Reaganomics has never worked and it can not be defended. When you see TV pundits like Larry Kudlow and Bill Seidman defending Reaganomics, you must understand that they are not pure economists. They are political economists, and they owe their careers to the Republican Party. Both Kudlow and Seidman make their money as senior economists for the Heritage Foundation, the Cato Institute, other Republican so-called think tanks, economic research institutes and socio-economic forums. Bill Seidman, of course, was the former chairman of the Resolution Trust Corporation (RTC), where there were many allegations of fraud. When the RTC was charged with cleaning up the S&L mess, it promptly proceeded to sell off a lot of property at very favorable prices to well-known Republicans and Republican interests.
No matter what Republican political economists says, Reaganomics in the final analysis can not be justified because you can not defend the indefensible. You cannot get around the fact that the Reagan Bush Regime came into office with a $1 trillion accumulated National Debt and the Social Security Fund (both the General Fund and Disability Fund) was fully funded. They came into office with all the other 43 Public Trust Funds, such as the Indian Affairs Fund and the National Reclamation Fund, fully intact and funded. Most importantly, they came into office with the United States being the largest creditor nation on earth.
Twelve years later, when the Reagan Bush Regime left office, they had expanded the National Debt from $1 trillion to $5.65 trillion. They had created a total long-term deficit in the Social Security General and Disability Trust Funds of some $3.2 trillion. Then in 1983, they started to say that we are henceforth going to count social security contributions as surpluses to the Fund, and we will count them now as General Revenue. To offset the drain, we will place non-marketable, long-term, US Treasury Bonds with a 3% coupon rate into the Social Security Trust Funds. In other words, we will stuff the Social Security Fund with worthless paper.
The Reagan Bush Regime tried to say that these were US Treasury Securities but they were restricted and non-marketable. That which is restricted and non-marketable, according to the Securities and Exchange Commission, is a worthless instrument -- whether that instrument is government, corporate or whatever.
By the end of Reaganomics (when George Bush left office in January 1993), the public treasury was spilling red ink at the rate of $2 billion per day, approximately twice what the Bush Administration said the deficit was.
The fact remains that the deficits, during the Reagan Bush Regime, were consistently twice as high as what was publicly revealed. Due to the "voodoo economics" of the Reagan Bush Regime, they were able to hide the deficits in a variety of ways, principally by this egregious and nonsensical Reaganomics technique called "off budget deficit financing."
When they were deciding budgetary matters in Congress, they would say, "We'll put this $8 billion 'off budget' or this $12 billion 'off budget.'" What this meant was that "off budget financing" was simply money, being spent currently, which was not being recorded as having been spent currently. It was simply an accounting trick. It was also like maintaining two sets of books, wherein you can spend money, say $8 billion, but instead of putting it in the deficit column, it shows up as a zero figure and the $8 billion deficit is transferred to your second set of books called "off budget financing."
The problem with "off budget financing" (and the reason why the Treasury Department to this day can not balance its books) is that this is money, which still has to be raised through the regular sales of US Treasury bills bonds and notes. What happened was that the sale of these bills, bonds and notes for off budget financing was put in a separate category, not as actual liability or actual debt of the US Government, but future contingent debt.
Future contingent debt is debt that is not immediately due, payable, or honorable by the US Government. It was only due and payable, when said notes were presented for redemption -- whenever their term or maturities ran out. In other words, "contingent" means upon redemption at a future date.
There is a parallel between this tactic of Reaganomics and the latest accounting tricks of so-called Enronomics, and the failure of the energy giant Enron. Enronomics used the same trick to hide losses -- even though one is a government entity and the other is a corporate entity and the bookkeeping is different. But Enron did use the same tactic in hiding its losses through offshore accounts. This is much more complex, in fact, extraordinarily complex. There are numerous ways they did it. One way was to enter into a transaction, which is known as a "cross," an "options" or "futures collateral cross."
A "cross" means you cross out a current cash contract for a future contract and all obligations, debts, and liabilities, profits included, are then rolled over into the next series of contracts.
Remember all futures contracts and options contracts are issued fixed strike price, fixed series. But a cash contract (and this is where Enron got in trouble towards the end) is unrestricted. This means there are no price limits imposed on daily movements. Future or so-called non-cash contracts are susceptible to daily limits, either up or down, hence the expression "limit bid" or the expression "limit offered."
This is where you can get into a squeeze (and this is not the first time) as in the late 1970s, when Revco and Continental experienced the same squeeze in the grain markets. In the mid 1970s, Holly Sugar and Clewiston Sugar experienced the same squeeze in the sugar market. How you get into trouble is when a market takes off in one direction and keeps moving in that one direction. In Enronıs case, they came into September 11, being short oil because there was a widespread expectation in the oil market that the price of oil was going to drop by as much as two dollars a barrel in the fourth quarter. That was the widespread expectation. Demand was falling and OPEC was not cutting production to offset the falling demand and that was the expectation.
After the September 11 Incident, when the price of oil began to skyrocket every day, limit bid, limit bid, limit bid, day after day, eleven days in a row, when you were short in the forward contracts, there was no limit. The liability was endless, and in the forward contracts, the price of oil began to spread between the cash current contract and the next available futures contract increased from about 60 cents a barrel to over $4 a barrel -- very quickly. So if youıre short in the cash contracts and all of the futures contracts are "limit bid," it is almost impossible to hedge your risk because, in order to offset the current short in a cash contract, you have to get long in the futures contract. If those futures contracts are opening up limit bid every day and stay "limit bid" all day long -- and not only "limit bid," but "limit bid with pools."
"With pools" means that there are so many hundreds, thousands, hundreds of thousands of contracts to buy, which cannot be fulfilled because there are no sellers. Thus, what happened is that Enron found itself having to cross out contracts in the cash market, which effectively meant that they had to buy back a current short into a sharply rising market. It was Enron, and not only Enron, but Southern California Edison (SCE) which was also caught very short. All of the oil companies (Mobil, Exxon, etc.) were all caught on the wrong side of the market.
In essence, what you had was a lot of buyers chasing a rapidly increasing market. Because of these buyers, the spike in the price of oil that happened after September 11, reached unnaturally high levels because you had so many buyers in the cash contracts.
They had very few offsetting long positions. Why? Because A) they were under the impression that the price of oil was going to fall. B) They were also under the impression that the demand for oil would continue to fall because there was plenty of physical deliverable oil in the United States at the time.
What happened is that the physical supplies of oil got used up pretty quickly because all the secondary marketers wanted to buy that oil, that physically currently deliverable oil before the price went even higher. They were locked into contracts with utility companies and even some county and state governments to sell that oil and/or natural gas at a fixed price at a certain time in the future. And that is how the California Energy Debacle happened. Companies that had made obligations to sell oil and/or natural gas at a fixed price at a fixed time in the future found themselves having to buy that energy that they had to deliver in a rising market.
So, despite my personal differences with Bill Clinton (I was no fan of Bill Clinton), Iıd like to offer a few words in defense of Clintonomics. As I mentioned in my book (http://www.almartinraw.com/orderform.html), the Clinton Cadres had lied to me when they first came into power. I was offered a deal, wherein they would help me out to collect the debt that Oliver North owed me, as long as I kept my mouth shut about my knowledge of Bill Clinton and other senior Clinton Cadre membersı involvement in CIA-sponsored narcotics trafficking in Mena, Arkansas, and other, shall we say, exotic financial transactions appearing within financial institutions and investment companies in the state of Arkansas, not least of which was the Stephens investment group and the Worthen banking group. But those are my personal differences.
I believe you have to give credit where credit was due, and Clintonomics, the idea of restraining government spending, the idea of not reducing taxes, but offering tax incentives for true increases in productivity and efficiency, worked.
Clintonomics (what Clinton announced as his long-term economic policy) was that he would restrain federal government spending and that he did. And even Democrats couldnıt believe it. Republicans couldnıt believe it either. Who ever heard of a Democrat restraining federal spending? Such a thing had never occurred before. Clinton knew that the United States economy was very shaky when he took office because of the enormous debts accumulated by the Reagan Bush Regime, which they had hidden. They did a tremendous job of building confidence, of lying, of hiding figures. Clinton knew that that could not be sustained, and that we had to generate fiscal surpluses as quickly as possible.
Remember Clinton came into an economy with a 7% unemployment rate and a 7% inflation rate. Clinton knew that those numbers had to be brought down, and one way that could be done was to restrain federal spending and offer a tax incentive package to business and industry that actually incentivizes them to increase productivity and efficiency. You would have thought he would have pumped up spending on social programs as Democrats have traditionally done in the past, but instead he actually restrained spending across the board and put in strict caps for all categories of federal spending. He said that that spending could not increase more than 2% a year in all categories. Washington pundits were amazed. Nobody believed this guy in the beginning, that he would stick to this plan and that he would be able to carry it out.
Clinton was able to stick to it, despite opposition from both Republicans and Democrats. The Republicans pounded him to increase defense spending. But he stuck to it and it bore enough fruit, so he could go to the American people directly and say that we are diminishing the federal budgetary deficit of our predecessors; inflation is coming down; unemployment is coming down; and it works. What was novel was that he was able to go over the heads of both parties directly to the American people and that was his strategy. The American people saw that it was working and that engendered support for his policies. The Republican and Democrat parties hated him because of it.
The Republicans did everything they could to beat him up on defense spending. They said our defense capabilities are falling apart; the equipment is falling apart; we need more money; Clinton is allowing us to become defenseless. Clintonıs response to that was absolutely correct. He said that no matter how much money you spend on defense, the Republicans always said the same thing. They never change their tune. Thereıs never enough money spent on defense to make them happy.
The essence of Clintonomics, then, is genuine fiscal prudence, sustained over a period of years, something we have not had since the first term of Eisenhower. There was, of course, pork barrel spending, but Clinton used the line-item veto extensively, even with his own party. Why do you think Senator Byrd didnıt like him? He kept vetoing Senator Byrdıs $10 billion West Virginia Highways to Nowhere.
Clinton curbed pork barrel spending. He reined in federal spending in general. It was Clinton who reversed the social security policy and began to put social security money that people were paying, the FICA taxes, back into social security, instead of counting them as general revenue -- what the Republicans did into the second term. Theyıd say that Nixon was able to produce a surplus too. But itıs so disingenuous when the Republicans say that because there was a tiny surplus of $3 billion in 1969, but the only reason that fiscal surplus was created was because of Johnsonıs reduction in defense spending in his final year in office. Nixon didnıt have enough time to increase defense spending, since he came in January 2, while the federal budget closes September 30. Right after that, we went back into deficits.
Clintonomics had this nation back on the right track, economically speaking. Fiscal surpluses were growing. Clinton had a scheme to begin to repurchase and retire government debt through open market transactions, something the Bush II administration just discontinued because there is no more surplus engendered to be able to do that. We had four successive years of federal surpluses created. Debt was being repurchased and retired. The Republicans said that these surpluses could not possibly be real because the National Debt continued to increase. The reason why it increased was that the bills, bonds, and notes that were originally sold, the Treasury instruments, to finance this off budget debt were coming due for redemption in greater numbers than the surplus that was being created. Itıs just that the surpluses were being consumed and then some by maturing debt which had not been calculated as debt to begin with.
Now thereıs more Republican disingenuousness. Remember how Bush II campaigned originally on the platform that he would continue Clintonomics. Thatıs what he said. He didnıt have to say that, but that was the truth. In all the campaign speeches he made, he did not try to defend Reaganomics, or the economics of his father. He didnıt try because he knew it was a can of worms.
When George Bush II got into office, he immediately reverted to a Bush. He canıt help himself. Heıs a Bush, so immediately he ratcheted up federal spending especially on defense into a slowing economy. The slowing economy was not Clintonıs fault, and it wasnıt Bushıs fault. It was just a natural reaction of a speculative bubble that had been created in the internet industry.
When that bubble burst, the effects rippled throughout the economy, and the economy slowed down. Therefore Bush was put in a difficult political position. He knew the economy was slowing, yet being a Republican and being a Bush, he couldnıt help himself, but to spend more money on defense. Then he proceeded to institute the largest tax cut in the history of the country. People think that since they got their $300 check in the mail, thatıs it. People must remember that this is not a one-time tax cut, but itıs a ten-year program, a $1.6 trillion tax reduction. It is the largest tax reduction package ever put through. It should also be remembered that 93% of the tax benefits of this package go to those earning $200,000 a year or more. Because of this tax cut and the dramatic increase in defense spending into an economy which is already slowing, Bush has taken what was a projected 10 year accumulated surplus of $2.2 trillion and turned that into a negative number. As of fiscal year September 30, 2001, when all previous surpluses had been exhausted, Bush is going to take a zero surplus economy (a break-even economy) and, by September 30, 2002, weıre looking at a $250 billion deficit. By September of 2003, weıre looking at a $400 billion deficit.
When Clinton left office, he left with a Clinonomics ten-year plan and a twenty-five year plan, which was called Target 2025. In the ten-year projection of Clintonomics, which would have happened if Bush kept his pledge, the Office of Management and Budget (OMB) had projected that at the end of ten years we would have accumulated an aggregate fiscal surplus of $2.2 trillion. Now under the Bush II Regime, this has turned into a negative number. In ten years, there will be accumulated fiscal surpluses, but in fact, there will be a further accumulated fiscal deficit carry-forward.
If you take Clintonıs plan and extrapolate it over 25 years, we had to raise approximately $15 trillion of fresh federal surpluses. That would have been enough to pay down the National Debt and to refund Social Security all that was owed with interest in arrears, to pay down all remaining off-budget debt, and to pay down any other government "non-streamed" or "non-collateralized" government obligations. It would also have been enough to fill all the holes in the 44 public trust finds, created by the Reagan-Bush looting of said public trust funds.
For example, the Indian Affairs Trust Fund now has a deficit of $10 billion that was simply stolen to mask Reagan Bush deficits. Every one of the 44 public trust funds now have multi-billion dollar deficits, yet the revenue streams continue. Now because of Bushıs own economic policies, he cannot fulfill any of his pledges.
Already we see a remarkable increase in the federal budget going to debt service. Clinton had reduced that figure substantially. The peak of that number occurred in 1986, during the Reagan Bush Regime when 26% of the federal budget went to servicing debt. Clinton had reduced that number to 18% in his final year in office and had the Clintonomics plan stayed in effect, that number would have gone to zero by 2025.
The percentage of debt service has already risen to 20%, and if one extrapolates Bush spending plans and tax cuts over the next ten and twenty -five years, we are talking about an accumulated national debt, by 2025, which will exceed $30 trillion.
People are trying to blame the recent downturn in the stock market on various short-term fundamentals, like accounting scares, for example. The real reason the dollar has been falling and the price of gold has been gradually rising, is that there is a growing loss of long term confidence in the US economy by both American and foreign investors. Our equity and debt markets are going to continue to suffer, as long as Bush is in office and his policies remain in effect.
Former Rep. Bill Alexander (D- Ark.) told me that Clinton used to say privately that he realized that the rest of the world outside the United States was gradually falling apart. The projections were done through the Target 2055 study, the largest inter-agency study commissioned during the Bush I Administration, which included participation by OMB, GAO, Bureau of Labor Statistics, the Federal Reserve etc. It was the greatest financial and economics-demographics study ever done by government at a cost of $3 billion. It was this study whose conclusions were so dire that the Bush Administration had it suppressed until they left office.
Clinton knew that by the year 2025 other First World countries would begin to collapse, and the United States, in order to keep the whole world afloat, had to be in a position to bail these other nations out but to do so at the least cost to the American taxpayers, a plan that did not commit taxpayers to a open-ended long-term liability.
The Clinton plan was to let most of the other nations collapse, and they figured the collapse would take up to about 2040 to occur. Then the foreign debt of these former First World nations would be trading at ten cents on the dollar. The United States could have used its enormous fiscal surpluses, which would have been created by 2040, actual surplus money, something the US government has never had.
We could have used those accumulated surpluses to purchase the debt of foreign countries, to bail them out, to effectively impose real fiscal discipline on them, and to change their economic systems from the political, social and economic doctrines of social welfarism to lasting and unfettered capitalism and unrestrained free enterprise. This was the long-term thinking of the Clinton Administration.
Now with Bush policies, we come back to the short-term again let the Bush administration do whatever is in its best political interest in the short term and let the next administration worry about the consequences. But now the consequences are much more dire because we will not have the money available to stabilize the rest of the world, when it will be incumbent upon us to do so because we should have been, in twenty years time, the only remaining country in terms of a viable economy.
We were supposed to be, in fact, we were destined to be the Global Savior. Yet Bush has taken that away. We will now be in the same position, relative to other nations, in twenty years time, in terms of our accumulated national debt and in terms of the percentage of the federal budget that is being used every year to service that debt -- the same position as nations which are failing.
And what did Clinton tell Alexander? Clinton realized that we would eventually become, in thirty or forty yearsı time, a one-world government. As Clinton understood, it wouldnıt be a one-world government by design. It would be a one-world government by default. It wouldnıt be any complex or sneaky or shadowy plan to put the UN in as a puppet for the US. As the rest of the world fell apart, the United States would emerge as the leader, the only viable economy left standing and the only country with the financial capability to stabilize the rest of the world. We would have a defacto one-world government by default -- because the rest of the nations wouldnıt be able to do anything about it.
Now in thirty or forty years, youıre going to have a one-world government by design not by default. The conspiracy theorists have much more to worry about under a Bush Regime long term, than they did under the Clinton Regime long term. Those who believe in some sort of sinister machination behind the one-world government have much more to worry about under a Bush Administration. Itıs not going to be a one-world government by default anymore since weıre going to be among the defaulters.
We have lost a golden opportunity when Clinton left office. We were looking at a $250 billion a year fiscal surpluses that could have been both sustained and increased indefinitely simply through the continuation of Clintonıs economic course. Inflation and unemployment were coming down. The dollar was at all time high, and even our balance of trade deficits were starting to reverse. The economy was in the best shape ever. The Dow Jones average was trading above 11,000. Real interest rates were at all-time lows, and economic productivity and efficiency were at all time highs. Now Bush has taken our nation from the road of fiscal responsibility and put us on the Bushonian path of never-ending federal budgetary deficits and never- ending increases in the gross National Debt.
Everyone should understand the dire consequences in the longer term. We are now going to join the rest of the world in a gradual decline. Our internal security policies are going to be such that we are going to be a dictatorship, but that dictatorship is going to be necessary to control a United States in a gradual state of economic collapse.
Why do you think these security measures are being put in place? Why do you think Bush is doing this? We are gradually turning this country into a dictatorship. Very few people would actually disagree with that idea. All the new restrictions on personal liberties and freedoms will increase over time.
More power will be consolidated in the office of the presidency. The militarization of law enforcement will become a fait accompli -- after the Posse Comitatus Act is rescinded and military forces within the United States are increased. This will be necessary to control civil unrest and political strife, which will undoubtedly be created in the throes of the inevitable Bushonian-inspired economic collapse.
Bush II has now committed America to the path of Grand Malfeasance, or as his father used to say "to the continuous consolidation of money and power into higher, tighter, and righter hands." The Bushesı success in this strategy is illustrated by the fact that the top 1% of the population controls 53% of the nationıs wealth. It should also be noted that 88% of that top 1% are Republicans.
Now the Clinton Administrationıs fiscal responsibility is being perceived in a new light. Itıs actually referred to as the "Salad Days" of recent economic history.
Meanwhile, to counteract the coming depression, the Bush Family, the First Family of Prozac, will encourage Eli Lilly to make their products more available.
George Bush Sr. has said that as long as we have Jack (Jack Daniels Whiskey) and Prozac, everything will be all right -- and the suicide rate will be held in check.
It might not even be necessary to legalize cocaine. All it takes is to direct the pharmaceutical companies to increase the production of Prozac, Zoloft (and donıt forget Xanax) and all the anxiety and depression will simply vanish. At least, thatıs the plan.
AL MARTIN is America's foremost whistleblower on government fraud and corruption. A retired US Navy Lt. Commander and former officer in the Office of Naval Intelligence, he has testified before Congress (the Kerry Committee and the Alexander Committee) regarding Iran-Contra. Al Martin is the author of "The Conspirators: Secrets of an Iran Contra Insider" (2001, National Liberty Press, $19.95; Toll FREE order line: 1-866-317-1390) He lives at an undisclosed location, since the criminals named in his book have been returned to national power and prominence. His column "Behind the Scenes in the Beltway" is published regularly on Al Martin Raw: Criminal Govt Conspiracy (http://www.almartinraw.com)