The most likely situation is this. After much shouting, a fiscal deal is reached in the new year – with a headline adjustment of around $1 trillion over 10 years, and perhaps with a 50-50 split between tax increases and spending cuts. Public attention recedes. Commentators proclaim that the budget problem has been fixed.

But then we hit a real fiscal crisis, with foreigners declining to buy newly issued Treasury paper and interest rates on that debt – and interest rates more broadly throughout the economy – rising sharply. The Federal Reserve fights to keep interest rates down, but its monetary policy in that instance is regarded as inflationary, further destabilizing the situation.

That crisis – date unknown but intense for sure – forces much more damaging fiscal cuts, including cuts in Medicare but also across the board (and bringing higher taxes). This is exactly the kind of disruptive fiscal austerity that damages an economy. One such dramatic, even humiliating, potential scenario is described in gripping detail in the opening pages of “Eclipse” by Arvind Subramanian (my colleague at the Peterson Institute for International Economics).

We end up poorer, more unequal and struggling to remember how we ever cared for one another in old age.

Real Fiscal Risks in the US – Simon Johnson

A Chinese depiction of Jesus and the rich man

Based on highly sophisticated computer program results, calculations are favorable that the current communist government of China will be overturned by internal insurrection within five years. The model demonstrates that the rapid attempt to create a middle class and consequent an internal consumption economy by the communists has been a total disaster. By artificially creating demand in the people which outran supply and establishing umsustainable leverage, the people’s anger at the government  cannot be sustained beyond 2017 and social unrest is inevitable.

Further details are fothcoming.

I thought that Clinton’s speech at the Democratic Convention was disgustingly dishonest, even for him. The simple fact is that both Parties are owned by the Oligarchs and nothing is going to change until the system is reformed. If Romney is so concerned about the “47%” eating and getting medical care, why isn’t he equally worried that government intrusion into private capitalism, orchestrated by a former CEO of Goldman’s, pretending simultaneously to represent the interests of all the Republic was bailing out banksters who weren’t allowed to lose. Hypocrites all.

When it collapsed, due in part to bank-friendly policies that Rubin advocated, he made more than $100 million while others lost everything. “You have to view people in a fair light,” says Phil Angelides, co-chair of the Financial Crisis Inquiry Commission, who credits Rubin for much of the Clinton-era prosperity. “But on the other side of the ledger are key acts, such as the deregulation of derivatives, or stopping the Commodities Futures Trading Commission from regulating derivatives, that in the end weakened our financial system and exposed us to the risk of financial disaster.”

“Nobody on this planet represents more vividly the scam of the banking industry,” says Nassim Nicholas Taleb, author of The Black Swan. “He made $120 million from Citibank, which was technically insolvent. And now we, the taxpayers, are paying for it.”

Rethinking Robert Ruben

“The suspicions that the system is rigged in favor of the largest banks and their elites, so they play by their own set of rules to the disfavor of the taxpayers who funded their bailout, are true.

It really happened. These suspicions are valid.”

Neil Barofsky, TARP Inspector General

The Fed is not the solution; the Fed is a creature of the biggest banks, and very much a part of the problem.

Once again we hear a lone voice of common sense, and reason for reform, in this case Sarah Bloom Raskin, speak out forcefully for reform.

You may recall ‘The Warning’ which featured Brooksley Born, who sounded the alarm about the growing dangers of the unregulated derivatives market during the Clinton Administration. And who was thwarted and bullied by team Greenspan-Summers-Geithner.

And you might remember how the Wall Street Banks used the NY Fed and the Treasury’s Tim Geithner to block the reforms proposed by the FDIC’s Sheila Bair.

I do not think that these men who block reform and serious change are evil. Rather, I think they are just dead wood, who know nothing more than the system of privilege that has elevated them, and rewarded them, and which they are loathe to see change.

But the times are getting difficult, and so it is time for a change, which is necessary for there to be a sustainable economic recovery.

And in the election of the President this year the people are being given a choice, as someone so aptly put it, between an ineffective and compromised gamekeeper and one of the worst and greediest of the poachers. Obama was marketed as an independent outsider, but he is not. They are both owned by the system, each in their own way.

And that means change is not going to come from the top. But it will come nonethless.

If this continues the capitalists will eventually destroy themselves, because none of them will want to be the first that calls a stop. And that will be a tragedy.

Baseline Scenario
Fed Governor Speaks Out For Stronger Rules
By Simon Johnson
July 28, 2012