The United States of America is claimed to be the wealthiest nation on Earth. Certainly, our GDP is the highest by some measures, our accumulation of long lived assets and infrastructure is historic, and our country is abundant in natural assets and commodities. Yet do the lives of our citizens in terms of material well being and quality of life reflect this great wealth? If a nation’s health is proportional to its material wealth, are our financial liabilities that are four times the size of our GDP degrading our nation’s health? Many are concerned that no matter how America’s wealth is measured, that we have reached our pinnacle and are now in decline. Some suggest that globalization is the cause.
When Adam Smith first penned “The Wealth of Nations” in 1776, the concept of wealth existing within the organism of a nation was not questioned. Nations had grown from their feudal beginnings into mercantilist empires and had begun to develop industrial capitalism within their mostly agrarian societies. However, the concept of businesses being melded to the future prosperity of their growing nations was the accepted paradigm.
Now that globalization is upon us, this marriage of business and nations is no longer a given. The traditional measurement of a nation’s wealth as that of the output of its businesses no longer fits now that cross border transfer of financial, physical, people, and intellectual assets are fluidly afforded multinational corporations. If we can no longer measure a nation’s wealth as that of its corporations, what is the paradigm shift that replaces this measurement?
If we divorce a nation’s wealth from that of its businesses, then a new picture of its material wealth emerges. The sum of a nation’s true material wealth is its natural resources and commodities, its capacity to maximize the value of these resources, and its ability to protect them from plunder. A nation’s wealth depends on its distribution infrastructure, its fixed assets that are capable of production, and the strengths of its people; their legal infrastructure, learning institutions, accumulation of national core strengths enhanced by interconnectiveness of innovation and production, and their accumulated learnedness and capabilities.
In addition, a nation’s material wealth depends on financial liquidity to transfer these assets to their highest and best use. Currency is the oil that lubricates a nation’s wealth producing assets. It provides for the efficient and fluid transfer of commodities, people and productive assets to create a maximum efficient output that will both meet the demands of consumers and that will simultaneously produce profits to feed current consumption and future growth capacity.
A nation’s ability to grow wealth depends not only on maintaining its output at maximum efficient levels but on investing a portion of its output into extending its future capacity. Once again, currency provides liquidity as the medium of capacity extension. Currency is created through debt contracts. A nation’s businesses and individuals enter into contracts to accept debt and, through this process, its banks create currency to supply transactions. Therefore, a nation’s ability to grow depends upon its ability to add debt and to create adequate currency.
A nation’s ability to add debt depends both on its current debt level and on its maximum debt capacity. It can add debt up to its ability to repay it while maintaining current consumption and while providing for future growth at a level that will allow future consumption to be maintained. Adding debt beyond this level will result in excess currency and consumption that lessens its future growth and future consumption, and that heightens its probability of repayment default.
The difference between a nation’s current debt and its maximum debt capacity is its available credit. If a nation adds more debt than its available credit, it adds more currency than its productive output and therefore dilutes its currency, increasing its probability of inflation. Therefore, it is critical for a nation to manage its debt below its maximum effective credit level while growing its available credit through reinvestment in infrastructure and education and through development of concentrated hubs of innovation and productive core strengths.
A nation’s credit capacity is the cumulative capacity of its citizens. Each individual, by his or her own development of education, skills, aptitude, and desire develops an individual maximum credit capacity that grows as these attributes build. An individual’s income reflects his maximum credit and his ability to obtain currency in advance of earning it through loans that add debt. Cumulatively then, a nation’s liquidity is the additive ability of each of its citizens to accept more debt.
Liquidity is provided to a nation through currency distributed by its banking system. Once again, the “Wealth of Nations” paradigm of a commercial bank’s primary mission is to match a nation’s currency to its wealth creating activities in adequate measure. In this paradigm, banks are tasked with the responsibility to evaluate a nation’s entities’ and individuals’ capacity to accept debt, and to enter into contracts that ensure that a nation’s and its citizens’ maximum debt capacity is not exceeded.
The “Wealth of Nations” central bank then ensures that the sum total of a nation’s currency supports maximum efficient output at full employment. Through the central bank’s manipulation of interest rates, it controls a nation’s credit capacity. When interest rates are lowered below historical averages, credit capacity is increased and consumers are enticed to add debt to their ongoing purchases by bringing would be future purchases into the present. In this manner, the central bank attempts to offset peaks and troughs of the business cycle.
However, throughout America’s history, and exponentially more so with the advent of globalization, America’s banks have not accepted nor fulfilled the “Wealth of Nations” mission expected of them by the majority of our citizens. America’s banks and the Federal Reserve in fact manipulated debt instruments to support globalization at America’s grave detriment. Doing so precipitated America’s greatest Ponzi ever, our housing bubble, violating their fiduciary responsibility to our nation. They obliterated their “Wealth of Nations” responsibility, enticing America to accumulate debt well in excess of its credit capacity, feeding a bubble frenzy that manipulated Americans into perceiving debt accumulation as investment.
The housing bubble enticed borrowers to think of their increasing debt not as early consumption but as a down payment on rising equity. Individuals were enticed through low introductory rates to take on long term debt well above their asset debt capacity. This became a logical choice because housing prices rose at 20 percent per year, making the housing bubble a logical “short term investment”. Lower introductory interest rates suckered borrowers to reach for higher debt levels than they could endure long term because of the potential to flip their “investment” for profit during the introductory rate period in what amounted to a dangerous Ponzi scheme.
For the two to three year period of watching their “investment” grow, individuals dipped into their savings and covered their short fall with short term consumer credit that was also made plentiful by the banks. To feed the Ponzi, banks enticed consumers to use short term credit in amounts well in excess of their ability to repay by offering introductory consumer credit interest rates as well. This unsecured consumer credit, well in excess of individuals’ total credit capacity, could be used to finance short term short falls in consumption capacity while their housing investment grew. With available savings and additional unsecured credit through credit cards, the “logical” investment choice was to let it ride on the housing bubble.
When the music stopped, many people who were in the game for quick profit lost their savings, destroyed their credit ratings, and maxed out their debt capacity using all of their available credit. Of course most home and commercial property owners that were not playing the game also lost massive value in their long term real estate investments. In addition, as the bubble popped, many credit card issuers increased their interest rates from low introductory rates to as much as 32 percent per annum, further pegging debt at or above sustainable levels.
This housing Ponzi was a manufactured raising of credit capacity well in excess of America’s ability to repay and an enticement to use that capacity to feed the housing bubble frenzy knowing that the bubble would reach an unsustainable height and that greater fools would be stuck in the end with excessive debt that would stagnate not only individuals’ future growth, but that cumulatively would stagnate America’s growth as well.
If China had not enticed American bankers and businessmen to use America’s credit capacity, if they in turn had not manipulated Congress to eliminate regulations that had earlier been put in place to mitigate excessive credit speculation, if social engineering for the poor had not provided initial cover for the banks to create manipulative debt instruments, if the Fed had not manipulated interest rates to historic lows, if banks had not thrown out historical debt-to-income loan criteria in favor of feeding the speculation with reckless housing loan products and hysterical credit card offers, and if Americans had not allowed excessive greed to cloud their thinking into believing that a new economy had arisen, the debt bubble would never have occurred. Yet it did, and America’s debt, and that of its citizens, has far exceeded its maximum debt capacity. As a result, we now are faced with lower future consumption, lower future growth, and a very high probability of default.
Given that the “Wealth of Nations” paradigm America has been operating under has in fact been inextricably altered and that our nation’s material wealth can no longer depend on multinational corporations or international banks to align with America’s interests, is it now time to develop a plan going forward that puts America’s interests ahead of our multinational corporations and banks? A plan to turn around America must include restructuring our debt load, immediately bringing it down to a level below our maximum debt capacity. It must include quickly forcing the repair of America’s business and consumer credit ratings. And it must include the simultaneous and immediate addition of 15 million jobs, not the paltry 1 to 2 million offered by our meek politicians. This turn around, as further outlined in the links below, should be and can be the initial step in shifting America’s paradigm to a “21st century Wealth of Nations.”