I keep reading well-informed Americans complaining that the real scandal isn't bonuses to corrupt/overpaid/incompetent executives, but the funnelling of American taxpayer money to counterparties, many of them foreign banks. I don't think Americans are ever going to understand it. First of all, it isn't taxpayer money. No American taxpayer is going to pay more taxes over this, at least not directly. The treasury is just going to run the printing presses a bit longer.
The United States is the world's largest Ponzi scheme. Americans buy stuff they don't have the money to pay for (because the generators of wealth, the factories, have been shifted overseas by the American oligarchs), and pay for it with IOUs. The rest of the world plays along, because it likes the short-term profits to be made from the insatiable greed of American consumers, and because it has no clue of how to make the merry-go-round stop. Neither the American government nor the United States itself can ever possibly pay what it owes. Never. Yet the prosperity of the rest of the world depends on financiers accepting the American accounts receivable and the American debt paper as being worth close to its face value.
If there is a massive default on payments to the counterparties, the whole scheme collapses. The scheme depends on the illusion of the American ability to pay. The illusory American ability to pay keeps the money flowing. Just as Madoff paid redemptions out of money from new investors, American debt over the years, to the extent it hasn't just been rolled over, has been paid out of the funds obtained from new borrowings. The debt paper is revolved, and more debt rung up, all on the basis that the United States is solvent and can actually pay all its obligations. Of course, the United States has been able to achieve its massive income inequality be satiating poor people with cheaper and cheaper consumer goods from China and elsewhere (bought, of course, on credit), with the savings on consumer goods hiding both inflation and the massive reduction in purchasing power of the poor and middle classes (the American intelligentsia is terrified of what will happen when the American dollar loses all its value and consumer prices fly up, which is why FEMA built all the secret internment camps).
If there is a huge default - like not paying the AIG counterparties - the United States will no longer be regarded as solvent, and all the lending will have to stop. Most financial institutions would actually be prohibited from lending by their own national regulators. This would cause American paper to become suddenly worthless, and the entire world economy would collapse. Amongst many other happy scenes, the heads of all the politicians of the world would end up on the ends of pikes around their respective legislative buildings.
The Chinese - who are, of course, complicit in this, having built their economy on worthless American debt which they knew was worthless - want a new world order with a new world currency. I imagine that will be the plan for everybody. Just as Nixon rejigged the world economy in order to let the world pay for the Vietnem War, some big realignment of world currencies will be used to pay the American debt by placing it on the shoulders of poor people around the world. That's the way it always works. We'll be told, perhaps correctly, that the alternative would be much worse. Until then, Obama has to keep rearranging the deck chairs to make it appear that the United States is solvent.
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