Memo to Axelrod: Part 1

Let’s declare war against the very notion of a jobless recovery. Otherwise, the nation faces an economic relapse in 2010 with stagflation, double-dip recession, chronic job losses and political disaster for the president and incumbents in both parties.

The current “recovery” is the result of a monetary bloat that has injected between $5 trillion and $10 trillion into the financial system to benefit banks that hoard the money. This destroys the economic cushion, which will not exist when hyper-ballooning deficits and national debt must be dealt with.

If credit rating agencies had financial integrity without political strings, they would have already removed America’s AAA rating with our deficits and debt, which are similar to those of near-bankrupt developing nations.

With trillions of dollars injected into the system, two results are inevitable. First, the money bloat will create at least a short term, modest recovery. Second, it will create significant inflation, especially with massive and unprecedented deficits and national debt that are a fiscal Vietnam.

Ratings agencies, global debt markets and inflation will force extreme action to cut the monetary bloat and fiscal deficits. This means major tax increases and spending cuts, restricted monetary policy and far higher Federal Reserve interest rates at a time of slow jobless recovery. This will drive the economy back down as inflation moves back up.

We must increase lending now and create jobs now, before credit markets and the Fed drive rates far higher.

What was urgently needed, but did not happen, was the economic cushion and financial reform that should have been created while the trillions of dollars were being spent. This did not happen. Now, after trillions of dollars were spent to restore lending to finance growth:

Credit card interest rates: up dramatically. Credit card delinquencies: rising fast, while banks guarantee more defaults by jacking up rates on troubled customers. Foreclosures: rising. Mortgage delinquencies: rising.  Commercial real state: falling. Net bank lending: still down. Unemployment: rising. Financial reform: none. Compensation reform: none. Toxic asset change: none. Consumer credit expansion: zero. Oil prices: rising. Gasoline prices: rising. Stimulus spending: paltry. Monday’s initiative is fine but modest compared to deep systematic problems. Regressive taxes: rising in hard-hit states, negating stimulus.  Cost of financing deficits: rising, and will skyrocket with Fed rate increases. Mortgage financing rates: will skyrocket with Fed rate increases.

The credit card bill strangles consumers and small business by continuing every rate increase and abuse for nine months. Banks are shifting from fixed to variable rates. As the Fed raises rates it will all be passed on and further strangle consumers and small businesses. By 2010, some credit card rates will reach 40 percent. With the Fed raises most rates will fall between 20 percent and 30 percent, formerly called usury.

The current program leaves intact virtually all of the practices that created the mess. It is closer to the Bush-Paulson banking paradigm than a New Deal or New Frontier.

There is a grave danger of stagflation, double-dip recession in 2010, chronic job losses and big political trouble. The answers reside not in Geithner’s policies but the president’s campaign speeches.

Part 2 will describe a progressive capitalist agenda to promote real growth and avoid the gathering storm.

Budowsky was an aide to former Sen. Lloyd Bentsen and Bill Alexander, then chief deputy majority whip of the House. He holds an LL.M. degree in international financial law from the London School of Economics. He can be read on The Hill’s Pundits Blog and reached at