Imagine three well-dressed people on a sidewalk: a white-haired man in his early 70s, a woman in a pantsuit with the tails of her jacket splitting over a protuberant behind, and a young, spaghetti-thin African-American man. They are absorbed in a dispute, but they carry on in polite, moderated tones.

Across the street, a building is collapsing, another one is on fire, a woman is jumping from the roof of a third structure. Others kneel, gasping for air near inert human forms, more dead than alive. The police, hands clapped to their heads, run to and fro like ants after a squirt of insecticide.

Firefighters arrive, jump out of their glistening red machines, and attach their hoses to the hydrants. But no water comes out.

Not so many feet away, the three continue their disagreement, oblivious to the tumult. .


Thus the presidential campaign soldiers on, all but ignoring the largest economic upheaval since the disaster of 1929. Given the chaotic state of no-longer-so-high finance in America, they have good reason to stay as far away from the daily debacle flooding out of Wall Street and, inch by foot, putting the nation under water.

But whoever wins the White House will enter it under conditions undreamt of when this long presidential season began. Long-held delusional assumptions have ceased to be tenable, owing to the catastrophic brew mixed up by Wall Street.

On day one of his administration, to borrow a phrase from Hillary, John McCain would have to make some agonizing reappraisals of his war policies. His website proclaims, “More troops are necessary to clear and hold insurgent strongholds; to provide security for rebuilding local institutions and economies; to halt sectarian violence in Baghdad and disarm Sunni and Shia militias; to dismantle al Qaeda; to train the Iraqi Army; and to embed American personnel in Iraqi police units. Accomplishing each of these goals will require more troops and is a crucial prerequisite for needed economic and political development in the country.” He does not discuss how he is going to pay for the first installment on his vow to camp in Iraq for a century if need be. The United States has been borrowing the funds needed to carry on the war, but those days are over.

Owing to the ever shrinking dollar bill, foreigners are ceasing to buy U.S. government securities. Last year they bought $126 billion less than in 2006. Every war before this was paid for, at least in part, by raising taxes. This time we lowered them and borrowed the money. Although there have been times in McCain’s career when he recognized the necessity of raising taxes, of late he has been a hard-line member of the school that believes tax cuts are good for whatever ails. A big thwack at the capital-gains tax rate will cure cancer.

For their part, the two Democrats vying for their party’s nomination have left the impression that some of their programmatic ambitions will be paid for by money saved by ending the Iraq War. They would do well to recognize that there is no money to be saved. The best that can be hoped for would be less money borrowed, which will not go far toward paying for things like the “affordable, high-quality child care” Obama’s website says he will “provide … to ease the burden on working families.” They may be able to do that kind of thing in Sweden, where they tax the bejabbers out of the citizenry and where, much more to the point, the krona is as rock solid as our greenback is not.

If one of the Democratic contenders is elected, he or she will be hampered by financial constraints while withdrawing from the Iraq conflict. The endgame they envision would take months, or more probably years, and all that time the meter will be clicking.

Both parties have acknowledged that large sums are needed to repair a rusted-out highway system, and the Democrats have been promising a hatful of new or expanded government programs that are extraordinarily costly because they are labor-intensive in fields such as education and health. How they are to be paid for is another matter. Hillary maintains that much of the cost of her health proposals would be met by preventive medicine keeping people from falling sick, an assertion for which there is no evidence.

Raising taxes in today’s precarious business environment may only make a bad situation worse. The money will have to be borrowed or printed or both. Not a particularly good idea. Printing money, a modern form of debasing the coin of the realm, causes inflation, a subject none of the candidates is dwelling on but which they may have to talk about as the cost of everything continues its climb. Ben Bernanke has been pumping hundreds of billions into the collapsed veins of the financial system to keep the great banks and investment houses from dying.

The situation the incoming president will find him or herself in is not the same as the one that confronted Franklin Roosevelt and his New Deal. He was able to deficit-spend to his heart’s content without causing inflation because there was so much unused capacity in the country. Factories were idle and fields were fallow, so printing money stimulated production rather than driving up prices.

In some previous panics, recessions, and depressions, bankruptcies cleared the field for growth and recovery. After bankruptcy, the company may have folded, the farm may have been foreclosed on, the house taken by the bank, but people at least emerged debt-free, able to begin again. Today the policies being followed are different. Republicans and Democrats both, perhaps without quite realizing it, seem to have agreed that both big financial institutions and homeowners will be kept half alive somehow but left with heavy, paralyzing debt.

Debt taken on to buy new equipment, to develop products and technologies, or for a home is productive, enabling debt. But that is not the kind of debt we have saddled ourselves with. This is unproductive debt, much of which was contracted at the Wall Street version of the roulette wheel. Hundreds of billions of dollars were borrowed and risked on the basis that houses would be worth more next year than last because that’s what real estate did. It just went up in value by some alchemical process unavailable to any other segment of the economy.

Secure in this truth, bankers, brokers, and others seeking to make fortunes without rendering useful services told themselves and repeated to the world that, in the whole history of the United States, real-estate prices had never gone down and had always gone up. Aside from the fact that no reliable data exists for such an exuberant claim, people knew it could not be so. In a free market, prices go up and prices go down. They just do.

On this never-down-always-up hypothesis, mortgages were issued by the hundreds of billions and turned into bonds, which were turned into more bonds and used for insanely complicated side bets until a gigantic cobweb debt skyscraper, mounting into the trillions, was erected and now threatens to topple. Nobody fathoms how the thing was put together or how it can be dismantled, but there it stands, endangering whatever hopes and projects an incoming administration may have.

For the time being, the government’s response is to try to spend our way out of the crisis. The economic stimulus package will cost $168 billion, which we might borrow from Japan or Germany or the Arabs or anybody—please, help! While our elected officials stand on street corners passing out money, the Federal Reserve is spending more propping up the financial institutions, but come next January, the new administration is going to have to choose between continuing to spend and risking destructive inflation or cutting off expenditures and risking a destructive crash.

The new president may also find that America is not quite the world’s sole superpower anymore. Though it is a fixed conviction that the U.S. has gained its special status because of the might of its arms, others know better than to think American power derives from its bathtub toys.

They know that the primary basis of the nation’s strength has always been its economy. They saw the hollow military power of the Soviet Union and understood that communism’s rotting economic base could not sustain its rockets, its submarines, and its other advanced weaponry.

Moreover, the Soviet ruble was no match for the dollar, the world’s reserve currency, the money of international trade, the most sought after and reliable currency. The dollar has been literally as good as gold, which is why foreign governments and individuals have bought so many hundreds of billions worth of U.S. government and non-government notes and bonds.

Dollar power has enabled the United States to dominate the World Bank, the International Monetary Fund, the World Trade Organization, and to have a significant influence on the internal economic and social arrangements of scores of nations. It has made it possible for the American military to secure lodgments around the globe.

A dominant economy has made enabled the U.S. to intervene and guide the world’s financial systems and, when America has chosen to do so, cut off and starve states with whom it has inimical relations. Neither Germany nor Japan nor China, three large and wealthy nations, would be taken seriously if one of them were to threaten economic sanctions against a weaker, obstreperous state, but when the United States does, men in distant capitals buckle. At least they used to.

But the dollar isn’t the dollar anymore. It does not hold its value as it once did, and it is, month by month, year by year, losing its allure. Thanks to a persistent low-grade inflationary policy and trillions in American debt, ministers of finance, currency traders, and businessmen of all stripes are beginning to turn away from the greenback in favor of the euro or other currencies. The longer this trend continues, the less the range of choices the incoming president will have in the conduct of foreign affairs.

As for ameliorating the international trade agreements many Americans believe have been detrimental, forget about it. In straight power terms, America, now the world’s largest debtor nation, cannot raise tariffs to bar creditor nations’ merchandise. A person does not order around those to whom he owes money and from whom he is borrowing more.

Far from obtaining concessions from America’s creditors and bond holders, the new president will have to worry about what was once an impossibility—that foreign creditors and investors, scared by the diminishing dollar and the inability or refusal of the American government to take remedial steps, will head for the exits or, worse, panic and stampede to get out of dollars and into euros, pounds, yen, and yuans.

On a smaller scale, this is exactly what happened to Bear Stearns. Should such a series of events unfold nationally, Americans will suffer huge inflation, evaporation of savings, bankruptcy, unemployment, and the kind of social strain from which much ugliness and even regime change have been known to flow in other nations that have tripped into this kind of abyss.

None of that need be. There is a way out, but it is not a happy-go-lucky one. The next president will have to tell the nation to man up. The remedy the new White House occupant cannot help but announce is the castor oil of austerity, an indefinite postponement of much that millions want. That’s what you do when there is no money and you are in debt. Americans have faced worse in their history. They can do it again.

Nicholas von Hoffman is a former columnist for the Washington Post and Point-Counterpoint commentator for CBS’s “60 Minutes.”