Strange how what might once have seemed a drastic measure, such as quantitative easing that by all accounts was historic in its reach, can appear tame when compared to the revolutionary measures that will be soon be contemplated if we are unable to reverse America’s fortune. Strange how what will be proposed next in this post might also seem revolutionary, except when compared to the much more drastic measures that will be proposed by others if what is recommended here is not implemented and America continues to accelerate its downward drift.
What has become increasingly clear is that Americans will not consume our way out of our most severe business contraction since the Great Depression. If we are to reverse course, we must produce our way out of our demise. Our GDP must increase, and in so doing, our increased production must provide all Americans the ability to work for each other and for the world on behalf of our country’s future.
What is also clear is that our attempt to centrally increase production through quantitative easing failed to spark a resurgence of economic growth. Our next great attempt must not be allowed to repeat replenishment of the world’s bank’s balance sheets or to repeat grand government sponsored projects that take too long to trickle down to the rest of the economy and that lack the traction to jump start our economy. If the ill fated quantitative easing experiment could not reverse our contagion, our next attempt must instead be distributed throughout the economy to kindle millions of micro-investment opportunities that will nurture sustainable growth.
To distributively spur GDP growth, America must provide a broad swath of domestic equity and debt capacity that can be invested by millions of Americans in countless avenues of productive capacity. By creating the monetary environment that allows our nation’s pent up innovations to take root, we can put all Americans to work on the highest and best domestic priorities for growing our economy. Yet our current government policies are producing just the opposite effect. During this global recession, while allowing the Federal Reserve to ferociously pursue Keynesian limits, we have supported policies that both diverted and consumed domestic equity while at the same time destroying domestic debt capacity. These policies must now be dramatically reversed.
Our equity policies must be reversed. Rather than encouraging growth of equity to keep pace with our country’s productive growth needs, we have pursued policies that chase equity away to other countries by increasing the cost of doing business in America through regulatory, structural, and labor costs. Of the equity that is left, we have pursued policies to capture much through estate taxes, capital gains taxes and corporate profit taxes to pay for our grotesquely bloating government budgets. Without growth capital, we cannot grow.
Our debt capacity policies must be reversed. Rather than aggressively pursuing policies to stem the damage from our real estate bubble, we instead are allowing our real estate equity bubble to slowly deflate, increasing the nation’s housing debt overhang approximately 10 trillion dollars. We are further pursuing policies to clear this overhang through aggressive foreclosures and bankruptcies of millions of Americans that destroys debt capacity in two ways. First, much of the debt that is not purged through bankruptcy is just transferred from housing debt to liens on the debtors’ future earnings. Secondly, the credit ratings of the debtors are damaged, shrinking their ability to assume new debt. Without new debt capacity to both absorb the old debt capacity lost and to add to new equity, America cannot increase its GDP and jobs.
Either through historical ignorance, or worse through a deliberate effort to give elite constituents opportunities to protect their piece of a dwindling pie at the expense of the entire nation, we have reconstituted bank equities while doing little to gird their underlying loans, to expand our nation’s credit, or to reverse this business cycle’s monetary implosion.
The beneficiaries of these failing policies include our bloated government that delays inevitable and urgently needed right sizing, and banks that continue to feign fairy tale housing equities on their books so that they can continue to extract interest payments while appearing by most accounts to maintain a modicum of solvency. The losers thus far from our failed government direction have been the rest of the U.S. economy, all savers, all job seekers, and the America’s future.
If we are to repair America’s capitalist system without having to eventually resort to revolutionary measures, we must immediately reverse our monetary policies with what might seem revolutionary measures today, if not for the much worse measures that will inevitably come as a result of our continued inaction. We must stop attempting to pay for excessive government budgets with current and future growth equity. Instead, we must continue the path of slashing government expenditures. We cannot have our GDP growth equity cake and eat it to fund deficits.
Once we smartly choose to conserve our growth equity, we must take the much harder step of changing our policies to incentivize equity owners to keep their equity in America rather than allowing it to be invested offshore, or the heroic steps we took to save our GDP will be for naught as the saved equity simply slips away through direct foreign investments to the East. In addition, if we are able to convince equity owners that America is a good investment, we must also create available debt capacity alongside that equity, because investments in GDP growth require both equity and debt.
Our nation’s existing debt is already maxed out. 80 percent of this debt was created by a series of orchestrated bubbles intended to extract capital for Asia’s expansion. Our country was left strapped with overwhelming debt and was unable to move forward as Asia, now flush with our capital, ran past our stalled economy. We must stop this bubble debt from placing a stranglehold on our nation’s future.
Without a realistic method to isolate and appropriately deal with the debt created during our spectacular real estate bubble, we cannot move forward. Thus, I make what now seems a revolutionary suggestion, but only so because we have not yet degenerated into requiring an even more revolutionary measure. We must isolate the existing bubble-created, under collateralized debt and have our government force the debt holders to convert it to equity, thereby co-opting those who extracted the debt to share in the risk of making America once again successful.
As an example of debt conversions, our government will insist that banks remove the overextended portion of housing loans from their books and replace them with partial bank equity ownership of those same homes. Once we remove these artificially elevated debt obligations from the mass of Americans, we must accelerate repair of their credit ratings that were damaged solely due to our nation’s business cycle debacles so that all Americans may appropriately support our country’s future economic productivity.
While seemingly radical, my solutions will support the equity and debt consolidation that must be infused back into our country’s future. A simple review of our Western capitalist system will clarify why my conclusions are on point and why we must aggressively reverse course. Let’s remind ourselves of the monetary linkages of the Western capitalist system. First, investors provide both equity and debt needed to grow businesses to meet the needs of the market. More risk adverse debt providers require periodic repayment of principle and interest before equity providers share in the business profits. Because some industries’ profits swing more widely from the peaks to the troughs of the business cycle, debt providers require the business owners in these industries to obtain a greater amount of equity to survive the cycle while continuing to make principle and interest payments.
During the initial rise of the business cycle, as demands for goods and services increase, the return on a business’s equity increases making the business a more attractive investment, attracting further equity to build supply capacity to meet increasing demand. Banks, typical suppliers of debt capital, assess a business’s future profit potential given its additional equity, and agree to increase its debt through new loans that combine with the equity to build additional business capacity.
Toward the end of the cycle, as supply grows to exceed demand, revenues reduce. The reduced revenue must first cover the interest on the newly acquired debt before providing a return on equity. Decreased return on existing equity decreases demand for new equity. For those companies that added too much debt in ratio to new equity, they risk defaulting on their loans at the trough of the cycle. Thus business cycles enforce maximum debt to equity ratios.
Taken together, American industries have historically required a ratio of 1 unit of equity per 1.5 units of debt. With a total American business values of about 52 trillion dollars and real estate values of 38 trillion dollars, the corresponding fully balanced equity levels approximate 36 trillion corresponding to a sustainable business cycle debt of 52 trillion dollars. However, U.S. debt now exceeds 57 trillion, suggesting we are over-indebted already by 5 trillion. And this ratio does not yet account for the approximate 10 trillion in debt overhang not yet addressed by our shrinking housing bubble. With a combined 15 trillion dollar debt imbalance and an economy in the trough of the business cycle, America’s economy is stalled, requiring either an increase in equity, a reduction of debt, or as I propose, a radical movement of both.
And yet, my suggestions are not so radical when juxtaposed against what will be proposed by much more radical proponents than I when our economy nosedives from its current anemic plateau. So let us consider not taxing existing equity away to pay for government debts, not incentivizing existing and new equity to seek offshore investments, isolating existing debt and converting it to equity, distributively dispersing available equity and debt capacity, and accelerating repair of our citizens’ credit ratings that were caught in the cross fire of our bubble debacles.