Paulson acknowledged in Berlin Tuesday that soaring oil prices are dragging down economic prospects in the United States and around the world.
"There is no doubt that both our countries, as well as the world, are feeling the burden of high oil prices," Paulson said following a discussion with German Economic Minister Michael Glos.
There is a temptation to say "Well, duh?" at what is, after all, a rather banal restatement of the obvious. But compared with the Panglossian uber-optimism that has blindingly radiated from every sweat-pore of the Bush administration over the past seven and a half years, Paulson's comments stand out as an astonishing anomaly of candor and common sense.
In 2001-2003 we predicted in these columns that the Bush policy of betting the entire house on keeping interests rates at rock bottom levels, regardless of circumstances, could not be sustained forever and would inevitably result in a flight of international capital from the United States and a potentially very serious collapse in value for the U.S. dollar.
During Bush's first term, we also warned that the U.S. domestic economy had become so structurally dependent on imports of manufactured industrial goods, especially from China, that a collapse in the dollar would not automatically curtail imports and eventually strengthen the dollar and U.S. competitiveness, as classic Adam Smith liberal economic free-market theory maintained.
Instead, the more the dollar fell, the more the annual U.S. balance of payments deficit would grow. And that deficit even then was the highest in both dollar and absolute terms ever recorded by any major industrial society in modern world history.
The only policy that might still stabilize the U.S. economy, restore international investor confidence in the United States and stabilize the plunging dollar would be to do what Bush and his Treasury team resolutely refused to do in 2001-2003: Allow prime interest rates to soar, however much that would hurt the U.S. housing market and domestic conditions in the short term.
There is no likely prospect of Bush making a U-turn to launch such a fiscally responsible but politically unpopular policy before the November presidential election.
Democratic presidential standard-bearer Sen. Barack Obama of Illinois is more likely to implement such a policy if he is elected than his Republican opponent, Sen. John McCain of Arizona.
That is because Obama has very publicly taken Paul Volcker, former chairman of the Federal Reserve, on his team as a senior economics adviser, and it was Volcker, with the support of President Ronald Reagan, who broke the back of 1970s inflation and laid the basis for a quarter-century of virtually uninterrupted U.S. economic growth and expansion by keeping interest rates high in 1981-82.
Today, the Reagan-Volcker achievement in breaking inflation by the use of high interest rates ranks with the achievement of President Warren G. Harding -- another Republican -- and his Secretary of the Treasury Andrew Mellon in 1921 as being the quickest, smoothest and most long-term successful recovery from a major economic recession or depression in U.S. history. The recovery of the U.S. economy from the worst crisis of the Great Depression under President Franklin Roosevelt took six years by contrast.
Oil prices won't fall in the near future whatever Bush, McCain and Obama say, do or hope in the next few months. The structural pressures are just too unrelenting.
There are, however, a surprising range of fiscal policies that the U.S. government still has the power to implement to improve the situation. But neither Bush nor Paulson appears to be considering them.
That is why Paulson's honest and unflinching assessment in Berlin -- although without the suggestion of any new policy that could realistically alleviate the problems -- is the best one can realistically hope for -- at least for now.
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