Richard Whalen

The 2008 election campaign will center on the economy’s many-sided deflationary problems, and what to do about them with stagflation already ominously rising. Piling new deficits on existing debts is no solution. A global run on the dollar may bring the domestic crisis to a head as early as this spring.

The combination of a sharply slowing economy, cutbacks in consumer spending, an extremely cheap inflationary dollar and energy-driven imported commodity inflation – plus a deep-seated credit crunch forcing badly invested banks to curtail lending – is creating a crisis beyond the ability of the most astute Federal Reserve easing policy to correct by itself. Uncounted billions of dollars in bad “assets” of falling value need to be cleared from the glutted real estate markets and warehoused by a revived Resolution Trust Corporation (RTC), playing the same leading, successful role as during the S & L collapse in the 1990s.

In the current vacuum of political and intellectual leadership, realistic members of the global business leadership community have a rare opportunity to propose new ideas and policy prescriptions. Reviving the RTC is merely a stop-gap. The last time the world faced deflation and credit collapse, the crisis transmuted into World War II. The only “new idea” then was government-directed mobilization; the draft ended mass unemployment.

The U.S. already has the wars in Iraq and Afghanistan consuming some $100 billion annually, offsetting the delayed $150 billion “economic stimulus” package that won’t take effect until summer.

I believe Senator John McCain and Senator Barack Obama will square off as the major party nominees. McCain publicly admits his lack of economic knowledge. Obama admits nothing and is waiting for his University of Chicago braintrust to come up with a plan. He is at least mentally prepared to take radical action, demanding whatever specific support he needs from the timid Democratic-controlled Congress.

McCain should not only propose making the Bush tax cuts permanent but call for reducing “non-essential” government spending by $150 billion to make fiscal room for more 2009 tax cuts. And he should call for fiscal policymakers in the Administration and the Congress to accept their neglected responsibility and ease the burdens of the overworked Federal Reserve. That approach could catch Obama in a McCain-Bernanke crossfire that might fluster the bright young man.

America has an ever-changing political center of gravity. Since the Reagan era, national elections demonstrated that America was a center-right country. But then in the 2006 Congressional elections, liberal Democrats were elected and the center started to shift leftward.

Barack Obama’s presidential candidacy anticipates that America is becoming a center-left country. If McCain beats Obama to the fiscal policy punch, advocating government spending reduction and tax cuts, he can seize the initiative and help ignite an anticipatory late 2008 -- early 2009 upswing in the economy. He might even win the election.