Analysis: It's the economy, stupid

WASHINGTON, July 16 (UPI) -- The U.S. economy is a roaring bear, not a charging bull, these days. The bear is hungry and bad-tempered, and its rage is getting worse.

Most of all, the gathering economic storm over the United States is forcing even the Bush administration and its top policymakers to abandon their passionate faith in minimum regulation, no government bailouts and the invincible power of optimism.

Ben Bernanke, chairman of the Federal Reserve, told the U.S. Congress Tuesday the future was "unusually uncertain" and faced "numerous difficulties." At any previous time in the Bush administration, this kind of talk would have cost Bernanke or his predecessor Alan Greenspan their jobs. It has been quite literally heresy under the Bush administration to admit economic prospects have been uncertain, let alone awful, but like climate change, the direct experience and obvious evidence has become too much to deny or sweep under the carpet.

The U.S. dollar has plunged to record lows, and the housing slump continues apace, leaving Fannie Mae and Freddie Mac, the two gigantic pillars of the mortgage market, in dire need of government support. Unemployment is rising. General Motors is in serious trouble, Delta Air Lines has lost more than $1 billion and the IndyMac Bank collapsed in Southern California last Friday.

Worst of all, the flaming dragon of inflation is back for the first time in more than a quarter-century since Paul Volcker, the legendary chairman of the Federal Reserve under President Ronald Reagan, slew it by letting interest rates soar sky high in the early years of Reagan's first term. Today, to add insult to injury for President George W. Bush, Volcker is an economic adviser to presumptive Democratic presidential nominee Sen. Barack Obama of Illinois.

The latest inflation figures for the U.S. economy are not just bad, they are scary. Food and energy prices rose in June so high and so fast that they pushed up the consumer price index more in a single month than it had risen in more than a quarter-century, since the last great inflationary wave was finally tamed.

These waves of woe guarantee a Democratic sweep of Congress in November, probably the biggest losses the Republican Party will have suffered in the Senate and the House of Representatives since the Dem landslide of 1964. Unless Obama does something exceptionally self-destructive or stupid before November -- and he is not a man given to self-destructive behavior or stupidity -- they will propel him into the White House in January.

This is not merely because Obama is the opposition candidate challenging a heritage of eight years of Republican control of the federal government and national economic policy. It is also because a frightened American public no longer believes that minimum government, minimum regulation and zero state intervention will assure their prosperity. On the contrary, the call now is for much more government action, not less, to try to staunch the wounds, reduce the number of corporation collapses and maintain jobs.

When it comes to taming inflation and restoring crucial international investor confidence in the dollar, there is actually a lot the federal government can do. But there is no doubt that Obama, with Volcker at his side, is far more likely to do it than either Bush or Republican presidential front-runner Sen. John McCain of Arizona. That is because the only hope for stabilizing the dollar and reducing gasoline prices in dollar terms is to let U.S. prime interest rates soar sky high.

Reagan proved this can be done. Had a presidential election been held in 1981 or 1982, he knew he would have been swept out of office. But the draconian interest-rate rises came early enough in his administration that the pain was past, unemployment was dropping and the economy was again surging strongly ahead a year before the Gipper swept to a triumphant re-election in 1984. Bush today does not have the time to pull that off before the November election, but the next president does.

A desperate White House is pointing to the sharp drop in spot oil prices on world markets, dipping to $136.62 per barrel on Tuesday -- down more than $6 on the day and a fall of around $11 since Friday -- as a sign that the worst may be over in that area. But this is whistling in the wind, for two reasons.

First, every serious energy analyst has been warning for months that global demand is now so high that there is very little elasticity left in real prices. A few months ago, even the new "low" of $136 would have seemed like an apocalyptic bad dream.

Second, if the dollar plunges out of control, oil imports into the United States and then prices at the local gas pump will spike higher than ever before.

The bear is roaring, the U.S. economy is shaking, and the international markets have no confidence that Bush, Treasury Secretary Henry Paulson and Fed Chairman Bernanke have any idea what to do about it. This is not Apocalypse Now, but it certainly is bad, and things may get a lot worse before they start to get better.