Category Archives: U.S. Tax Policy

Reforming Congress is the Answer to Fair Taxation

No skin in the gameTax reformists argue that everyone needs “Skin in the Game”. But how is skin defined? In the days of kings, peasants owned no land to tax and kings paid no taxes, of course. A portion of the yield of the land peasants worked was given as tribute each year and passed up the chain of title. Coins were used in exchange between serfs and craftsmen to make taxation easier.

After the plague, serfs attempted to assert themselves by moving off the land from which they were bound to work for the highest paying lords. To stop this “chaos” the crown imposed laws that made it illegal for lords to pay above historical wages and for serfs to leave their lands. Serfs revolted and their leaders were brutally executed (broken record).

In those days, the government was not of the people, Government was of the church and of the aristocracy. Serfs were forced to pay the church and aristocracy to govern them and revolted when the governing or taxing became too harsh. America’s republic created a government of the people and by the people for the people. We determined our own taxation, which did not include a tax on our production for 140 years.

But Congress had a “better” idea. Previously America had sin taxes and war taxes, and then taxes on imports/exports, presumably helping domestic business to compete, but not until 1913 did we have a permanent income tax. Yet, as they say, kill the fish by first starting at its soft underbelly. The people did not protest the first permanent income tax because 90% made so little income that they slid under the minimum income required to be taxed.

Yet, think about it. Congress defined income as that derived from salaries and wages. These are not how America’s elite derive their wealth. They do not toil for wages?!?! How could it be that this soft under belly would stay fixed on the incomes of the elite? From this starting point, the class battle began.

In Eisner v Macomber, the Supreme Court expanded income to include that derived from capital, score one for the working class. In Helvering v Bruun, the Court decided increases in wealth alone could be taxed. Score another…Something clearly had to be done to reverse course. In Commissioner v Glensaw, the Court helped the elite in distinguishing capital income from ordinary income. Ordinary….as in ordinary people and their ordinary income….aaahhhhh.

Once taxation had begun, first applied to the wealthy, the paradigm was set. Then, all that was needed was to transfer the limited income taxation paradigm to the lower classes through the courts, shifting the tax rates toward ordinary income and away from other forms, and we have the principles we have in place today, taxation of a minor portion of wealth, heavily proportioned on the labors of the middle class.

The wealthiest of America’s middle class decry that 47% of Americans pay no income taxes. Why not rise up in arms about the fact 99% pay no deer license fees? Here is a closer figure to the population that pays no income tax. 48% of the adults in the United States do not pay any alcohol taxes for they do not drink alcohol.

There are many forms of taxation in the Country and many different levels of taxation as well. Income tax is just one of those. The very first permanent form in 1913 was structured so that 90% of Americans did not pay it. Somehow that figure, through manipulations of Congress, has now settled into the 47% level.

Yet, the proportion of taxes compared to total wealth that the underclass pay is quite high when compared to the total wealth of the elite. Those that reside in the upper ranges of the middle class get the greatest rub to their wealth, but perhaps that is the penalty they pay for being the stabilizing buffer between the wealthy and the downtrodden.

Pointing to this 47% figure as if it is the light of truth is a story that has been fed to those of us who pay the most. It is our compulsion to either puppet the story or to search for a more enlightened truth and to herald it above the others.

Government is bloated and should be put through the deadwood cutting process that most businesses go through in hard times to cull out the inefficient and ineffective. In fact, this should be an ordinary process structured into our government process. Yet, these costs though significant, are only a drop in the bucket compared to the cost of programs that have been put in place by Congress.

Of the restructuring that needs to occur, reform of Congress itself is the highest priority. As I spent the past two years connecting the dots and devising systemwide solutions for our economy, the simple fact was that all changes kept reverting back to Congress, and Congress now has in place a system that will not allow it to make needed changes.

Congress has now gerrymandered itself into extremism. It has limited the representation of the house so that it no longer represents the people as originally intended. It has structured campaign financing to favor the wealthy and in fact 90% of campaign funds come from the elite and 87% of campaigns with the highest campaign funds win their elections. Congress now over-represents the 1% and vastly under-represents the 99%.

Without restructuring Congress to fairly represent the balanced needs of the Country, no reasonable solution will be resolved to move America toward a thriving path. And without reform of Congress, an important step of tax reform will continue to be a classless battle of classes.

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America Should Put All Assets on the Table for Taxation

tax policyI wish for society to be as free of government as is can be, that government be limited to those functions enumerated in the Constitution such as providing for the national defense.

National defense – what is it? America is a group of people clustered together by geography under a common set of laws that we have crafted over time for the protection of our rights from attacks by outsiders and insiders. We have a common economy that provides for our people and a common military that protects us from state led, organized attacks. We have a judiciary that protects us from overt abuses of our laws by our executive and legislative branches. We have a common legislative branch that should strengthen our other institutions through commonly agreed upon laws of engagement for the national defense of our people and an executive branch that acts upon these laws fo our common defense.

How well is our government performing its duties of national defense? Our defense of state organized attack is from another era. Our defense of terrorism has overtaken our liberties. Our defense of attacks on our infrastructure, such as against nuclear and cyber attacks, is in its infancy and struggling for balance. Our three branches of government have been commandeered by America’s elite to provide for their defense against interference from the rest of our society.

Is the middle class defended? Is the working class defended? Are our unemployed and underclass? What is the balance that must be obtained in a defended society?

Some argue that Government is too big, that it takes too much of our money to manage this leviathan. Certainly, our government has too many people and assets and these are costly. But cutting the size of government is only a drop in the bucket compared to the excessive costs of our programs and regulations, and thus cutting the size of government will do very little to curb our deficits and lessen our debt. It is not the size of government that is at issue but the size of expenditures that have been agreed to by past legislators and that have been enacted by past executive branches. It is the size of our agreements that is bankrupting our country. More than anything, we must prioritize cost reductions and government must not be cut to the point of disfunctionality in the process of cutting costs.

Once America’s spending priorities have been readjusted to fit our abilities to pay and our government has been resized to manage those priorities, those priorities and the new size of our government still has to be paid. We still have to agree how each of us will contribute to the funding of our government. Each of us has assets that can be taken to pay for government. We have assets that were purchased in previous years and assets that have been acquired in the current year. We have assets that have been made through investments and assets that have been given to us as compensation for our labors. Some of our assets are liquid and some are hard assets not so easily converted to money.

Government must now come together to represent the people in deciding which of these assets will be assessed for taxation. The best we can hope is that our legislators are balanced in their representation of the people. Who of us believes that regarding economics, our legislature is balanced in representing all classes of people?

The largest of our nation’s costs are military and social safety nets. Both of these costs were agreed to by past federal legislators as the best compromise, given the structure of our society at the time. Our military was structured for hegemonic offense, to thrust America’s economic interests abroad. Our social safety nets were structured to care for those of our citizens whose labor was set aside to maximize the profits of capital owners.

Fast forward to today. Our elite’s financial interests are in even more need of hegemonic military protection, as a much greater percentage of their assets are abroad. Even more of our citizens’ labor has been left idle by their decision to invest abroad, and now our social safety net program costs are excessive. We now balk at having such high government program costs, yet we are unwilling to cut or hegemonic military or to bring back investment to employ our citizens. So instead, we sit stupefied watching our legislature do what we expect them to do, stall on our behalf.

Now, our elite wants to cut the costs of social safety nets that are caused by foreign investment and our poor want to cut the costs of our hegemonic military that exists to protect those foreign investments. And if neither will budge on cuts, then each wants the other to pay for the excessive government program costs that we will incur.

However, the economics of America are driven by the investments of our elite. If America’s elite choose to situate their assets in foreign lands rather than in domestic businesses that will employ our people and that will minimize safety net and defense costs, who then should be responsible for covering these costs? Are my words socialist or are they simply recognizing that every economic choice has cost consequences?

I am not advocating going back to the days of kings, back to the beginnings of our nation, when America’s lands were given to the elite families of America by the crown, and restructuring them to give all an equal share, nor of reconfiguring the lands taken from indigenous peoples and given to the governors, financial, and political elite of the time. I am not advocating correcting these historical manmade injustices.

However, all men should have a living wage and our national defense calls for maximizing the outputs of all in our society through the investments of our elite that have been given the blessings of historical circumstance as well as those that have made their fortunes nurtured within the defensive infrastructure of the United States.

The elites’ assets are mostly in excess stores of value, above what are required to live and to consume. The middle class have assets that were mostly created through their labor, 0-3 years worth of labor in liquid assets and a house, maybe two. The working class might have a home and few liquid assets, plus current assets from recent labor. The underclass have few assets to speak of. Which of these assets will be taken to pay for the requirements of government?

The vast majority of assets that America owns are left untouchable by government. Why is that? Is land that has been in a family since it was bestowed upon them by the King of England any more valuable than a dollar that was made by the sweat of labor in 2013? If a working class man has no assets but $5,000 in a bank made by his labor this year, why are those assets what should pay the bulk of the nation’s governmental costs while the assets of land in a 50,000 acre estate are deemed off limits?

Do I want the government touching any of my assets, or those of the laborer with $5,000, or the American lord with 50,000 acres? Well I realistically know it must to function. If it must, are any of these assets more sacred than another? Why is it that we have conditioned ourselves to accept that recently acquired assets are acceptable to tax but those that have been in a family for centuries are not?

The argument has been structured so as to only compare recently acquired assets, for to look at all assets would be to see how amazingly imbalanced ownership of assets is in America. My proposal of taxing only assets that are not being productively used in the economy, while impossible to enact, is intended to break through this manufactured paradigm. Whether America has a flat tax, a fair tax, or a progressive tax, we should compare all assets, not just those recently acquired. And we should not create false paradigms that differentiate between that were acquired through investments, those acquired as payment for the use of capital, or those handed down through generations from the King.

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Detroit and America Must Choose to Banish Catch 22

Catch-22-1961-by-Joseph-H
Catch 22 is a phrase in the book by the same name that has come to mean a problem that has no solution, for it contains a circular argument, like those that have plagued Detroit for the past 63 years. These problems have been blamed for the misery of millions. Are they truly Catch 22?

Problem #1

To bring more business and population to Detroit, crime must be reduced. But crime cannot be reduced unless there are jobs that pay living wages. And jobs will not be created unless there are incoming businesses, which will not come because there is too much crime.

……………………………………………Catch 22….

Problem #2

Crime will not be reduced unless would be criminals can find jobs to replace benefits of crime. To do so, those jobs must pay living wages. But a majority of the unemployed are illiterate and undereducated and do not qualify for jobs that pay living wages. Therefore, they cannot obtain jobs that will pay living wages. Without a living wage, crime will not be reduced.

……………………………………………Catch 22….

Problem #3

America’s unemployed need jobs. To employ Americans, a minimum legal wage must be paid. But the world competes to make and sell widgets, and world wages to make widgets are less than America’s minimum legal wage. Therefore widgets must be made overseas and sold to Americans. Making widgets overseas keeps Americans unemployed and without jobs.

……………………………………………Catch 22….

For the past 63 years, since the peak of employment and population, the leadership of Detroit, as well as most major cities in America, has accepted the Catch 22 paradigm that their economic problems are unsolvable and therefore, not really a burden that is theirs to carry. Accepting the Catch 22 paradigm means they condemn America to high unemployment and high crime in our inner cities. Accepting the Catch 22 paradigm means that millions of lives will go unfulfilled and wasted, that millions of children go unfed each night, and that our nation suffers as we commit the least of ours to an arduous lifelong pursuit of happiness.

Catch 22 paradigms are roadblocks that keep America’s political leadership from helping America to reach optimal output and productivity. Catch 22 paradigms are impediments that keep Americans from reaching their highest opportunity for all to pursue happiness.

Catch 22 paradigms, however, are merely paradigms that are placed in the collective consciousness of America by those that wish them to exist. America is conditioned to accept them yet they need not be accepted. Owners of capital benefit from them. Political leaders benefit from them. The rest of America does not benefit from them. If America accepts these paradigms, they continue. If America simply rejects these paradigms, they vanish.

Catch 22 paradigms support the efforts of owners of capital to create maximum wealth but cost trillions of dollars and millions of jobs in the American economy. America could force American capitalists to spend their dollars in America. But our history, principles, and laws support the freedom of owners of capital to spend their dollars in whatever part of the world provides the highest returns.

To force owners of capital to spend their dollars in America would require a change of laws that would turn on our principles of freedom for all Americans. We cannot turn our back on our heritage of freedom. Therefore, we accept that the economic engine of America, the capital of our wealthy elite will be spent in other parts of the world, costing trillions of dollars of loss and millions of jobs in our economy.

…………………………………………………Catch 22

Solutions do exist to Catch 22. American owners of capital can make profits in America to employ our workforce without forcing them to spend dollars here if political compromise is made to allow equivalent profit. Jobs can be created that include a living wage, if political compromise allows for living wages. Crime can then be reduced and the pursuit of happiness can be lifted to a higher plane. And believe it or not, all of this can be accomplished without spending more tax dollars, which is the ultimate cry of those shouting Catch 22.

These real and viable solutions, however, require political compromise. America’s economic problems have arisen from deep seated differences of vision that drive conservative and liberal parties alike to pursue their own visions without compromise, producing the political vacuum that must exist for Catch 22 paradigms to live.

In Detroit, one vision is for all that have made it through the gauntlet and that have risen at least to the middle class to escape to the suburbs, and to make Downtown a playground fortress against the poverty of the inner city, while giving up the rest of Detroit’s citizens to Catch 22. The other vision is to form a grass roots effort to fight the plight caused by Catch 22 to all of Detroit’s citizens, yet without attacking Catch 22 as a mere paradigm. They therefore accept its paradigm that economic suffering must continue. Detroit’s two opposing visions have fought compromise since the riots of 1967 brought their opposing views into the political light.

Problems that such a lack of compromise creates in Detroit then cause the city to fester without solution. Polarized city political leaderships acquiesce to the meager capital investments left for their cities as they pursue their opposing political visions. Polarized state political leadership compete with other states for limited capital investments by promising owners of capital that they will not have to share the tax burdens of the state. And polarized federal political leaders pass legislation to allow for owners of capital to make maximum profits overseas at the expense of jobs at home.

Political leaders become convinced that their political interests lie closer to the owners of capital than to those of the rest of their constituency. Without having to compromise across the aisle, they pass Catch 22 legislation that make it easier for owners of capital to invest dollars overseas while escaping the uncompromising political fighting that continues at home. Political leaders’ efforts on behalf of America’s elite become an easier route to remaining in political power than having to bend in political compromise on behalf of America.

Detroit’s solution rests in ending Catch 22. America’s solution rests in ending Catch 22. The solution to ending Catch 22 rests in political compromise that puts Detroit’s future, America’s future ahead of political expediency. Viable solutions exist. Jobs can be created. Owners of capital can be rewarded in America. Much suffering can be banished. The American economy can return to prosperity.

No Catch 22….

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The Solution is Relatively Simple if The Will is Relatively Strong


Without extraneous noise from various American factions over the past thirty years, the logic for how America fell into this economic mess is relatively straight forward. The reasons why previously tried and currently proposed solutions will not work are equally as coherent. A solution for digging America quickly out of the circular predicament we are in is relatively straightforward. What is not straight forward is the gerrymandered path through Congress to do what is needed on behalf of the American People. What follows are general truths (although each has exceptions to the rule). See if you agree.

What do we know?

• The Western World’s banks lent to both businesses and consumers beyond historically safe levels for three decades. As a result:

oThe West is now bloated with excess private debt
o The economy is struggling to pay debt loads and default rates are high
o Debt repayment has absorbed discretionary revenues that would otherwise be invested into a growing economy

• America used excessive bank credit to spend beyond its means for the past three decades. As a result:

o Money was available to fund speculative bubbles. Higher bubble values in turn made more money available to spend on consumer needs during the bubble rises
o Investment and housing bubbles propped up 15 million jobs beyond what the underlying economy would have otherwise if America simply spent within our means
o As real economy jobs transferred to the East, America’s underlying weakening economy was hidden by our continued excess spending

• America’s Federal Government borrowed to pay for welfare and warfare for four decades. As a result:

o America’s public debt grew to 100% of GDP, a level that could absorb all public discretionary spending if interest rates rise, spending that would otherwise assist a growing economy
o Further increases in Federal debt could result in America’s credit rating being lowered which in turn could force higher interest rates

• The rubber band of excess spending could only stretch to finite limits. As a result:

o When the limit was finally reached, Banks knew first and moved quickly to protect themselves from what they knew would be a free fall by closing credit lines, charging exorbitant rates on outstanding credit debt, and stopping lending even to credit worthy consumers
o Without access to consumer credit to cover the shortfall between incomes and housing debt, consumer demand stalled
o Without access to credit, the housing bubble popped and housing prices freefell
o To make ends meet, consumers cannibalized financial investments and investment prices fell
o Within a very few years, much of America’s housing and commercial real estate debt far exceeded the value of underlying properties

• With the collapse of housing values and credit, the plug was pulled on the artificial engine of growth. As a result:

o Consumer demand contracted
o Demand for labor then contracted and jobs were lost
o Federal tax revenues contracted as unemployment rose
o Lower housing values reduced state and local tax revenues

• State governments that required balanced budgets and local governments, dependent on housing tax revenues were rescued initially by Federal stimulus dollars. As a result:

o State and local governments failed to react quickly and responsibly to a permanently lowered tax base.
o Many states and municipal governments came perilously close to default

• American multinational businesses were buoyed by Asian GDP growth but our domestic businesses were hammered by a weakened domestic economy. As a result:

o Multinational businesses secured substantial cash balances but withheld investing over concerns of the world’s teetering economy
o Domestic businesses shrank with the contracting economy, lost access to credit, and laid off employees to survive.

How does America wish to respond to the crisis?

Republicans want to:

• Protect military spending
• Recover through less government spending, lower taxes, and less regulations

Yet:

o Even without cutting taxes, balancing the federal budget will require cutting 43 cents of every dollar the federal government now spends
o Military spending and its hidden ancillary spending cost a third of the federal budget. Without drastic cuts to military expenditures as well as all other federal expenditures, the federal budget cannot be balanced.
o If we do not curb deficit spending to quickly achieve a balanced budget, America’s interest rates will rise and cut off federal discretionary priorities
o Lowering taxes without cuts in government spending that offset not only the tax cuts but the extreme deficits now in place would exacerbate an already dangerous interest rate precipice

Compromise issues:
o Government spending is steadily increasing. Government spending increases and not just rate reductions in increases must be reversed.
o While lower taxes are one way to provide the private sector additional revenue for growth, it is not the only way. The private sector can acquire investment capital by other means if credit can be accessed.

Democrats want to:

• Increase social programs, secure social agencies, and protect entitlements
• Recover through stimulus spending and supporting state and local budgets
• Increase taxes on the wealthy to pay for social programs

Yet:

o Even without reducing government spending, federal taxes would have to increase 75 percent across the board to balance the budget
o The United States could not spend enough to stimulate the entire world’s demand in order to recover from a worldwide monetary implosion. Thus far, $2 trillion in stimulus spending and $15 trillion in loans has budged the world’s economy little and has had no multiplicative effect.
o It is evident that the economy will not recover enough to offset stimulus spending with increased tax revenues. Therefore, stimulus will further exacerbate the federal debt and invites a faster debt rating reduction and higher interest rates

Compromise issues:
o To balance the budget, social welfare spending must be reduced, along with all other budget line items, to much less than America spends today
o To at least maintain America’s middle class standard of living, GDP growth must keep up with population growth. GDP growth must be supported by investment capital. Congress must either redistribute Federal spending to support higher private sector productivity, lower taxes to free up private sector investment capital, or entice business to invest domestically by creating a better business environment

America’s unemployed and underemployed want to:

• Find productive employment
• Gain access to credit
• Reduce their debt payments
• Eliminate their housing bubble debt overhang
• Regain savings for retirement

Yet:

o Jobs will not become available until businesses begin to rehire
o Businesses will not begin to rehire until the economy improves
o The economy will not improve until consumers increase purchases
o Consumers will not increase purchases unless they can pay existing debts and have enough left to increase discretionary purchases
o Consumers will not have additional funds without increasing incomes, repairing credit ratings, and gaining access to more credit
o Consumers cannot increase incomes unless the 25 million un-or-under employed gain employment, cannot repair credit ratings without increasing income, and cannot gain access to more credit without repairing credit ratings
o Consumers cannot gain employment until businesses begin to rehire
o And thus the circular argument of an imploded monetary economy………….

Compromise issues:

o In an imploded economy, consumer demand and business supply cannot be corrected in isolation, but must be repaired simultaneously.
o Democrats tried to fix both consumer demand and business supply through artificial government stimulus, but it was not large enough or economically diverse enough to reignite the economy, and it did not attempt to simultaneously correct the underlying debt and credit issues that also must be repaired in tandem for an imploded economy correction to adhere and affect a turnaround.
o To create enough turnaround friction, stimulus must bubble up from the economy wide full employment, improved credit ratings, and access to both consumer and business credit. Government cannot possibly spread stimulus broad enough or create a large enough stimulus through spending programs alone
o Republicans have offered to correct the economy by creating a better business environment through lower taxes, fewer regulations, and multinational businesses incentives. However, the Republican plan for reigniting the economy only addresses methods for attracting capital back to the United States, hoping to make the U.S. a better alternative for multinational corporations to spend capital than elsewhere. Yet multinational businesses are not spending their capital anywhere and will not until the global consumer demand improves. And at this time, Republicans are not offering any solutions to improve the global business environment.

A viable turnaround solution requires that:

• All able Americans immediately return to work
• U.S. consumers are freed from the weight of housing debt overhang and credit ratings that were damaged by the worldwide monetary implosion
• The dollar is uncoupled from attempting to stimulate the entire Western world.
• Multinational Corporations be enticed to bring investment capital into an economy that has already begun its turnaround
• Federal, state, and local governments not be allowed to skim needed growth capital out of a delicately growing economy

One viable solution includes:

• Job voucher plan to employ all able Americans immediately

http://jobvoucherplan.com/must-reads/

• Equity for debt swap to remove excess housing debt

http://jobvoucherplan.com/2011/08/04/hawaiians-have-the-hale-housing-solution-to-right-america-housing-bubble/

• Credit amnesty program to quickly repair business and consumer credit

http://jobvoucherplan.com/2011/09/08/yes-america-can-quickly-turnaround-heres-how/

• Modified Republican multinational incentives that entice domestic investment without giving carte blanche tax holiday and that does not entice further foreign domestic investment

https://jobvoucherplan.wordpress.com/2011/10/26/our-economy-can-be-re-ignited-like-a-boy-scout-fire/
http://jobvoucherplan.com/2011/06/18/can-the-coming-world-depression-learn-anything-from-the-great-blackout-of-1965/

• Republicans and Democrats do the heavy lifting of deciding together which programs will be cut, how to best run the military with a much reduced budget, how to extend the life of entitlements with a much reduced budget, and how to reduce Congress’s incentive to hold to a balanced budget.

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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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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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Without Economic Security, America Has No National Security

A corporation’s mission is to provide profit to their shareholders. Other stakeholders must be satisfied so that they support the corporation, yet America has no law against maximizing profit to the detriment of other stakeholders.

When China opened its doors after 150 years and created special economic zones in which American companies could set up shop as long as they brought their trade secrets and intellectual capital, 40,000 did just that without reprisal from the United States. It certainly was not illegal to do so, and of course, the American consumer was rewarded with somewhat lower prices.

Another stakeholder, Congress, got enormous campaign contributions by China bound corporations, and there certainly isn’t a law against that. In fact, America turns a blind eye to average senate races costing 10 million dollars that have been paid for by our corporations and banks, more than 90 percent of campaign donations. We do not fault our Congress for passing laws to help their corporate constituents nor do we fault our Supreme Court, whose recent ruling on Citizens United gave corporations the unique status of having citizen rights without citizen responsibilities.

By paying the $150 dollar fee to become a corporation, businesses gain property rights that are sacrosanct in America. Corporations can sell property even if it harms others, in most cases. In a very few, such as that is being raised with GE, when a corporation attempts to sell a trade secret or intellectual property that could put our fighting men and women in harm’s way, we stop the sale in the interests of national security. But when 40,000 companies took their intellectual property to China, America did not claim national security.

And why would we have when the China gold rush began in 1979? Our industrial belt had been rusted by international competition and we were told that globalization would bring millions of jobs to America. It did but it took tens of millions more away. We were also told that imported goods would be cheaper than American ones and they are. But the cost of lost jobs, lost wages, less taxes, fewer factories, transferred intellectual property, future GDP growth, trade imbalances, and greater interest on trillions of borrowed debt was way costlier than the savings from Chinese trinkets.

By moving millions of jobs off shore, we gutted regions of collaborating industries like Detroit, Youngstown and Pittsburgh, whose workers, engineers, scientists, and businessmen intermingled to create next generation developments that would grow America’s future prosperity. But can we fault our corporations just because their collective actions cost America millions of future jobs and GDP? No, we cannot for our laws do not even suggest that American corporations should consider our citizenry as stakeholders. And in 2011, America has not yet even considered that our economic security is directly tied to our national security.

Without yet considering how we will support a future war of attrition without domestic factories, our nation has not yet debated our financial security. America now has bulged her budget to 3.4 trillion dollar budget yet collects only 2.2 trillion in federal taxes. We are forced to borrow from the Chinese the very dollars we give them for their trinkets, while keeping 30 million of our citizens underemployed. Our credit rating has finally been lowered because of this folly, and now our Congress is faced with making deep cuts to our budget which may include substantially reducing our military capability.

We have not connected our past decisions to allow our corporations to give millions of intellectual properties to the Chinese in trade for access to their markets and to their cheap labor to our national security. Yet these decisions have in fact lessened our national security, because without economic security, we have no national security.

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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.

Budget
• 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

Taxes
• 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**

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

Trade
• [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

Energy
•**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

The Gingerbread Corporate Man (A Bedtime Story)

After having travelled across the Atlantic Ocean to build their little stone baking mill, an elderly American couple wished for a son. Knowing that America considers corporations to be citizens, they decided to bake a gingerbread corporate man. They added equal amounts of capital, toil, and love to bake their son. Upon coming out of the oven, he immediately began to delight his parents.

He worked side by side bringing them prosperity and joy. However, as he grew older and collected more capital unto himself, he grew haughty and began to think, “Why do I toil for the benefits of my parents. I am the capital of flour and sugar, and they are but mere laborers.” So one day to his parents’ horror, he ran down the dirt road for other worlds singing, “Run, run as fast as you can, you can’t catch me, I’m the gingerbread corporate man.”

As he ran down the path, he happened upon the mayor of the town who asked, “May I take but an arm or a leg to help feed the townspeople?” The gingerbread corporate man would have none of it, running away shouting, “Run, run as fast as you can, you can’t catch me, I’m the gingerbread corporate man!”

A little further down the road he met a tree hugging, spotted owl who exclaimed, “Slow down your development! I want to eat you.” But sidestepping the owl’s advances, he ran away shouting, “Run, run as fast as you can, you can’t catch me, I’m the gingerbread corporate man!”

Over the Wall, he dropped to the street finding a gaggle of banker geese honking, “Don’t stop! We will collect all of the flour and sugar in America and give it to you for your journey.” The gingerbread corporate man, thought a moment and asked, “You don’t want to eat me?” “No”, they cackled. “We want to eat a bit of every bag of flour and sugar we take from the little old ladies of America and give the rest to you so that you grow big.” “You’ve got yourselves a deal!” shouted the gingerbread corporate man as he ran down the street.

As he neared the seashore, he came upon a bevy of bakers from the baker’s union who shouted, “Stop, you have all our flour and we will be without a livelihood if you run away.” “Will you bake until the midnight hours toiling in heat?” asked the gingerbread corporate man. “No, will you let us eat you?” retorted the baking guild. Instead, he ran down to the sea shouting, “Run, run as fast as you can, you can’t catch me, I’m the gingerbread corporate man!”

As he reached the shore looking back toward the mayor, spotted owl, gaggle of geese, and bakers all running after him, the gingerbread corporate man shouted, “Oh no! They will catch me. How can I cross this deep ocean?” At that moment, he came upon a crafty Huli Jing, a Chinese fox lingering at the shore. The fox exclaimed, “Climb upon my tail and I will swim across the Pacific.” “You won’t eat me?” asked the Gingerbread corporate man. “Of course not”, said the Chinese fox, “I want to help you.”

As the gingerbread man climbed aboard, he brought the huge bags of flour and sugar that weighed down the fox. The fox said, “Climb upon my back so you won’t get wet.” As they swam closer and closer to China, the gingerbread man added more and more of the capital onto himself, making him bigger and bigger, weighing down the sly fox further.

When China appeared on the horizon, the fox said, “You are much too big and powerful for my back and I am tired. If you want to enter China, you must bring all your fast ideas with you and hop upon my nose to keep dry.” Wanting to escape the Americans who wanted to eat him, the gingerbread corporate man did as he was told.

As soon as they reached the Eastern shore, the Huli Jing tossed the gingerbread corporate man into the air, opened his mouth, and snap, that was the end of the Gingerbread Corporate man!

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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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Filed under American Governance, Federal Budget, U.S. Monetary Policy, U.S. Tax Policy