Category Archives: U.S. Monetary Policy

Ben Bernanke Conducts an Economics Demonstration

Standing behind a lectern in front of a distinguished group of economists, Bernanke explains his maneuvers. He pulls out a good sized, clear glass vase and sets it atop the lectern, explaining, “This vase represents America’s monetary system. It seems empty but it is not. In fact it is full to the brim with air molecules. These molecules represent the Fed’s every day monetary function, creating money out of thin air and placing it in circulation. How much more monetary function do you think we could put into this vase?”

An economist raised his hand and said, “None I suppose. It seems the vase is pretty full of air right now.”

“Ah,” exclaimed Bernanke as he pulled out a bag of river stones. “But what if these river stones represented stimulus?” He neatly placed stones one atop the other till they filled the vase. “You see, we can fill this economy to the brim with stimulus and it does not overheat to create hyperinflation. But now that stimulus did not create the desired economic effects, is the vase full?”

A colleague raised his hand and stated, “It appears to be full but about to start emptying because the Chinese are beginning have stopped buying our short term debt.”

Bernanke determinedly remarked, “Yes but with unrest stirred up by an Arab Spring, a bit of European unruliness, and a horrific tsunami, we have a mixture for reserve currency absorption.” He then pulls out a jar of small round pebbles. “These pebbles represent Quantitative Easing.” With that, he pours the pebbles into the vase and begins to gently shake the vase letting the pebbles penetrate the crevices of the larger river stones until all have filled the empty spaces. “With quantitative easing, we are able to fill the longer tranches of debt, pushing out the treasury maturities beyond a year. Now does it look like our vase is full?”

“Seems so,” states a dissenting Fed board member. “The markets are now beginning to wane and more countries are beginning to question their holdings of U.S. dollars.”

“True!” exclaims Bernanke as he pulls out a pitcher of little steel BBs. “But what I have here is QE2.” With that, he pours the contents over the vase and gently shakes the BBs into the crevices between small pebbles and larger river stones, until the entire pitcher of BBs finds their way into the vase. “As you can see, I am able to push more and more of our nation’s debt into the out year treasuries, all the while propping up the markets, and yet we have no hyperinflation. Is the vase full now?”

“Definitely.” Remarks a marketeer as he reacts to Bernanke’s remarks that there will be no QE3 by pulling out of the market, sending it south. Sensing a potential slide into deflation, Bernanke reaches down under the lectern and pulls out a pitcher of sugary white fine Florida sand and begins to pour it over the vase, shaking the sand into the tiny crevices left in the vase, then waves his hand over the vase telling the market that interest rates will hover at zero for the next two years. “You see, I have more tricks up my sleeves. I call this Operation Twist. By this concurrent Fed and Treasury action, I can shove more and more of America’s debt way out into the treasury curve without hyperinflation.”

“But no one else is buying the debt and you are talking about creating even more debt by buying into the European’s crisis. Won’t this finally create hyperinflation?” shout the prime metal buyers as they watch the market tank and their metal prices dropping.

“Aha,” exclaims Bernanke gleefully as he pulls out his last pitcher containing crystal clear water which he promptly pours over vase and it seeps into the last known air pockets within the confines. “You see by packing the out years full of debt, I have effectively made more room in the early periods for a bit more room to conduct QE3. Call it by any name you want but the Fed will solidify Europe’s crisis and shore up America’s failing economy as long as I have space in the vase and the dollar does not hyper-inflate. To do otherwise would be to subject the banks to deflation and collapse.”

(Soooo…Europe may breathe a sigh as the can kicks further down the road, the markets may have a mini rally, the metals may trail off for a bit as other short term hedges seem a better bet, and then what? Your vase really does seem to be full now Dr. Bernanke.)

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Filed under Federal Reservre, U.S. Monetary Policy

China May Call EurAmerica’s Bluff and Let the Western Financial System Collapse

Brazil taught the world that what was behind the Wizard of Oz’s curtain was pure smoke and mirrors. When two MBA’s transformed Brazil’s rapidly deteriorating economy by simply creating a second currency and stating that it, unlike its hyper-inflating counterpart, had a constant value, and by sternly imposing political discipline on the new currency, they showed the world that currency is not the purview of international banks that create it from thin air. Currency is the will of a nation to share its productivity on an equitable basis.

China had not learned this lesson at the end of the barrel of EurAmerica’s gunboat diplomacy and suffered millions of casualties in the years after 1840 as a result. But China has learned it since and has taken advantage of her hard won understanding by playing the West’s own mirage of money against its immobile institutions. Through sophisticated manipulation of our businesses, banks, and politicians, China has reaped the rewards of EurAmerican pursuit of maximum quarterly profits and interest rates. The entirety of EurAmerica is now neck deep in its own debt that has provided China with tens of thousands of factories at EurAmerica’s workers’ detriment. Our citizens will languish in decades of debt repayment, wage decline and underemployment as a result.

Now that EurAmerican leadership has transferred massive amounts of real wealth to China’s shores, building the armaments of the world’s next century of commerce, our captains of industry, fathers of finance, and patrons of politics are now asking her to protect the financial instruments that procured those resources. Certainly, after how the West scourged China less than two centuries ago, she owes no allegiance to the West’s economy. In fact, China may already have ascertained that the end game cannot afford a prosperous West in the face of China’s emerging commodity and consumption needs.

If China does not responsibly act to assist the global crisis, she will surely suffer in the short term from it. However, as the Long Depression of 1871 proved, the country emerging from the depression with the abundance of real assets emerges more quickly and with a stronger position to consolidate hegemonic power. And the Great Depression proved that the country holding the world’s financial wealth emerges as the dominant reserve currency. In that case, America held the majority of the world’s gold.

It may be in China’s strategic best interest then to allow the world to financially collapse. China has the productive assets. She has a surplus of fiat money. She has the commodity relationships. She has built a substantial reserve of gold bullion as a backup source to restart her economy. And more importantly, China’s state run bank recognizes that the curtain protecting the Emerald City protects only a fiat monetary system built upon the premise of an existing western caste system commanding allegiance to debt derived money.

If EurAmerica collapses, it will take years for our political system to sort out a restructuring of power and debt obligations. In the meantime, China will surge ahead in re-establishing a world order built on a constructive new monetary and credit system with China at the center. She will then selectively engage with companies and institutions of the West as she strategically sees fit. Our current debt and credit default swap bubble has created dinosaurs of the West walking aimlessly into financial tar pits. It is unfortunately a house of cards that and I am afraid China is going all in to call EurAmerica’s bluff.


Filed under China, Economic Crisis, U.S. Monetary Policy

As America’s Political Process is Upheaved, Our Institutions and World Governments will Share the Responsibility for Our Debt Restructuring

Certainly at any moment in time, if we examine a bell curve of society, we find a percentage of people who are unable to manage a budget or that have impulsive natures regarding credit and materialism, and together as a group, they find themselves over their heads regarding debt and consumption.

Ultimately, everyone is responsible for their own spending habits. No-one forces us to indebt ourselves or to reach beyond our means to purchase life’s comforts. However, just as a family bathing at the seashore can find them swept out to sea by a breaking riptide in which they are defenselessly broken by one of the world’s destructive forces, a family can also be swept away by the world’s financial forces when its monetary system rises in a feeding frenzy or violently contracts.

When these systemic accelerations and decelerations impact the world, the bell curve of personal budgets violently shifts, trapping not only this lagging tail of incapable and impulsive budget breakers but also a much larger swath of responsible citizens as well. In the most recent financial collapse, this budgetary bell curve was shifted and skewed dramatically by America’s generational monetary flaws, by America’s post-war demographics, by a shift in America’s fortunes, by our lack of institutional oversight, and by institutional entrapment of larger forces that self-servingly swept up Middle America. Together these forces led to a pervasive over consumption and overwhelming debt.

Generational Monetary Flaws – Our capitalistic monetary system, although arguably the best system for advancing societies, still has great flaws, the greatest being its reliance on capital providers and money lenders to create money that over time concentrates wealth back into their hands. This concentration builds to a breaking point about every third generation. Each generation shifts its philosophy from those of its parents, allowing the generational capitalism pattern to play out one generation after the next. After a financial collapse, the first generation is traumatized, the next generation legalistically rebuilds, and the third happens to branch out to become risk takers setting the stage for Ponzi excesses and collapse. Our recent collapse unfortunately happened as usual during our country’s latest risk taking generation.

Demographics – After WWII, our grandparents and parents set about to make up for the war and created a bulge in population, the baby boomers. This generation’s spending patterns were well known as they progressed from childhood into marriage, spending years, and into preparation for retirement. The entire world connected to this generation’s spending patterns and fed into its cycle which could be considered instinctual by nature. The build up to this monetary collapse came as the boomers were in their biggest spending and investing for retirement income period when they met with faced a world that was willing to help them foolishly part with their capital during their largest debt capacity years.

Shift in America’s Fortunes – America had been given the gift of excess wealth during the run-up to the Depression of 1871 from Europe’s banking system that manipulated a Ponzi housing scandal to extract Europe’s population’s wealth out of Europe for America’s rail expansion. Our capitalists came out of that depression with enough of Europe’s capital to “win” the world’s second great round of industrialization and to feed Europe with armaments during two great wars. America exited the two wars with most of the world’s gold and much of her industrial capacity.

We were now the world’s hegemonic power with an immense concentration of power. Our baby boomer leadership chose to spend our power and financial position on two competing motives that together squandered our fortunes. America chose to become the world’s first truly worldwide military superpower to defend ourselves against the next great war, spending more than double the rest of the entire world’s military budget. In addition, our boomer generation found that this war chest could be used to cure some of our societal issues that led to our being the world’s superpower.

America began its war on poverty and bigotry that together with our military expenditures sapped us of our newfound wealth and started us down a path of borrowing against our world reserve currency status to meet our lofty goals. The result of this two pronged philosophy was a national debt that as of this year surpassed our GDP.

Lack of Institutional oversight – America’s constitution was a work of genius in protecting our new nation from tyranny in its infancy. Our founders designed a grand web to catch tyranny from rising from any faction to thwart the progress of America. Yet we did not protect ourselves from our own debt.
So when America’s government began its war on communism, bigotry and poverty, it did so without a built-in constitutional predator to stop the spread of our governmental spending or to suppress the self serving monetary support for our spending folly from the international banking cartel that comprised our Federal Reserve.

For two centuries, our constitutional republic form of government had worked well in slowly advancing our society through dramatic societal shifts resulting in only one civil war, and had supported our laissez faire business growth during the nineteenth and twentieth centuries to make America the dominant economy of the world. Yet, our economy and position as the world’s reserve currency hid the dangers of a reckless Congress until its out of control spending surpassed our ability to enable it. Too late we have found that the Constitution has no protections against entitlement building and imperialistic spending.

The saying, “One’s greatest strength taken to extremes becomes one’s greatest weakness”, applies to our purposely weak federal government in the case of a rapidly advancing government directed capitalistic economy from the East. While our form of government has protected us fairly well from tyranny, it also has provided us with a fairly constrained federal government and 50 competing state governments to fend off the economic advances of China that has risen from two centuries of infighting to once again challenge the West’s hegemony.

Our constitution protected us only “fairly well” because it too came under attack when in 1913, America’s decision to hold the House of Representatives at 435 representatives led to the ability of our financial elites to wrest financial control over both chambers of Congress and move our nation dangerously close to plutocracy. The result of this shift in power was to remove the government’s oversight of those that would harm America’s financial security and to instead refocus Congress’s attention on guarding our elite’s financial opportunities. This shift set the stage for institutional entrapment.

Institutional Entrapment – While visiting a maple syrup farm, I found myself hiding behind a big maple tree in the midst of a full on cattle stampede as bulls and cows stormed out of the maple forest toward a waiting wagon full of sweet sorghum laced feed provided by their manipulative farmers. These cattle had been programmed to rush headlong in a daily feeding frenzy toward these sugary delights that were fattening them for market.

Like cattle, people are also able to be programmed and manipulated into instinctively acting en masse to meet the needs and desires of manipulative institutions. America’s masses were caught in a rip tide of institutional forces that individually and together overwhelmed our budgetary bell curve and sent us into a frenzy of debt much as Europe was swept into the Long Depression of 1871.

In 1979, China determined to come out of 150 year slump that had been precipitated by the West’s gun boat diplomacy and to implement her strategy to rise to the position of 21st century hegemony. At only 1/8 of America’s GDP, China was determined to implement a decade’s long strategy to build her infrastructure and education to support a gold rush of investment by foreign powers. In 1979, China opened her doors to any companies that would bring intellectual capital with them to educate China to the world’s newest innovations.

40,000 U.S. corporations set up shop in China bringing with them their trade secrets that would have enhanced America’s economic future and bringing millions of jobs that would have employed America’s now 30 million underemployed. Together with international bankers, they lobbied our Congress to establish favorable trade policies so that China could flood America with low cost goods that put many domestic companies out of business, that thrust America’s wages downward, that removed both blue and white collar jobs from our shores, that reduced our GDP and GDP growth, that increased our trade deficits, that reduced our tax base, increased our federal debt, that gutted our shores of thousands of factories, that devastated our world commodity relationships, that harmed our reserve currency status, and that by virtue of these financial insecurities harmed our national security.

Faced with wage pressures, baby boomer expectations of a better life than their parents, and a mounting disparity between the upper quintile that benefited from globalization versus the bottom 80 percent of Americans who found their purchasing power diminished, America rushed to the mega-distribution and retail outlets like Walmart whose shelves were filled 90 percent with low priced, sweet sorghum laced, Chinese goods.

International bankers, intent on providing the capital to meet the needs of the modern gold rush, devised methods to extract capital from America. Beginning in 1980 immediately after China opened her doors, our retirement accounts were designed as 401ks to feed the stock exchanges with funds to funnel to China. Then three subsequent booms were orchestrated to extract more capital from our baby boomers. The last boom was our great housing debacle in which 100 % non-recourse, non income verification loans were offered to Americans during the greatest housing Ponzi ever known, and on top of this Ponzi, international bankers laid a credit default swap scandal that fed a speculative gambling four times the underlying assets that had already been speculatively pushed to 200 percent their underlying real asset values.

Americans, fell subject to a rising swell of asset values and loose credit that was instigated by our political forces, multinational corporations, and international bankers to feed the China gold rush. Our instinctual need to meet consumption desires in the midst of America’s masses’ falling purchasing parity was entrapped by globalization’s desire to feed China’s burgeoning industrial infrastructure through maximum extraction of America’s and the West’s capital by increasing our indebtedness to its utter limits.

So while America’s middle class is not without blame for taking on debt beyond its ability to pay, it must be remembered that its ability to pay was swept out to see with a collapsing economy, caused by multiple factions inside and out of America that were intent on bulging American family debts to meet the hegemonic aspirations of the East and the western institutions that self servingly supported their efforts. Now without isolating and limiting the impact of this massive American private and public debt, our economy will not recover from this financial riptide for twenty years. As we stagnate, China will triple her economy and dwarf ours. Our financial and national security will be threatened.

We cannot afford to allow this mountain of debt to hold America back from restructuring its economy to meet this national threat. We must now transition from a nation of consumers to one of producers. We must reverse our economy to meet the obligations and expectations of our society. We must also revert to a society that can meet its obligations and the expectations of the world’s creditors.

America’s people cannot be held fully responsible by our institutions and those of the world for the frenzied financial wave that overtook us. We cannot be held in servitude to pay for our banker’s and multinational corporations’ follies and for the foreign investment infrastructure that will raise China’s economy. Those that had the elite power to manipulate and entrap America must now join us in getting our house in order, in isolating and restructuring this debt to share in the pain of its disposal. This is a first and high priority for America.

Those culpable will need to share in the process. Our people will share some responsibility. In the end, after this political process is upheaved, the responsibility will be shared by all that participated in the rip tide of events that shaped our modern crisis.

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Filed under American Governance, American Politics, U.S. Monetary Policy, U.S. Tax Policy

America’s New Consumption Paradigm Must Divorce Multinational Corporations and Marry New Business Partners

America measures her prosperity by her ability to consume. Consumption makes life more full. It extends our health and comfort, and expands our experiences. While consumption is not the essence of our happiness, it does define the extent to which we can overcome the harsher limits the world imposes on our pursuit of happiness.

Our nation’s choice since WWII to embrace throw away consumption will now have to be questioned as we acknowledge the post cold war world that is competing for limited commodities. Yet our desire to consume as a nation is destined to increase. So a critical question facing America is how we will meet the future consumption needs of all of our citizens.

For the longest time up until the last 30 years, America’s consumption needs were met by a marriage between our businesses and our nation. We assumed that our businesses‘wealth and nation’s wealth shared the same checkbook and that America’s businesses would take care of our consumption. Our economy has since forever changed, the marriage has dissolved, and our checkbooks have been separated, but in many ways, our politicians and economists still consider this obsolete national comparative economics marriage to still exist.

To suggest a way forward, I ask that you first consider the analogy that America could initially be compared to a balloon in which America’s wealth, both of its businesses and its citizens, was the air inside. More air (wealth) in the balloon expanded its size and America’s total wealth. At some point in time, however, some businesses decided to remove their air from America’s balloon. Now America’s balloon depends upon a different set of stakeholders to keep it inflated. This analogy is presented further.

During America’s rise, for prosperity to reach all our citizens, the size of America’s balloon had to expand in proportion. What added air into the balloon? Land, commodities, long lived assets like buildings, and infrastructure, and intellectual achievements, are examples of items which added value and took a long time to deplete. Services and quickly obsolescing products like live stock and produce added value for a short time before being consumed. Wealth was measured in real achievements and assets.

What took air from the balloon? Consumption…The very consumption that we use for our pursuit of happiness. However, if we consumed more than we produced, air left the balloon and deflated it, making America poorer and less capable of meeting our future consumption needs. If all Americans stopped producing and simply consumed, our stores would soon be bare, our fields barren, and our housing dilapidated. To maintain the air in our balloon, we had to at least produce as much real assets as we consumed.

America’s objective was to create a positive flow of air into the balloon. Every American’s goal was to produce more real assets than each consumed. This was not always possible during troughs of business cycles as we experienced short bouts of unemployment. However, as our economy recently contracted, we found that 30 million Americans were left under employed and consuming more air than they produced for a protraction unlike any since the Great Depression, because no productive jobs existed to allow them to produce more.

The business of creating productive jobs typically falls on the entrepreneurs, businesses, capitalists and bankers of America. Together, they collaborate to determine how best to invest existing wealth, and to consume it to produce even more wealth. Capitalists, owners of wealth, and bankers, lenders of wealth, provide businesses and entrepreneurs the means to pursue business ideas that can produce more wealth. They do this as a means to increase their own wealth within our capitalist system.

The American capitalist system allows:

• Americans that earn more wealth than they can consume to own wealth
• Wealth to be stored as physical inventory or as currency
• Owners of wealth to earn a return on investment (ROI) for using their wealth as a risk buffer for wealth lenders.
• Banks to lend wealth to others in exchange for an interest return.
• For ROI and interest to concentrate wealth into the hands of wealth owners.
• For Americans to bequeath their wealth to their offspring, who accumulate it, further concentrating wealth for generations.

Important to the concept of our American monetary system is that the owners of wealth receive return on investment (ROI) and interest for letting their ownership of wealth to be used by others, for if they do not, they hoard their wealth and the American balloon does not expand.

As important as ROI and interest are to expanding our balloon, consumption is just as important. For it is in consumption that ROI and interest are earned, and in which more wealth is transferred to wealth owners and lenders. With each act of consumption, more wealth is transferred and concentrated to wealth owners as the price of their collaboration in growing America’s balloon. This is the construct of capitalism in America. Flawed as it is, it is the best system that the world has created for expanding economic balloons.

The flaw of capitalism is that once concentration becomes too great, the collaboration between wealth owners, businesses, entrepreneurs, workers, and consumers within the balloon begins to break down until we enter into a cycle of monetary collapse such as we are experiencing today. How does wealth concentrate and how fast does it occur?

From WWII, average return on equity and debt has averaged 10 and 8 percent per year respectively until recently. With a total market capitalization and debt of $100 trillion, worldwide wealth transfer to American capitalists and bankers of $9 trillion per year would occur if it were not for wealth redistribution to mitigate its effects. Even with mitigating effects, wealth inside America’s balloon has become so concentrated about every 50 years or so that it precipitates a crisis that requires a major redistribution of wealth just to restart the collaboration cycle once again.

After the Great Depression, America thought it fixed the concentration problem through regulations imposed as part of the New Deal. From WWII until 1970, it seemed that New Deal impositions combined with the rising power of American unions stalled wealth concentration and all quintiles of income rose together. For a brief generation, wealth concentration halted and the business cycle quieted.

But globalization rose to offset the New Deal and to quash the power of unions. Like an aggressive cancer, globalization rapidly reversed New Deal regulations and forever annulled the marriage of business and America. The national balloon had sprung a leak. Beginning in the late 1970s until the most recent monetary collapse, wealth began to concentrate once again in our upper quintile and most aggressively in our upper 1 percent of Americans. And this wealth concentration cycle was different than all previous wealth cycles in that for the first time in history, wealth was no longer constrained by national borders.

The age of the Multinational Corporation and international financial fiat money arbitrage had arisen. Now air could easily leave America’s balloon, as “free air” in the hands of its owners. From the 1980s onward, as America’s government and unions attempted their inevitable redistribution efforts, America’s businesses’ air flowed easily to reaches beyond their grasp. The abstract idea of “free air”, free from national balloons, became the mantra of its “owners” as capital flowed to countries that could provide a greater return.

Why did our nation not react even as the greatest exodus of wealth ever known occurred in front of us? Because during this thirty year Great Extraction of air from America’s balloon, our balloon kept the illusion that it was still inflated. Even as productive, wealth creating air was being sucked out of our balloon, for awhile the balloon maintained its rotundness through the wild speculative debt money being created by baby boomer loans. We bubbled through three separate booms as boomers borrowed historic levels of dollar debt to offset our depleting productive air. All the while, China fed low interest loans into the balloon to maintain its appearance as the Fed printed money to fill out the soft spots. Yet this historic debt was built upon a Ponzi mountain that eventually would come crashing down leaving our balloon limp and lifeless.

America’s balloon collapsed because of excessive concentration, excessive consumption, and excessive extraction of “free air” from our balloon. More importantly, the balloon collapsed because of our denial of the changing dynamics between business and America, and America’s failure to respond accordingly. America’s balloon no longer represents the marriage between all businesses and the nation. It no longer can count on the owners of “free air” to willingly do their part to subsidize the expansion of America’s balloon.

Instead, America’s balloon now excludes the wealth of capitalists, bankers, multinational corporations and other owners of “free air”. America can rent their air but only at international “free air “ rates. America must now count on and support those that are fully invested in our balloon, including those businesses that by virtue of their geography or purpose are tied to America’s future.

We cannot, however, be beguiled by the idea that we do not need “free air” Americans. We need elites’ capital and we need their investment in America. We just cannot expect it to subsidize America’s growth at their expense, as though it is an unmentioned, unmeasured, and unrepresented “tax”. On the other hand, we cannot continue to give our elites sweetheart deals that subsidize “American businesses” below international “free air” rates just because their lobbyists wear the false allegiance of the American flag upon their lapels.

America’s excessive consumption must be purged and replaced with a productive mindset. Government acceptance of the hubris of borrowing 43 cents of every dollar to fund the world’s largest government must be expelled along with any politician that accepts it as the norm. The baby boom mindset that believed America was blessed to live beyond our parents’ means even as we failed to create real, productive output to keep pace with our consumption must be replaced with the work ethic of our parents and grandparents who made America great.

Our 30 million under employed workers cannot be sidelined because international businesses that are not part of our national balloon do not hire them. They must be given a new hope to work on behalf of those businesses that fully partner in America’s 21st century balloon expansion. And businesses that fully embrace their role as partners in America’s growth going forward must be given the support to compete with the behemoth international businesses and international banks that now hold power in Washington.

Ultimately, America must replace our throw away consumption patterns with longer lived assets that fulfill consumption. The energy and commodity footprints that support our economy must be transformed to sustain a world growing more interdependent on the same commodities. America can commit to lead the world and to sell our newfound conservation consumption to ready consumers.

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Filed under American Governance, Multinational Corporations, U.S. Monetary Policy, U.S. Tax Policy

Yes, America Can Quickly Turnaround, Here’s How:

America is a melting pot of concerns and of people dynamically and distributively acting to improve our nation. But when any one issue overwhelms the others, it drowns out their focus and support. A lack of Jobs has become that screaming voice. While Government’s role is far more than just support of business, with an entire nation affected by 25 percent un and under employment, the focus is on helping them to create employment. It is the equivalent of a Maslow’s theory of Government.

Within that Maslow’s theory concept, the sooner we right our course, the sooner we can expand our collective consciousness again. The following is a win-win, Middle America construct for dramatic economic turnaround that can quickly right our course, that is Government proactive, yet balanced with pro-business, private initiative, free market principles.

A lot more must be done than the following to right our course but as a focus on a quick turnaround, the following is a good start. First, we have to restart the economy with increased consumer demand and business credit and elimination of debt overhang:

Job placement
• Implement distributive job placement through small business job voucher plan
• Place all able Americans in jobs through voucher program
• Guarantee voucher program will exist for a minimum of 24 months before any reductions
• Guarantee reductions based on unemployment figures

Debt isolation and swap for equity:
• Require voluntary complete appraisal of all commercial and residential properties – owner pays
• Enforce mark down of all properties to appraisal by banks if accepted by owners
• Allow banks to swap ownership equity for debt to the amount written down
• Require banks that cannot carry higher equity to merge or restructure

Credit repair
• Institute a credit amnesty program
• Enforce the credit institutions raising credit scores 20 points and eliminate bad credit info two months in arrears for every clean month
• Eliminate foreclosures, workouts, and bankruptcies with 30 months clean record

Business loans and grants
• Provide business grants to small business to cover equity portion of SBA business loans tied to guarantees to hire new full time employees
• Assuming a business loan requires a 200,000 per employee, grants of $40,000 per new job would be required. 15 million jobs would cost an investment of up to $600 billion of which half would return in personal and corporate taxes over a two year period.
• Increase government guarantees on bank loans to small business to 100 percent for first two years of originations
• Provide direct SBA loans for businesses unsuccessful at finding bankers to accept 20 percent

Second, we have to right our long term course. Ideas that are being touted by Republicans [with caveats to ensure savings are not funneled offshore], and **a few additional ideas** will help our longer term economic position.

• Cap and trade budget
• Require trade of budget within same time period for all new initiatives including salary adjustments
• Require a phased in balanced budget

• Reduce corporate tax rate [for domestic business only] and eliminate tax loop holes
• [Eliminate tax deferral of profits that stay overseas]
• [Eliminate taxes for all overseas funds that are re-invested in American business infrastructure]
• [Reduce death taxes that are reinvested in American enterprises]
• **Do not implement Romney’s regional tax plan**

• Place a moratorium on regulations
• Cap regulation costs
• Enforce a regulatory prioritization cap and trade of regulation costs

• [Require economic impact study and public review and comment period for all proposed trade treaties, and a minimum of net nuetral benefit excluding corporate profit]
• Enforce existing treaties with China

•**Invest in research and development of solar and wind in areas that most promise cost reductions**
• **Build solar and wind economic zones large enough for a 20 percent supply of energy needs**
• **Invest in transmission to those zones**
• **Provide 100 percent, interest free loans for all conservation projects that can show 5 year payback and require payback only from energy savings**

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Filed under American Governance, Job Voucher Plan, U.S. Energy Policy, U.S. Monetary Policy, U.S. Tax Policy

America’s Future Building Block #5 – Radically Revise America’s Debt and Equity Policies

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.

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London Riots and America’s Credit Downgrade are a Forewarning

London is once again experiencing ongoing riots following protests in November ,2010, over tripling of school tuition and again in March, 2011, when demonstrations of over a half million people erupted in riots to protest 81 billion pounds in public spending cuts. This time, the riot was triggered in Tottenham, the poorest section of London, when Mark Duggan, a black youth who had shot a police officer was allegedly dragged from his taxi and killed gang style by other police officers.

Protests turned into three days of violent riots and looting as cars and buses were hijacked and left burning in the streets and fires broke out in different parts of the city. Dozens of police officers were targeted and injured and dozens of rioters were bloodied. Police cars were quickly smashed and fire brigades and emergency medical services were targeted as well when they attempted to enter the scene of the destruction.

While on the surface, this weekend’s riots in London resembled the 1992 Rodney King riots over police brutality in Los Angeles, several differences in both motives and tactics are noticeable. While the trigger was a perceived grossly excessive police action, the anger that has built up due to social cuts that are felt the most in the poorest of neighborhoods is an underlying cause. A sense of hopelessness is setting in as young black males are experiencing the highest unemployment in the UK due to the downturn. Most recently, their neighborhoods have been impacted by the closing of youth centers due to budget cuts. Interviewees in the midst of the riots are expressing that violence is the only real way to get their message to community leadership.

More ominous for our time is the method used by the rioters and looters. Unlike earlier American riots where demonstrating crowds mulled into disruptive forces that overflowed into sporadic rioting and looting, in Britain, hundreds of youths participated in social media flash mobs using text and twitter to quickly gather in diverse locations for rapid guerilla smashing and looting. At each flashpoint, quickly moving gangs of up to several hundred would assemble, sometimes targeting just one large store for looting and destruction, and just as quickly they would disperse as police arrived, only to reappear elsewhere as their social media dictated.

Britain was temporarily spared a downgrading of her credit rating because of the quick action taken by Parliament to enact austerity measures. These actions have spilled out into the streets of London multiple times now. One outcome of America’s credit downgrade is that we will most likely now be forced to follow suit and enact our own austerity measures. Can we learn how to mitigate the impact of austerity measures on our poorest and most likely affected before simply instituting social cuts that will endanger their communities?

Are we prepared for the newest flash mob use of social media? Do our law enforcement and safety infrastructure agencies have the right tools and training to effectively counteract these social guerrillas? Are our police proactively building community relations and preparing their communities for America’s coming frictions? We have seen in England what will be coming to America, and our most recent Congressionally triggered credit rating decrease is a wakeup call for us to use this brief time to prepare.

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Hawaiians have the Hale (Housing) solution to Right America Housing Bubble

I was living and working on the Island of Oahu during the last days before the crash of Japan’s Nikkei in 1990. It was a time of exuberance and excess to rival America’s 1920s and 2000s as the Japanese borrowed from their bubbling housing to gamble on a 400 percent boiling stock market. Some of this newfound riches found its way to Hawaii as the nouveau riche would travel to Hawaii, buy a full set of golf clubs to play a round of golf, and then leave them for their caddies as they travelled back to their burgeoning economy.

At the peak, Japanese came in droves to the island to purchase property that seemed relatively inexpensive. They paid double the asking price of families that had held their properties since title was given to them by King Kamehameha III during the Great Mahele of 1848. With such exuberant prices, Hawaiian families grabbed the sales, except that now all the properties commanded twice the value of just months earlier. Sellers found with quickly rising prices, they could not buy as much as they had before they sold.

Then as quickly as the Japanese land rush had occurred it vanished. When the Nikkei plummeted 70 percent from its drunken zenith of 39,000, Hawaii’s housing market crashed and quickly reverted back to historical prices. Interestingly, this Hawaiian housing hubris exposed the tie between international capitalism and property rights.

Historically, Hawaiians did not have property rights. They easily lived off an abundant land and sea that was owned entirely by their King and managed by his chieftains. None knew of property rights and capitalism, as a feudal sustenance and bartering was all that was required. However, as the disease scourge of the West eventually killed off 90 percent of the indigenous population (interesting parallels to the American Indians) the people became more dependent on the foreigners that had immigrated to the islands. The American money system indebted all, including the King who enjoyed the luxuries that debt could afford.

While the concepts of capitalism were foreign to the natives, they were not foreign to the children of the missionaries, servants of God who had come to the islands 30 years before to live spartanly amongst their inhabitants. Their children understood that a higher economic use of land than merely “existing in harmony with paradise” could provide immense riches if only they could gain property rights and tie those with debt funding and low cost labor to produce commerce from the enriched volcanic soil.

Early in the 1800s, missionary descendants began to lease land from the king to develop profitable sugar plantations. As plantations expanded, securing permanent ownership of the land was essential. They persuaded an indebted king to change Hawaii’s concept of property rights in what became known as the Great Mahele of 1948.

In 1840, the missionaries convinced the King to establish the rule of law. In 1848, they got the king to add property rights to that rule. The King divided up Hawaii and gave permanent land rights to chiefs and native Hawaiians. By 1850, they had him change the rule of law to establish that foreigners could buy land from the native Hawaiians. Of course by the time 40 years had passed capitalists then owned 90 percent of the most fertile Hawaiian land. Native Hawaiians were no match for the capital inflow that perceived the land as having a higher use value for the international commerce of sugar than of mere sustenance.

To summarize, a people that owned the value of a country, Hawaii, gave that value to people of another country, the United States, who exchanged for that value, dollars that had been created in banks of the foreign country, the United States. Banks of the foreign country, the United States, loaned dollars to the plantation owners, foreign missionary’s children, who promised to pay back more dollars than they borrowed. The missionary’s children then used the laws they created and the loan dollars American banks created to give paper to the people of Hawaii for the richest soil of their land, ninety percent of the islands. The dollars given to the Hawaiians were then used by the Hawaiians to lease back the land in which they had given ownership to the missionary’s children and arbitrage opportunity to the plantations and American banks. This is the power of capitalism when combined with international property rights! (Ominously similar to the current gutting of America’s value through similar means)

To make this transfer of a country’s wealth possible, two paradigm shifts had to occur. First, King Kamehameha III had to create a cultural tsunami, similar to that imposed on the American Indians that property wasn’t to be used communally, but that it should be divided up with stakes that marked the divisions, and that these divided pieces of property should then be recorded on pieces of paper to mark individuals’ rights. He then had to allow these ancestral rights to be transferred to foreigners, people who did not understand the Hawaiian concept of family fishing and communal farming, but that who did understand a cultural shift to financial arbitrage, collective renting of labor, immigration of lower cost labor forces, and debt driven capitalist economies. With these two cultural eruptions, the missionaries’ children laid ground for Hawaii’s financial and cultural shift to the West.

Fast forward to modern times, five missionary families still own most of the land of Hawaii in large land trusts. To continue to control this land dynasty, they instituted a new concept, that of land leasing. When most property is bought or sold in Hawaii, the purchaser does not take ownership of the land itself, purchasing only the dwelling. The land is provided to the dwelling purchaser on a 99 year lease but its ownership remains in the missionary family trusts and the appreciating value of the land is still retained by the land trust. As a result, the value of the dwelling seems unreasonably low compared to fee simple lots.

This concept actually has a potential to help America out of our current property rights morass. Hawaii has shown that the same geography of space can have two separate property rights, in Hawaii’s case an owner of land and an owner of the dwelling, in which the title to these two rights coexist and can be transferred, sold, and managed separately of each other. To apply this concept to our housing debacle all that is required is to take the shared equity concept just one step further, beyond physical separation of title between land and dwelling, to a concept of shared equity in both.

Currently, when a property is sold, all liens must be disposed to affect a clear title to both the dwelling and the land beneath for the purchaser. Yet, historically, America accepts that mineral rights and air rights as well as grants of rights for public use beneath the land have been allowed to be carved out and to survive a perfection of title. What if similarly to how stock owners of a company share financial rights to the company, multiple entities or persons could own percentages of both the dwelling and the land, and their ownership did not have to be sold simultaneously to record the transfer of the other entities rights? And what if, more importantly, increases in value upon partial sales were by law equitably shared between owners?

Before us, the dilemma of falling real estate prices in some cases 80 percent of the bubble’s peak prices, has stymied the housing market and has shut down the engine of our economy, credit. Banks expect homeowners, who agreed to their original loans, to pay back debt that was created from thin air from their previously ascertained ability to pay, even though homeowners are now unable to sustain payments in the new economy. Banks are also unwilling, and more importantly unable, to take responsibility for the financial dilemma by covering thin air debt with thin air assets. Their only viable option is to force eviction and to hope that the Fed will cover their toxic assets at full price.

As it stands, banks are foreclosing and homeowners are being evicted in historic percentages, ravaging our culture. And so far, the Fed has made it a sugary pill for banks to swallow. The risk of this path has been made fairly palatable to the banks, who now believe it a better path than to suffer the potential losses of workarounds that have been touted publicly by the federal government as a preferred choice while it is complicit in allowing a simpler and less risky alternative to be followed by the Fed. So the banks line up like seals waiting for the Fed’s fish feast to be strewn their way while the rest of America cries out for them to do their job and re-enter the historical market of evaluating risk and creating debt capital for the economy’s growth.

Hawaii’s concept of land lease could be a way out of the housing morass in America if our politicians would favor equitable and efficient removal of economic credit shackles and would stand for domestic American companies to once again compete with the East on unfettered ground, thereby building a platform for job growth and consumer confidence. If America’s leaders were to agree that housing debt must be marked to market while allowing the nominal value of housing to retain its high water mark, then by virtue of this agreement, housing would acquire equity book value as that portion between the high water value and the debt value. This equity could be our new component of risk sharing.

Banks, that had issued housing debt that would now be forced by dictate to mark down this debt, could replace it with an equity ownership in the property. This shared equity would give the bank a percentage of the property’s title that they would own in perpetuity until their decision to dispose of it. Any financial benefits that would accrue to the property that would be realized upon sale of any portion of the properties title would be shared amongst the owners of the property.

The banks would be the reluctant owners of vast realms of real estate. Their books would have less profit potential than from the Fed’s funny money printing, but they would be cleared of excessive debt and the banks would be free to sell their new equity in properties as they see fit into a more fluid housing market that once again would be functioning healthily. America would gain a functioning credit market, businesses could be reintroduced to their long lost economic partners, and our economy could be righted.

This concept and others like it will not be seriously viewed as long as the Fed has a blank check book to give its crony banks an easy way out of their dilemma while trashing America’s credit, stalling her economy, and thwarting our future. The current Fed solution is ill fated and must stop. The international market is about to nix this secretive sour note on America’s song that has harmed America’s international role and that has endangered the world’s economy for the self centered benefit of the banking class. Once America’s lenders slam the door on the easy way out, perhaps America should have a Hawaiian solution ready at the call to step in and do the heavy housing lifting.

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Ironically, Trickle Down Economics Trickled Down America’s Future

America is a land of irony. We are filled with capitalists whose intent is to accumulate all the wealth the world has to offer, and at the same time, we also have an altruistic nature that tears at our capitalistic infrastructure. We defend our great society and fund outreach to other nations through our tax dollars. We support our dreams of a united earth through a funding of the United Nations and fund our version of world peace through 1,000 military bases dispersed throughout the world. To grow our middle class, for the past thirty years we have supplied enrichment to our upper class to have it trickle down.

Supply side economics is an irony of political invention as well. Its invention of thought intended to provide extra capital to America’s private sector, the sector that creates taxpaying, productive jobs that extends America’s know how, innovation, skills, and gross domestic product. In our world’s current economic system, when a venture is started, some seed capital that has been accumulated by the world’s elite is then combined with borrowed money created from thin air by banks through the venture’s promise to repay. This devised modern structure of government and banking thus provides the investment needed to fund the venture’s infrastructure and start up expenses, including the financial support for job creation.

The wealthier of our country are those that have traditionally been able to accumulate more money than they need to fund their daily expenses, and thus they have provided the seed capital for ventures through their investments. Instead of the entrepreneurs that risk all to build real wealth and create the jobs, Supply Side economics instead provides tax incentives to the wealthy, ironically giving credit to the capital providers for producing America’s jobs. However, capitalism knows no patriotic allegiance. Investment capital will flow to the highest risk adjusted returns regardless of national borders.

After America’s obsessive military buildup made international investments safer, international business became safer investments in the sixties. Opportunities grew wildly after China opened its borders to investment in 1978, creating a gold rush that attracted loose investment capital from the entire world, building tens of thousands of factories that enriched international investors dearly.

So when Reagan Supply Sider legislators passed tax breaks to the “rich”, their trickledown theory wasn’t wrong, it was just decades late in adjusting to the realities of risk adjusted investment opportunity. Ironically, instead of trickle down, America’s tax policy resulted in pouring out, not a trickle but a fire hose gushing toward foreign shores. Trillions of dollars, created by burdening our middle class with excessive debt, left our economy and were converted into factories and other infrastructure such as roadways, bridges, and cargo ships to enhance China’s economy and to increase their employment base.

It appeared at least temporarily that America profited from our supply side doctrine. An entire industry was born to find ways to collect the extra capital and distribute it to the East. America surely got interim jobs in the financial sector to support this fire hose of foreign directed money flow. Yet, decreasing taxes for the “rich” created much fewer permanent jobs in America than it could have, passing the greater load of jobs to the East. It provided America interim financial and deal flow processing while accomplishing the opposite effect than was hoped for to America’s real economic future.

Ironically, Trickle Down Economics Trickled Down America’s Future…page 2 of 2….Worse, when those permanent jobs left our shores, so did decades of investment in our schools and education that every American has paid for through our contract with America. Each of us has voted to contribute thousands of dollars to our school systems to educate our youth. We do not publicly fund our educational system out of altruism. Americans understand that in educating our youth, they will learn the lessons provided by educated Americans before them. They will carry forward the knowledge that grows in our businesses to learn new theories and methods and to discover new scientific breakthroughs that will extend American technical capabilities. We invest in our children to grow our country’s GDP and to support both those that have come before in their turn at retirement and those that will come after who will raise their families in freedom and who will extend our great country’s experiment in democracy.

Ironically, beyond those trade secrets and innovations that are deemed highly responsible for national security, America does not have a policy about those innovations created in America that have been funded by at least 12 years of public schooling if not more through Pell grants, student loans, state school subsidies and other methods. America has an equity stake in every innovation created by Americans and yet we let them go as freely as we let our commodities be dug up from our patch of earth and be sold out from under us through private, foreign country based businesses operating mines on our public lands today.

However, the greatest irony is yet to come. In letting our capital be funneled to China, in letting our jobs transfer to her, in freely handing over our trade secrets, our innovations, and our scientific breakthroughs, we have transferred decades of core skill and national wealth building capability that will now build in China and not in America. The tax base that would have supported our great society social needs will now support those of China. The extra funds that could have supported our government’s international outreach will now support hers. Our altruistic capability will diminish purely from our trickle down tax policies.

And the great investments that our capitalists hope will provide gold rush returns from the trillions of dollars of investment extracted from the debts of all Americans, turns out they may be the greatest Ponzi of the 20th century. Those trillions of dollars now rest on China’s soil as hard assets. They cannot be dug up from the earth and planted back in America. The financial returns that investors hope for count on China remaining strong to honor her commitments. If China defaults, no one will travel to China and take a piece of the infrastructure back home. There is no international bankruptcy court that can enforce repossessment or repayment.

China’s ability to produce repayments of direct foreign investments depends on America’s ability to stay solvent and to continue buying Chinese goods, yet our solvency rests close to the precipice. If our current economic crisis is thrust off the cliff by short sided, self seeking politicians, America’s default will lead to China’s default and all the profits that our investors dreamed of receiving will disappear in the crash. The underlying assets and intellectual capital that transferred to China in the 20th century gold rush will remain there for China’s eventual rapid recovery while the trickle down and fire hosed out financial capital that left America’s shores will have ironically vanished with our gold strike dreams.

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My 100th Post!! – America’s Superiority Complex May Have Precipitated the Next Great Depression

EurAmerica has created a banking bubble that will be very difficult to unwind. We allowed the bubble to evolve because we have never relented from our grander perception of the European civilization in the community of civilizations. As such, after mercantilism resulted in the slave trade, industrialization ended in colonialism, and Bretton Woods preceded post-colonial national indenturement via the IMF and the World Bank, it seems EurAmerica boxed ourselves into an aggrandized monetary corner.

America singularly fell into the superiority trap when we assumed that our obsessive post war desire for a military to overwhelm all other militaries was desired of us by the rest of the world as well. At the end of WWII, America found herself having to fund our re-establishment of our international commerce by rebuilding the rest of the world including vanquished and allies alike. As we built our communist protectorate, it seemed infeasible that we could collect payments from other nations to both pay for our policing powers and for the Marshall plan, for earlier post war reparations beget Weimar Germany and WWII.

Yet America had most of the gold and the world had not yet let go of the concept of gold backed currency so all other nations needed gold backed dollars post war. It seemed only natural for a superior minded America then to charge other nations a fee through a debasement of our dollar. As a logical next step, when America desired to fund our Great Society and Vietnam, it was easy for our superior government to rationalize borrowing through additional money creation.

This exuberance and arrogance of easy money printing finally gave way to a misguided concept held by America’s central bank that perhaps the world’s first worldwide dollar reserve currency could actually be inflated to curb the $50 trillion dollar credit default swap bubble that dwarfed the worlds $15 trillion dollars of trading currency by comparison. We have now seen that this superior thinking was just folly.

America lost sight that money is just a place holder for people’s commitment to create real value in the future to offset the creation of money today. By our superior actions, we now risk causing even the first world reserve currency to hyperinflate. If by chance, the world is able to sustain stability of this current superior monetary system a bit longer even with a weakened Yen, a weakened Euro, and a weakened Dollar, the Yuan will likely emerge to complement the global mix.

Asia has already developed into a center of commerce within itself and the Yuan will easily surpass the dollar there. China has been wildly accumulating gold as a precursor to that eventuality. She recognizes that her strategy of keeping the value of the Yuan low to ease interest rates in America has run its course and that at a point, a strengthened Yuan will benefit hegemonic relationships more than continued reliance on exports to an overly debt ridden America. Therefore, the Yuan may soon take its position center stage in a sharing of reserve currency status with the other global currencies.

However, if something like a Greece default thrusts EurAmerica and thus the rest of the World into the Greatest Depression, our credit will be ruined for the foreseeable future. This mountain of credit default swaps will collapse, the current structure of banking and insurance industries will be awash. An accounting of which individual financial companies will continue to remain solvent will take time. Hard assets in America will quickly revert to true or even severely depressed values. A new American currency may evolve.

Asia will return to strength much more quickly than EurAmerica, and we may emerge in a more hegemonic subservience to Asia. A return to bilateral trading contracts backed by gold stores may be inevitable. The exponential growth of debt derived money creation will be reset to a slower slope of escalation. Nations will once again separate money and credit formation functions from investment banking, perhaps creating a non-profit incentive for central and commercial banks to curb the escalation of debt required to feed interest payments.

China’s concept of money creation will endear itself to the world with the idea that money is created by the commitments of emerging countries, not the supply of hegemonic capital. The promise of the emerging nation creates money, and that promise is solidified by the emerging nation’s ability to create laws, infrastructure, and education to support it. Without causing nations to be indentured solely to the needs of the empire, China may emerge from the Greatest Depression spawning a new monetary system that grows healthier worldwide communities in which money is truly a unit of commitment to future value created and not a political tool to indenture the world to a perceived EurAmerican superiority.

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