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DE BORCHGRAVE: Annus horribilis 2009?

By Arnaud de Borchgrave | Wednesday, December 31, 2008

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In "Countdown to a Meltdown," the Atlantic's James Fallows describes "America's Coming Economic Crisis, a look back from the election of 2016," when the 46th president of the United States will be the first since before the civil war to be neither Democrat nor Republican.

Once the run on the dollar started, predicts Mr. Fallows, a former Jimmy Carter speechwriter and prominent journalist, everything seemed to happen at once. There was the lesson of the United Kingdom in 1992, of Mexico in '94, of emerging Asia in '97, of Russia in '98, and of Brazil in '98, "and of the U.S. in 2009."

In "Chronicle of a decline foretold," prominent economic historian Niall Ferguson, writing in the Financial Times, said though this was "the worst economic crisis in 70 years, many people remained in deep denial about it." Despite President Obama's soaring rhetoric, the markets sank lower, and "the contagion spread inexorably from subprime to prime mortgages, to commercial real estate, to corporate bonds and back to the financial sector."

Mr. Obama's new New Deal doesn't produce a miracle, Mr. Ferguson predicts, "but the federal takeover of the big banks and the conversion of all private mortgage debt into new 50-year Obamabonds signaled an impressive boldness," and the beginning of the end of the "Great Repression," which substituted for "Depression."

Clinching the recovery is Mr. Obama's decision to fly to Tehran in June, which, like Richard Nixon's visit to China in 1972, symbolized "[Mr. Obama's] readiness to rethink the very fundamentals of American grand strategy." Al Qaeda's bungled attempt to assassinate Mr. Obama "only served to discredit radical Islamism and to reinforce Obama's public image as 'The One.' " And America's world leadership is back in business.

Venezuela's Hugo Chavez following Fidel Castro's death at 82 triggers the debacle, seen by Mr. Fallows. "A right-wing militia of disgruntled Venezuelans, emboldened by the news Castro was gone, attempted a coup in early 2009. Chavez captured the ringleaders, worked them over and then broadcast their possibly false 'confession' that they had been sponsored by the CIA. That led to Chavez's 'declaration of economic war' against the United States," which in practice meant closing the gigantic Amuay refinery, which produces one-eighth of all the gasoline used on U.S. roads - and reopening it two months later with a pledge to send no more products to American ports.

That kicked off the world's fourth - and worst - oil shock. But neither Mr. Obama nor Vice President Joe Biden had any idea what to do, according to Mr. Fallows' annus horribilis, when the spot price of oil rose 40 percent in the week after Mr. Chavez's declaration - "and then everything went wrong."

Mr. Chavez strikes a notorious secret deal with Beijing for preferential future contracts for Venezuelan oil. In return, China refuses to go along with a U.S.-sponsored Bretton Woods 2, a new world monetary deal. At the annual Davos World Economic Forum, a ranking Chinese official declares the dollar is no longer seen as a stable currency. The dollar then plummets 25 percent against the yen and the yuan. Two weeks later it's down 50 percent. The dollar buys 2.5 Chinese yuan, down from eight a year earlier.

The United States sticks to the dollar but the rest of the world no longer wants it. The two kinds of assets wealthy Americans and foreigners least want to hold are shares in U.S.-based companies. The fall of the dollar wipes out any conceivable market gains. Ditto dollar-based bonds, including U.S. Treasury debt.