Of The System

As Thursday's stock market plunge showed, it's hard to overstate the stress in the financial system right now. The Fed can't lower rates again without courting a hyperinflationary death-spiral. And it believes it can't raise rates without triggering a deep recession or worse.

The "system" doesn't like stress like this. There have been very few times in U.S. economic history when the consequences of policy failure have been so obvious and policymakers' options so limited. The main reason for the latter, obviously, is oil. And oil's a problem because the national interests of a small group of non-allies conflict with ours. I don't like quoting my own stuff, especially at length, but I'd rather repost it than rewrite it. From October 2007:

A phrase that's become popular is "a clash of cultures" and variations of it. The description's appropriate. The first culture is one in which policymakers believe they've repealed the natural business cycle. This culture of moral hazard and push-button Fed liquidity makes it possible for 30-somethings to sit in front of computer screens in Manhattan and Connecticut and make millions from the flickering green dots, while that same liquidity debases the dollars held by wage earners, retirees, and prudent savers; it allows mediocre corporate executives to exercise stock options and become fabulously wealthy; it tells stock and real estate speculators that if things go south, someone sitting in an office in Washington will press the "print" button and make everything okay; it makes "bridges to nowhere" possible; and it allows a nation to launch a preventive war and decades-long occupation without a thought about how to pay for it. This culture depends on dollar hegemony. The other culture is composed of a few countries, non-allies, that happen to occupy the ground above the natural resource most sensitive to Washington's print button. Since they have the gall to object to our insistence on exchanging ever-depreciating pieces of paper for their main (and finite) natural resource, they both complicate our attempt at reinflation and profit from it. If a U.S. attack on Iran happens during this administration, it won't be an act of the White House, neocons, or Republican party. And if it doesn't happen before January '09 and something magically comes along after that to make it "necessary" it won't be an act of the Democrats. It'll be the culture, the establishment. I don't mean "establishment" in the pejorative sense. You don't get to the Oval Office, or even come close, without understanding what that word means. Democratic leaders, including of course Hillary Clinton, understand the underlying exigencies and global market dynamics just as well as the White House. Of course we'll get the obligatory gnashing of teeth about the use of force. But let's see how much real resistance there is. Do you think the Dems want operational responsibility for what they realize must come next? This is deeper than either partisan politics or a weapons program that might produce a nuke three or five or ten years from now.

We know the prewar intelligence on Iraq was, at best, massaged and cherry-picked. We know that in January 2003, President Bush secretly proposed painting a U.S. reconnaissance plane in the colors of the United Nations, hoping that Saddam would then shoot at it and provide a casus belli. We know someone forged the Niger uranium documents. Any clear-thinking person using an ounce of hindsight knows the notes that accompanied the 2001 anthrax attacks (viewable here) were a ludicrous attempt to imitate the way a native Arabic speaker might write rudimentary English.

Anyone willing to do those things is capable of literally anything. There are some truly malevolent actors out there right now, and you don't exactly need a custom-fitted Reynolds Wrap chapeau to understand that. But it's important to realize they are just as likely to have names you've never heard before and probably never will. No one typed the Niger forgeries in the basement of the White House. The anthrax notes weren't painstakingly scrawled out in Karl Rove's office on a Sunday night. It wasn't necessary. The bad actors know that once their "work" sets the stage, public officials -- particularly these public officials -- can be relied upon to run with the ball. But I think it's a mistake to see that dynamic as unique to the current administration, or to believe that it won't apply the moment a Democrat sits in the Oval Office. Some underlying exigencies supersede partisan politics.

They have the oil. We have the paper. By shunning that paper and benefiting from our extraordinary attempts to stem economic weakness, they pose an existential threat to Bailout Nation. How much longer can the system allow that? If there's a time for vigilance and maximum skepticism about any sort of "provocation" that conveniently pops up, I think this is it.