Kyoto Protocols Would Have Accelerated China’s Plan to Reverse-Exploit EurAmerica

In 1978, the year China emerged onto the world stage with its four modernizations, China, a country with four times the population of the United States, had a paltry gross domestic product of $216 billion, less than eight percent of the United States. China exposed her strategy of four modernizations to the world as if to say,”Please invest in China and we will ensure that our workforce is educated, and that our business infrastructure is stable for your investment.” Yet, this openly expressed strategy, that may have seemed to the rest of the world as a difficult but noble goal for China to achieve, was only the tip of China’s Grand Plan, and only the part she wanted the world to see.

EurAmerica’s history with China was one of gunboat diplomacy, exploitation, and forced trading. When China opened her borders again in 1979, EurAmerica’s merchants were enthusiastic to exploit an opportunity once again. Yet, China had not forgotten EurAmerica’s role in the Opium War, the Sino-Japanese War, and the Boxer Rebellion. China would never open her border again to be exploited. When she finally opened her border in 1979, it was from a position of power, deep strategy, and long lived planning that suggested EurAmerica was finally ripe for reverse exploitation. China’s grand plan was to emerge as the 21st century world power.

What boldness of purpose China must have felt as she aligned her nation’s efforts to that decade’s long task. Looking back today on her impossible achievements, one must give pause to the monumental economic goal she set for herself in 1978, indeed greater than America’s technical goal of landing on the moon early in 1961. Yet, with such a miniscule $216 billion GDP and few material assets how could China possibly build her empire to surpass that of the United States?

Through a hybrid statist-capitalist political structure, China would create a conduit through which American businesses would willingly draw down the wealth of Europe and America and transfer it to China in order to share in the prosperity of that wealth transfer. Through the centralized imposition of forced savings on its people, China would provide low cost labor to sell goods at low enough prices to cause EurAmerica to look the other way as their neighbors’ jobs went to China. Through low interest loans, China would entice EurAmerican politicians to spend beyond their means to temporarily ease the pain of EurAmerica as China’s sucked away their life force. These were the basis of her strategy.

Similarly to how a business cycle contains early adopters and late stage laggards, China planned a capital extraction cycle for EurAmerica, in which China would extract capital in multiple phases, each phase having an optimal extraction strategy. First extraction would be through the early adopter “gold rush” investors rushing into China to stake a claim. China would also plan for early majority, late majority and laggard’s capital extraction.

In 1978, China assessed America’s assets:
• America’s most valuable assets were intellectual capital that resulted from 200 years of publicly funded primary and publicly subsidized secondary education
• America’s physical assets included business assets, commercial, and residential real estate worth $7 trillion in addition to public assets of land, buildings, and infrastructure
• America produced 26% of the world’s GDP at $2.8 trillion and consumed a quarter of the world’s goods
• America’s debt was as low as it had been since WWII as a percentage of GDP and its 110 million workers were capable of doubling their loans to provide China more capital
• America’s Baby boomers were entering a peak spending phase followed by peak saving
• America’s constitutional republic allowed a relative few capitalists to control the direction of her economy

By 1978, multinational corporations had steadily grown in number and size for two decades. China’s success depended on corralling MNCs through direct foreign investment to create massive inflows of capital quickly monetized as hard assets and infrastructure.

China would entice merchants to invest by offering access to the future potential purchasing power of its people. However, given China’s low household incomes, market penetration would be low to start. Therefore, to entice the early adopters, China would create special economic zones that provided the perfect investment opportunity of cheap educated labor, loose regulation, low taxation, strengthened business law, and enhanced infrastructure and transportation, in which businesses could produce goods at very low arbitrage costs to sell back to their home countries for high margins.

With low cost of goods from special economic zones, early adopter businesses were highly profitable and banks poured investment into China as a result. But, China could not complete her Grand Plan to multiply her GDP 50 times by enticing early adopter investors alone. She had to implement a plan timed to extract maximum dollars from EurAmerica at each phase of her exponential growth.

During the next stage, the early majority stage, China manipulated baby boomers’ peak spending phase:
• China’s low prices secured America’s baby boomers as loyal customers
• Prior to America noticing a substantial loss of jobs, China secured free trade agreements, and mined American businesses for their intellectual capital.
• She reinvested profits back into America’s debt to keep America’s interest rates artificially low in order to spur on higher levels of consumer spending and government borrowing.
• China supported lobbying of America’s mass investment vehicles to fund MNCs. 401Ks and IRAs, created in ‘80and ’81, funneled money through the stock market into MNCs for investment into China.

Then, America was drawn into the late majority stage as America’s baby boomers entered their peak saving years. 401Ks and IRAs artificially fed the stock market frenzy. Baby boomers sensed they knew how to invest in a bubble market that kept rising. With access to low interest rate loans kept low by China’s reinvestment, speculators borrowed money to bet on the rising stock market. America ultimately increased its debt to pump up stock values to build more Chinese factories.

Inevitably, the stock market bubble burst, leaving America’s baby boomers with lower retirement savings. The stock market that seemed destined to go up forever finally reversed rapidly decreasing valuations. However, the debt that had funded its escalation remained.

During the late majority phase:
• More businesses began to invest in China just to remain competitive with businesses that had moved offshore earlier.
• Tens of thousands of businesses transferred factories to China to obtain low cost labor
• Millions of Americans lost jobs
• With a generation of education completed, China now was able to take more advanced jobs as well as factory jobs. America’s bastion of protected, more technically competent jobs was not a bastion after all.
• American retail outlets for Chinese goods grew exponentially
• China continued to loan its excess profits back to the American government to keep interest rates low.
After having lived through the weakness of the stock market, real estate appeared to be the baby boomers’ best retirement savings alternative. In the early stages of the Great Ponsi, housing prices went steadily up. With low interest rates, Americans could now borrow on the value of their homes to continue funding China’s growth. China’s final stages of extraction saw the housing bubble increase beyond what had ever been experienced before.

Even though American jobs were increasingly being driven offshore, the frenzy of increased housing prices allowed additional borrowing from Americans, feeding the China gold rush further. This behavior was not unexpected, following a pattern of historical boom-bust cycles and was part of China’s planning. As a result of the stock bubble and the housing bubble, America’s total debt had risen to over $55 trillion. With such exuberance in the housing market, secondary debt markets participated in credit default swaps to the tune of an additional $42 trillion. China now had extracted close to the maximum of America’s value, leaving America with the corresponding debt.

So China extracted maximum value, first in trade secrets and early adoptive money, then by IRAs and 401Ks, then by stock market and home equity loans, then by 2nd mortgages and housing speculation. China monetized the massive cash flows as quickly as possible, building infrastructure and excess manufacturing capacity, while leaving America holding debt in exchange.

Without any other rising asset values to borrow from, America has tapped out its debt. Having maxed its debt, America can only print money to finance its trade deficits. Without further real debt derived money extraction to give China for infrastructure investment and without a real ability to pay for low cost Chinese goods, America is fast losing her worth to China as an infrastructure vehicle. Recognizing that maximized extraction and rapid monetization of America’s wealth is nearing its end, China is now finalizing the implementation of her strategy, that of pulling out of American debt before other countries that maintain reserve currencies create a run on the dollar.

In thirty short years, China was able to accelerate her GDP from $216 billion to $11 trillion. She amassed reserve capital of $3 trillion. She reversed America’s fortunes from the greatest creditor nation to the greatest debtor nation. She gutted America’s factories while creating the world’s largest manufacturing base in her own country. A measure of output that highly correlates to GDP is energy consumption. In June of this year, 2011, China surpassed the United States as the largest consumer of energy on the planet. While the U.S consumes 19 percent of the world’s energy, China consumes 20.3 percent.

In 1992, the world came together to discuss the impact of climate change resulting from energy consumption. The talks resulted in Kyoto protocols being initially adopted in 1997 that attempted to create a framework for reducing greenhouse emissions. The protocols called for 33 industrialized nations to reduce their greenhouse gases to 1990 levels and then to maintain emissions at those levels. Although it called for emerging countries like China to voluntarily lower levels, it did not require them to be mandated.

Of course, all of the countries who had no requirements to reduce their emissions signed the agreement. The United States, under scrutiny from environmentalists and others did not sign. China did sign. This was an additional strategy perhaps not envisioned in 1978 that nonetheless would have assisted in accelerating America’s slide had we signed.

GDP highly correlates to energy usage. In 1990, America’s real GDP was about $8 trillion as compared to $14 trillion in 2011. Kyoto would have caused America to either:
• Invest billions in the attempt to lower our energy usage per dollar of GDP
• Pay billions to other countries to have them produce less so that we could grow our GDP from $8 to $14 trillion
• Or, maintain our GDP at 8 trillion

In the meantime, China’s GDP in 1990 was $1.3 trillion and has since grown to over $10 trillion. China’s energy use has correspondingly grown as well until the point that this month, she overtook America as the greatest polluter. Kyoto was a grand idea that was doomed from the start because of the flaw that allowed the now greatest polluter to play by different rules. It attempted to cap the economic growth of America while allowing other countries to grow unfettered.

China had a Grand Plan that has been executed with the finesse expected of a centrally planned economy. Kyoto added nicely to that plan. America has been thwarted by China’s plan but now has the ability to reverse course. Given China’s size and growth rate, she will pass us soon if she has not already and her stride will be too great for us to catch her. However, by avoiding traps like Kyoto, and understanding that economic gamesmanship can accomplish a much greater destruction of a nation’s wealth than warfare ever could, perhaps America can once again right its course.

America’s Future – Building Block #1: U.S. Debt – Do we increase, decrease or default?

One of a few critical building blocks of American policy that will be required to right our ship of state is stabilization of America’s debt. The seeming annual deadline to vote on raising the debt ceiling is set for August 2nd. While the Republicans have threatened to default unless the ceiling increase has corresponding cuts to the budget, and while the world anticipates corrective action, we may only see hollow political chatter without material cuts because it is not yet America’s season for freefall from treasuries default.

However, it should be the season for reason. Some economists tell us that recent fear of historic deficits comes only from those ignorant of economics. They say we can print money at will without retaliation because of our sovereignty and world reserve currency status, that we owe this debt to ourselves, and that we can inflate the debt away. They surmise that we are nowhere near an insurmountable debt maximum. But how can they be so confident that America’s ballooning debt is not an issue?

Learned pontifications have confounded us through continued clamoring of countering arguments since 1990, when the debt ceiling was raised 33% to 4.1 trillion to contain our previous housing bubble, the savings and loan crisis. We have just exceeded our latest federal debt ceiling of $14.29 trillion dollars. Total American obligations of all public and private debtors are over $55 trillion, and including government’s unfunded liabilities, we owe $168 trillion. Even if we could balance the budget today, each working American is already obligated in some form to pay the world one million dollars. Who is right? How much American debt is too much debt?

In placing their faith in the pseudoscience of modern economics, our scholars fail to mention that the majority of currencies in history no longer exist. Hyperinflations do occur with regularity, 21 countries in the last 25 years. Debt levels do collapse governments, small (Zimbabwe) and large (USSR). Unfortunately, by the time societies recognize they have reached the beginnings of hyper-inflation, their currencies are already on a glide path to extinction. How close are we?

Prior to WWII, America paid down its debt between wars but our perception of debt changed in 1945. Backed by 70% of the world’s gold, the dollar was the world’s hope for rebuilding, and hence became its reserve currency. In 1944, the architects of Bretton Woods envisioned the dollar as the lynchpin to a system in which central banks maintained stable exchange rates to support balanced trade between industrialized countries, with minimal international indebtedness. They did not foresee the corrupting power they entrusted to the United States that would later subjugate the emerging world to a devaluing dollar.

Control of the world’s reserve currency proved too powerful an elixir for America. Perhaps we convinced ourselves that exporting inflation was a fair trade for granting Europe and Japan seed capital, and for our supplying our trading partners with military security. Nonetheless, for the past six decades the U.S. taxed the world $15 trillion through devaluation, and borrowed another $14 trillion, diverting substantial growth capital from emerging countries to fund America’s sustenance.

Without a realistic alternative, the world reluctantly accepted losses of their reserve currencies, but devaluation has not been without cost to America. The collapse of Bretton Woods spurred the growth of a $300 trillion FX market that has quickened the demise of the dollar’s reserve currency role. FX arbitrage and speculative volatility also precipitated the Asian crisis, causing the Asian monetary zone to closely align, lessening a need for dollar reserves. Including Europe’s drive to a common currency and China’s rise, all reduced the dollar’s power and made the possibility of an alternate monetary system possible. And America’s choice to drastically export dollar devaluation to provide investment banks buffer for unwinding of credit default swaps has brought the world to the brink.

While largely diminished, the dollar still yet dominates but for how much longer? After $2.6 billion of quantitatively eased dilution, Bernanke has fatefully claimed an end to QE, but only after President Obama announced a decade long expansion of trillion dollar budget deficits, replacing QE in name only. Is there no limit? If a limit is reached and the world fully rejects the dollar, history has shown that its fall will be too rapid to save. We now have imminent signs of that moment’s approach:

• China rejecting the dollar – For eight years, China purchased 20% of the U.S.’s deficit, buying 50% in 2006. However, for the last year, China has been a net seller of U.S. debt, reducing its total holdings 30%, and dropping its treasuries 97%. China has signaled that its risk of holding U.S. debt is greater than its risk of causing U.S. interest rates to rise, which will limit our investment in China, and will cause us to purchase less Chinese goods. Their risk equation has pivoted.

• Fed’s acquisition of treasuries – In 2011, the Fed has been the chief buyer of U.S. treasuries, purchasing over 70%, as opposed to 10 % during the last decade.

• Private investment shies away from the dollar – Investment firm Pimco, managing the largest bond fund in the world, cut its holdings of US government-related paper from $237 billion to zero for the first time in the history of the firm, stating the U.S’s problem is worse than Greece’s.

• Regionalization of reserve currencies – Asian, European, and Middle Eastern trading blocs all are all moving away from dollar denominated trades. As an example, China’s and India’s central banks agreed to direct currency exchange as of 2011.

• Commodity inflation – While the U.S. government quoted core inflation is up a mere 0.4 percent, Americans have felt the results of a real 12% inflation and much higher commodity inflation.

• Debt rating concerns – As of June, 2011, Moody’s has threatened to reduce the U.S.’s debt rating unless imminent progress is made on reducing America’s deficit

• American public losing faith – Most telling is the behavior of the American people. With 28% of home prices lower than the underlying mortgages, record numbers of Americans have chosen strategic foreclosures. 25% of foreclosures are from those that have chosen to walk away from debt obligations even though they still have the wherewithal to pay them. Feeling betrayed by America’s financial institutions’ “contract” with Americans for stable money, stable employment, and stable pricing, Americans increasingly no longer feel compelled to honor their financial contracts. The underpinnings of the dollar are on shaky grounds.

Our political and financial leadership now have choices to make. The Fed has signaled no more QE and the President has signaled a decade of continued historic deficits, but those announcements are political balloons that have been lofted toward their constituents. What should America’s true strategy be for our mounting debt?

We have but limited choices. 1) Debt can continue to increase at historic rates, perhaps preserving our banking system in its zombie state, but risking the loss of world credit, a spike in interest rates, crowding out of government services, and the march toward hyperinflation. 2) The rate of increasing debt can be reduced by either budget cuts or tax increases, but either measure may precipitate a return to America’s recession, increasing unemployment, decreasing GDP, and without substantially austere measures, continuing down a path toward loss of world reserve currency status. Or 3) America can take drastic measures to eliminate the deficit and to begin reducing the debt, most likely causing a rapid downward spiral of GDP which, similar to Greece’s predicament, will create an imploding cycle of further austerity measures and GDP reduction.

Considering that credit agencies have already fired lowered debt rating shots hair-raisingly close to America’s bow, the first option of continuing down our current path of printing money to fund our federal deficit is daring fate to draw us into the abyss. The world is quickly shutting off America’s Fed spigot of money printing. If we continue printing money, we risk paying higher interest on existing debt, crowding out needed government services and shocking America back into recession. The EU’s prescription for Greece has enlightened us that the third option of severe austerity is a prescription for thrusting America into obscurity with little hope of return. Therefore, we must now immediately embark down the second path of significant but directed deficit reduction. Sound choices of which reductions to make is a topic for a near future building block post and would be an interesting response from readers.

While the middle choice of materially lowering the rate of increase in our debt and over time reaching balance is our hope of recovery, it risks sending America into a double dip recession. If we reduce public spending without subsequently increasing private spending, demand will decrease, most certainly causing a downturn. Increasing taxes, without correspondingly increasing earnings of those paying them, will crowd out private spending, also decreasing demand. To successfully navigate our debt hazards, any decrease in government spending must be accompanied by a similar increase in private spending.

To increase private spending, either consumer demand must be increased with corresponding availability to credit, or private business spending must be increased with a corresponding potential for demand for its goods or services and a corresponding availability of credit. To keep this post to a reasonable limit, these issues are items for a future building block post.

Consumer credit is maxed out. Historic consumer debt combined with loss of housing and stock market equity and lowered prospects for employment have dried up any chances of a consumer led recovery. Loosening of credit without a corresponding increased demand for employees is unwarranted and spurring demand for employees is unfortunately another building block topic.

State and local governments are operating outside of constitutional authority in the red, and foreign governments have reduced credit to the federal government. Therefore, deficit reduction must initially be accompanied by increased domestic business spending if we are to avoid a recession. Increased spending must have the potential for successful creation of new profits. Sources of new spending must come from private providers of debt and capital, bank debt in combination with private business equity. America can no longer allow our banks to set the agenda for the path forward. The current prescription of repairing bank balance sheets while limiting credit is no longer feasible. These issues are also a subject for another building block discussion.

Some in Congress suggest we have a fourth option, that of initially maintaining the deficit by cutting taxes to spur growth while reducing government spending accordingly, eventually growing tax revenue through increased growth of the economy. While the idea has much conceptual merit, its implementation in previous Congresses was spurious. Private capital from lowered taxes was siphoned into overseas investments with little if any net benefit to the domestic economy. Much work from Congress, the courts, our executive branch, including trade negotiators and national strategists, business and labor must be done together as a community if we are to establish the real environment that can actually benefit from reduced taxes. (yet another building block discussion)

Initial prescription: Material reductions in government spending with corresponding highly incentivized, private investment that directs spending to domestic projects and increases domestic employment. Ultimately, in a timeframe considered realistic by world markets, the deficit must be eliminated through combination of reduced spending and increased GDP that strategically grows the domestic economy, creates full employment, and retains innovation. (More meat in future building block discussions)

American Predator and Prey Must Rise together Against The Cattlemen

June is the month when the plains of the Serengeti face drought and massive herds of wildebeest begin their migration to sustaining grazing areas. 1.5 million strong, their great migration is followed by predators that feed off the weak, young, and elderly of the herd. Yet the wildebeests produce a swarm intelligence, defending the herd as one against the onslaught of those that would attempt to separate the weak from the rest. This herd instinct protected the wildebeest through thousands of years of predatory balance with lions, hyenas, cheetahs, leopards and crocodiles, yet the wildebeests were not prepared for man and his fences. Between 1950 and 1984, the species lost 94 % of its numbers in South Africa, when fences blocked its migratory paths.

We continue to hear about the dwindling American middle class, our great herd migrating through the political seasons. The Great Middle of America continues to be the food stock of political predators, yet it faces a much greater danger of shrinking from foreign fencing placed by international banking and multinational corporations. If our Great American Middle is to survive, we must now use our swarm intelligence not only to protect from our common political predators, but to rise above the fate of the wildebeest and overcome the greater threat to our ecosystem.

Just as lions run through a herd of wildebeest to separate out the weakest prey, our political extremists seek to divide the herd through stereotypical “Willie Horton” attacks and to prey on the weakest of us. It is the nature of the American two-party political wilderness. For any extremist to succeed, they must find the balance within the Great Middle and tip it through distortions and spin through herd mentality to their view if they ever expect to feast on wildebeest.

Charging headlong into the herd, they slander race and religion to divide and conquer. Education, color of collar, age, sexual orientation, status, income, even patriotism has come under verbal attack to effectively divide. These are the ideological tactics to scatter the herd of Great Middle to the edges so that predators of extreme ideology may tear apart the flesh of the weakest for sustenance. As the Great Middle scatters, it diminishes.

Stampeding wildebeest confuse their predators by their sheer numbers. As we migrate through the political seasons, the Great Middle’s swarm intelligence must overcome political extremists’ use of herd mentality to separate. Stampede the herd! Test extremists as to their proximity to the constitution, and the furtherance of our country, by their neglect of our downtrodden and of the voiceless in America, and by their common defense against fencing.

The great migration of wildebeest and predators is an ecosystem threatened by fences built to deny its very existence. Cattlemen wanting to protect graze lands for financially motivated cattle herds foreign to the Great Plains, erected fencing for their narrow self interests. As the health of the wildebeest herd diminishes, so too does the health of predators. Lions are endangered with numbers dwindling below thirty thousand.

The American ecosystem, with its Great Middle and extremists must now also be protected. We sense endangerment, yet distracted from the predation of extremists, we do not yet have the tools to protect America from foreign fencing put up to disrupt our political migration. With international banking and MNCs redirecting markets, production, financing and wealth away from America, both extremists and middle America must rise above instinctual predator and prey responses to defend our country against foreign invasion and financial treason or our Great Middle migration will end and the American ecosystem will fail.

Will EurAmerica Enter a Cold Financial Winter? (Revised)

When China announced to the world that it would open its doors to foreign investment, multinational corporations from both Europe and America rushed to stake a claim to a unique gold rush opportunity of historic proportions. China offered EurAmerican MNCs that agreed to share trade secrets and intellectual capital, that had capital to expand China’s manufacturing infrastructure, and that could open their own countries to China’s goods, the opportunity to participate in China’s newly opened special economic zones, with the hope of marketing to their 1.3 billion people.

Requiring massive investment to capitalize on the opportunity, MNCs sought the support of international investment banks and lobbied home governments to provide looser, deregulated capital markets as well as to submit to opening home markets to “free trade”. MNCs then began a three decade long extraction of wealth, factories, and jobs from EurAmerica to build China’s manufacturing infrastructure and GDP.

At the beginning of China’s historic rise, American politicians freed capital for China investment by reducing taxes of the investment class of Americans; through a reduction of the top tax income rate from 70% to 50%, through reduction of capital gains tax from 28% to 20 %, and through tripling of estate tax exemptions. As more and more capital was needed, America’s baby boomer retirement investments were developed for ease of use in China. In America, 401Ks, started in 1980, and IRAs, made available to all citizens in 1981, siloed middle class investments into the stock market that directed a majority of retirement funds toward China.

Later in China’s growth cycle, EurAmerican banks devised ways to extract even more capital through debt instruments from their citizens. EurAmerican interest rates were set low, creating the credit to extract maximum capital to fund the growth of China’s manufacturing infrastructure through home equity and business development loans. Yet, to meet China’s capital needs in the exponentially growing latter stages of growth, extreme capital extraction through maximum borrowing of a majority of private citizens and public entities was required.

Investment banks created a method of extracting maximum capital from EurAmericans’ main investments, their homes. To accomplish this, Investment banks restructured the banking industry. They first created methods of incentivizing consumers to take as many and as large of loans as possible through risky, low interest, no income verification loans and other, more predatory loans. They also rid commercial banks of their traditional, credit restricting roles by incentivizing them to make as many loans as possible, with minimal risk because they could simply resell the mortgages to the investment banks for a profit. Finally, they developed complex, (and unfortunately faulty) derivatives to buy mortgages from commercial banks and repackage them for profits.

In the process, a majority of consumers that could afford it were lured through ease of access and Ponzified greed into their debt web. Greed played its part with commercial banks as well, as most became willing accomplices of the role that investment banks created in transforming them into maximum credit authorizing, debt creating factories to feed the raw commodities of capital that China needed for her later growth stages. As beneficiary of EurAmerica’s capital, China became a strategic partner to the process by supporting low EurAmerican inflation and interest rates through:

• Accepting free flow of manufacturing infrastructure into her economic development zones
• Funding infrastructure debt payments through sales of low costs goods back to EurAmerica
• Mitigating international demands to revalue the Yuan higher by maintaining historic trade imbalances with EurAmerica and reinvesting Yuan back into EurAmerica
• Keeping internal inflation low through internally enforced savings of wage controls and removing excess Yuan from circulation through funding trading countries deficits
• Managing external commodity inflation through aggressive development of international Greenfield commodity projects to supplement absorption of long term international commodity contracts and relationships that were left unattended by EurAmerica.
• Reinvesting surplus capital into EurAmerica, keeping world interest rates low to extract last vestiges of EurAmerican capital through historic levels of corporate and private debt

When this historic, debt driven, extraction of two great empires’ wealth reached its zenith, like all financial bubbles finally do, public, private and corporate debt had stretched beyond its ability to pay, exceeding $50 trillion dollars in America alone. The financial herd had stretched so thin that it simply required a few debt ridden gazelle to nervously default to start the whole herd stampeding frenzily toward the bank runs that inevitably follow peak excess. This time in history, it was the unraveling of the predatory American home loans that toppled EurAmerica’s financial house of cards. Nonetheless, if not for this gazelle, another would have jumped to take its place, for no exuberant and irrational credit binge ever stands in the longer term.

When this Rube-Goldberg loan scheme supporting the massive capital transfer from EurAmerica to China finally collapsed, investment banks were pushed to the precipice of default. Acting independently of government mandated goals, central banks, with the Federal Reserve out front, stepped in to protect the banking industry by providing liquidity to those investment banks most at risk. They did so claiming that not providing liquidity would have caused domestic businesses and private citizens to default through massive foreclosures, bankruptcies, layoffs, financial and operational restructuring.

Unlike previous historical investment bubbles, in which many investment banks failed, EurAmerican central banks temporarily saved the vast majority of investment banks through simultaneous, massive expansion of the money supply, staving off a rapid disintegration of public, private and corporate debt, recorded as assets on their balance sheets. Recognizing further monetary support was required, the Federal Reserve attempted to mount another widespread EurAmerican expansion of money supply but Europe, intent on preserving its courtship of unification and now dealing with the crisis of PIIGS deficits, did not concur. Without palatable alternatives, the Fed embarked on a Romanesque fait accompli of reserve currency monetary expansion, attempting to reverse the entire world’s contraction of money supply through what they termed Quantitative Easing.

It appears that temporarily at least the Fed’s Quantitative Easing policy have strengthened EurAmerican banks’ balance sheets, transferring some toxic assets to sovereignties, and have girded them to endure the coming double dip recession. However, it failed to accomplish their stated long term debt stabilizing goals. Unemployment is once again increasing, housing prices have reversed and are falling, and while some European countries have begun to institute austerity programs, America is projecting trillion dollar deficits for the remainder of the decade.

Unfortunately, the Fed does not have the magic bullet to repair the only ways to truly provide long term stabilization of massive EurAmerican debt supporting their balance sheets. To do that, EurAmerica must stabilize the underlying ability and desire of their debt holders to make debt payments. This can only be accomplished by:
• Maintaining and growing EurAmerican economies
• Reducing real EurAmerican unemployment
• Increasing the nominal values of EurAmerican Housing or restructuring housing debt
• Eliminating public deficits
• Reducing non-value generating debt
• Maintaining minimum interest on existing debt while incentivizing its reduction and saving

Without immediate and urgent prescriptive measures to meet the above objectives and to mitigate the impact of EurAmerica’s retreat from previous financial investment and consumption patterns, a cold, worldwide economic winter most likely ensue. American direct foreign investment has already begun its inevitable descent. Europe’s protectionism has kept available resources flowing to China but EU will soon follow with fewer investments in China as well. China will react with less support for EurAmerican deficits, severely restricting EurAmerica’s monetary managment options.

If we do not act soon, our political systems will be forced into severe austerity measures. The world will enter a deep and disruptive recessionary cycle from which countries and entire regions will eventually emerge in an entirely new trading pattern; one that is China centric, developed around its newfound industries that were funded by EurAmerica at the turn of the 21st century. China will emerge first, building on its excess modern manufacturing capacity and hegemonic commodities relationships. When at last EurAmerica exits from the long winter of debt riddled recession, it will follow the path to the Asian economies.

Prescriptions to follow…

Why Do Democrats and Republicans Play Childhood Games with America’s Future?

As young boys, growing up in Ohio, we spent many summer days playing “Smear the Queer”. We didn’t know the inappropriateness of the name of the game as young boys. We only knew it meant coming together in fields behind our suburban homes to blow off summer energy and to demonstrate each other’s bravado. The game consisted of one boy holding onto the football as long as possible by running to escape the others. Each boy would run with abandon in his chosen direction until the rest of the pack would catch up and dog pile him into the ground. Another kid would then capture the ball and run headlong in the opposite direction knowing that the crowd would soon pound him into the ground as well.

In this childhood game, there were no winners, no advancement of the ball to score for the team. There was only chest pounding, boyhood energy, and bull headed bravado. Because we were oblivious to the bigoted implication of the game’s name, we perhaps could have been forgiven in our 1960’s innocence of youth. However, America’s two political parties, claiming to be learned elite, continue this politically incorrect game with reckless abandon in the year 2011!

In the midst of an historic crisis that left 24% of our able workers sidelined from our economy, a crisis that may eliminate America as the leader of the free world and sentence us to a diminished future, our two parties have refused to be either a beacon of hope or a forum of reason. Instead, as each party has been given the opportunity to gain the support of all Americans, they have foolhardily run with abandon in the direction of self interest. Easily discerning their veiled motives that disregard most of America, our electorate has voted to quickly dogpile each party.

In 2008, after elections signaled America sought “change”, the country experienced a monetary crisis that impacted us all. Instead of rapidly revising agenda to lead us out of crisis, the Democrats lunged forward with wealth redistribution and universal healthcare, worthy goals for their party, but lacking acknowledgement of our country’s need to wage war.

Punishing blind loyalty to party, the Great Middle dogpiled the Democrats in 2010 and elected leaders who promised to get the country back on track. Instead, when the Republicans gained firm hold of the football, they giddily sprinted for the other side of the field toward their ideals of wealth protection, union destruction, defunding of Planned Parenthood and NPR, and cutting of entitlements.

The New York special election that gave a majority to Democrat Kathy Hochul in a Republican stronghold once again signaled the Great Middle piling on a party that irresponsibly misconstrued its mandate. Instead of advancing the Great Society in the absence of real economic growth, and instead reverting to trickle-down economics after having shipped 40,000 factories to China in the last decade, America wants critical leadership.

The Democrats are now beating their chest because they succeeded in mongering fear to protect Medicare from the likes of Paul Ryan. In the absence of leadership that calls for sacrifice from all Americans but that promises to not leave any of our brethren behind, this election signals that Democrats will likely get their turn to run like silly school children toward their camp in 2012.

But America cries out, “Where is our great leader?” Who will blaze a path forward that all can follow? Ask us to sacrifice for we must. Reduce our entitlements but put all able Americans back to work. Reduce government spending but divert it now into the private sector and transfer government jobs immediately into private domestic endeavors that can rebuild our future together. Call on multinational corporations to sacrifice for America’s future productivity. Divert dollars that continue to keep insolvent international investment banks afloat to keep America afloat. Put aside your silly boyhood games and lead.

A Politician, a Banker, and a Multinational Corporate CEO Walk into a Bar

We have a weird set of bedfellows running America. Without contemplating each other’s impact, our politicians, bankers, and multinational corporations (MNCs) nonetheless combine their efforts to make a mess of our country.

[ A politician, a banker, and a multinational corporate CEO walk into a bar. The politician closes down the bar for regulation violations and sends the crowd packing. On their way out the door, the patrons hand their wallets to the politician who gives them to the banker who lends them to the CEO who uses them to buy the bar and send it over to China. ]

Our politicians attempt to make our world brighter by passing regulations that add social costs of production to the cost of our local businesses’ products. Yet, they turn a blind eye to other nations’ lack of regulation that similarly pollutes the world while providing their industries a regulatory subsidy against American competition. MNCs then arbitrage lower foreign regulatory and labor costs to bring lower priced finished goods back to America for sale.

Rather than construct level playing fields, our politicians pander their votes to bankers and MNCs, providing one sided regulations and free trade legislation that subsequently reduces demand for American workers. Not deterred by America’s rising level of structural unemployment, they then pass extended unemployment benefits to pacify the electorate, refuse to raise taxes to cover the consequential damages, and instead ask the Fed to print money.

Our Federal Reserve has dutifully printed money for our politicians for decades knowing that one day it might have to print money for itself. That day came and the Fed helped itself to a whopping 2 trillion dollars of self help money creation. The Fed now stodgily claims that two trillion in quantitative easing will not affect the value of the dollar. Armed with economists to defend its actions, the Fed claims that the economy will grow as the result of QE 1 and 2, requiring more money for more transactions, that the Fed has means to reduce the growth in spending and tools to offset an expansionary increase if necessary, that because of heightened instability in the world market, QE 1 and 2 are being held abroad as reserve assets and thus will not impact price levels, and that it can easily remove any excess supply of money if its QE efforts have overshot.

[ In that same bar sat an Indian, a Chinese National and a West African sipping economic Coca Colas, as was their usual custom. To keep their economy colas cooled from unexpectedly overheating every time the Fed ran into the bar with a teapot of steaming hot water and forced them to take a shot of inflationary devaluation, they kept a few ice cubes of reserve currency on hand. This day, however, was different.

The Fed drove up to the bar in a dump truck filled with steaming hot quantitative easing, forced the three countrymen to place their colas at the rear of the truck, quickly lifted its bed with its sloshing steamy payload directly above the little glasses, opened up the back gate and drowned the colas with a two trillion ton tsunami of worldwide, commodity buying, inflationary steamy hot dollars. The Fed’s two remaining economists who, up to now, were willing to sit publicly in the bar looked sheepishly at each other before quietly removing themselves out the back exit.

An American businessman sat in the bar cheering on the Fed’s hubbub as he chatted with a local barber and a Tunisian barber. He shouted to the two barbers, “Now America will bring back our factories and compete with the world.” He hoped the Fed’s action would devalue the dollar enough that America’s businesses could afford to add value through American labor to globally priced commodities and resell the finished products competitively on the world market.

The Tunisian barber leaned over and quipped to the American barber, “Yes, now you too can come home from cutting hair all day, tend to your chickens and till your garden into the night to feed your family.” Overhearing the Tunisian’s comment, the American businessman wondered if the dollar value actually decreased enough to make American factories competitive, that it perhaps might not be such a good thing for American barber he had just befriended.

The American barber smiled to the businessman and the Tunisian, got up and left the bar in his automobile filled with metals, plastics, rare earth, and oil derivatives, drove to his home beaming with wood, copper, metal appliances, and internet streamed CRTs, cooled by combusted hydrocarbons, reached into his refrigerator and pulled out a relative feast of supermarket distributed, oil grown food commodities for his snack. All the while he was unaware of the coming “QE 1,2,3..n” commodities inflation that would level his playing field down to that of his Tunisian bar buddy. ]

God Save Us from the Fish Mongers – An Allegory

A small, tropical isle fishing village sits across an inlet from a much larger fishing village to the east. Both villages want for little, spending their days either fishing or taking leisure. The western villagers choose to fish in deep-water, prime fishing grounds where catches are ample and large. They have much leisure, for long ago a western family learned to use the woodlands of their island to produce boats. The eastern villagers, lacking boat building skills, are forced however to cast long hours along their shores for smaller inlet fish. The boat building family enjoys even more leisure than most because their skills provide access to the deep waters so their villagers give them a bit of fish from every catch.

Desiring vessels for their people, eastern village elders approach the boat builders with head gear in hand, explaining that they will provide twice the fish of the western villagers if the boat builders will also supply them with boats. With such an agreeable offer, the boat building family begins to supply boats to the eastern village, and soon eastern villagers can be seen venturing out into the deep for fish.

Flush with fish from the easterners, the boat builders craft an idea. They will trade their excess to westerners in exchange for a return of fish later. To entice their villagers, they will agree to give more fish today than will have to be returned later. Westerners find the offer irresistible because they can enjoy leisure now knowing that some day when they must repay the debt, they will work fewer hours than the hours of leisure they gain today.

Having an abundance of both leisure and fish but now lusting for more, the boat builders unwittingly cast aside their future and that of their island as they craft another idea. They will teach eastern islanders the secrets their forefathers gave them about boat building in exchange for a bit of fish from every catch of the boats the easterners build. Yearning to harvest more of the deep waters, easterners agree to the terms. As the ambitious easterners flood the fishing fields with boats, the western boat building family’s fortunes become titanic.

Mongers now flood the shores with fish from the east, eventually causing a fourth of the western villagers to sit idly by, borrowing from the boat builder’s excesses. Without a need to fish, they slowly lose their knowledge of the seas, and without a need to venture into the deep their boats fall into disrepair. The western village elders, who had survived by taking a bit of fish from every villager as payment for administering the village, now find that with many of their villagers idly living on the fish of the easterners, that they cannot skim enough catch from their villagers to live.

They approach the uberwealthy boat building family for solutions. Lobbying that loans of fish to the idle westerners is good for the westerners because they are receiving more fish today than they will have to repay, the family also quietly agrees to supply ample fish to the elders in exchange for support of continuing eastern trades. Having provided the elders fish that can no longer be obtained from the villagers, the family feels justified in crafting yet another idea. They will give fish to eastern villagers so that they can stop fishing and build even more boats in the east that will return a bit of fish from every catch.

The eastern villagers now control the deep fishing fields and begin to weary of trading fish to the westerners, who must rely on eastern fish, as their boats are no longer sailable. With even more villagers sitting out the long hot days in their huts, western elders grow ever hungrier, so with head gear in hand they travel in weather worn boats to the eastern shore and meet with the eastern village elders by the campfire. Emboldened by their newfound wealth, the eastern elders chide the western elders for their lack of foresight but agree to provide fish in exchange for the promise that the western elders will demand a skim of their villagers’ fish to repay the easterners.

For awhile, this uneasy arrangement continues between the western villagers, their elders, the eastern villagers and the family of boat builders until the eastern village bulges with boats. No longer needing the skills of the boat builders, the eastern village does not desire to give another fish to the westerners but instead demands the western village return the fish they borrowed.

Without the skills or boats to repay their debt, the western villagers look aghast as their elders call them to the camp fire. They no longer can sit by the shore gorging on borrowed fish, nor can they linger leisurely. They must now work long hours catching inlet fish to repay the eastern village. Their previous agreement to pay for earlier leisure with less work hours today was unfortunately sold off by the boat builders. For now, the westerners have no boats to venture into the deep and their labor will be spent casting from the shores. This tranquil village in paradise has unwittingly indentured its future to the easterners.

The family of boat builders, attempting to revive its lost fortunes, now sheepheadishly offers to build boats for the western villagers, but their offer is rebuffed. The easterners are now the preeminent boat builders and one by one, the villagers must meekly travel to the east with head gear in hand, hoping to acquire boats today in exchange for a bit of fish from every catch.

So….Why were the villagers allowed to borrow fish that they could never pay back? Why were the boat builders allowed to give the secrets of the island to the easterners, not only giving away their claims to the island’s boats of survival but the rights to the deep fishing fields that were not theirs to give? Why were elders allowed to borrow from the easterners while so many villagers sat idly? Why did the villagers not see that their elders would yield to the boat builders as a means of their own survival? Why didn’t the western village foresee that letting their skills and boats diminish was unsustainable for their island’s survival? Why didn’t they understand that by borrowing leisure, they would end up fishing for scrub fish along the inlet shore? Why?

Could Africa’s Failures Hold Secrets for America’s Future Success?

Why is it that the African continent holds an abundance of natural resources yet remains the poorest of the continents? Could its failures hold secrets of success for America? African leaders say that it is a lack of money that keeps their nations from succeeding, yet money is a commodity that can be printed from thin air by any nation that holds a printing press.

While both China and countries on the continent of Africa have the ability to print money, China’s star has risen while Africa remains peering up from the earth below. Perhaps it is the quality of money that creates success.

Before the modern age of banking, value was created and then exchanged for money. In today’s world, money is created and exchanged for the promise of value returned. It is the quality of this promise of future value that sets the exchange rate of money. In the global money market, China’s promise has been deemed a higher quality.

Countries of high quality value creation can create money velocity that expands chains of money to create more money. Strong rule of law, limited corruption, protection of citizens’ health and education of their young, giving voice to the people and purity of government’s purpose to regulate businesses for the good of all, these national qualities tend to make good on promises to create value. Fulfillment of promises creates value, grows money, and sustains a nation.

Combining high quality with high savings rates accelerates a country’s growth. Early civilizations forced excessive savings through wars and conquest. Then came mercantilism and colonization. America’s Captains of Industry concentrated savings by reinvesting industrial output through two great wars. Japan instilled a sense of state over self that inspired sacrifice and high personal savings during its rise. China, by her mixture of authoritarian rule and shoreline capitalism, has forced saving through foreign exchange manipulation and managed labor rates.

With her high savings and a well executed strategy of four modernizations, China has climbed toward hegemony. China has added education, infrastructure, and modern law to support business growth. She has opened up her shores to investment, requiring all who enter to bring gifts of innovation and trade secrets. With a credible belief in China’s future by both her people and the rest of the world, China has created a high quality of value creation and her wealth has grown.

Unlike China, many countries in Africa have suffered from a lack of credibility that translates into a lack of faith in future value and a corresponding lack of money creation. However, unlike the days of old when money was a physical commodity commandeered through battle, money is no longer outside of Africa’s grasp. Countries within Africa need only to commit to a path of higher value by building national qualities that will create money from thin air. And if this is a good prescription for Africa, it most certainly is for America as well.

Oil will Rise above $2,000 Dollars a Barrel?

Permit me to drift well beyond the trends of a recent article which stated that China would surpass America’s economy by 2016. America’s economy consumes a quarter of the world’s oil, Europe and Japan another quarter. By 2016, China will consume another leaving India, Latin America and the rest of the world scrambling for the remaining 25%. But China’s growth is doubling every 7 years so by 2023, her share of the world’s output will demand 50%, leaving the U.S., Europe, and Japan and India demanding the other 50%. What does that portend to the rest of the world?

Not much more than a decade away, without some miraculous energy alternative that thus far has not been revealed, there will be great conflict over oil. Much sooner, there has to be a sustained price spike. Surely, the world will attempt to suppress this price hike through alternatives by some yet unknown marvel. However, the world seems to have discounted a potential technological solution and is jockeying jitteringly amongst the oil producing states.

Is America prepared for oil at $500 dollars a barrel? How much would we pay for oil before consuming our domestic alternatives, and what realistic alternatives do we have? We could switch to natural gas for transportation, but that would use our entire reserve within a dozen years or so. We could plug our cars into coal fired electric, but at our rising demand rates, our nation’s reserves would run out within a few decades. These hydrocarbon alternatives would soon find their values rising as quickly as oil. Given the catastrophic conclusion, why aren’t we building wind power, wave power and solar power alternatives at breakneck speed while we still can? The Chinese, following their age old planning horizons, will complete 40 nuclear plants by 2020, and have current plans for 245 reactors. Why?

What if, within our lifetime, the real price of oil reaches $1,000 a barrel, or $2,000? What if gasoline reaches $100 dollars a gallon, Will we pay it? Who could? However, we will soon be forced to understand that the real value of oil is much, much greater than $100 a barrel, and we will willingly pay it.

With the marvel of oil, Americans left the farms and produced a complexity of products and services that extended the quality and length of our lives. In 1776, without oil, 90 percent of us farmed and our average life span was 33 years. Now only 1 in a hundred remain on U.S. farms, and our lives age twice as long, thanks to the benefits of societal specialization brought about by oil.

Oil is the engine of modern life. Oil is now doing the agrarian work of 150 million men in America, plowing and fertilizing the land. About a third of America’s oil consumption goes to food production. What is that worth a barrel? Well at the average American wage and 150 million men, that would put the value of oil at over $2,000 a barrel (gas at $80 a gallon).

Oil truly is Ponce De Leon’s fountain of life. Much of America’s GDP is diverted at an ever escalating rate to healthcare to maintain our 75 year lifespan in the face of epidemics of obesity, diabetes, heart ailments, cancer, and Alzheimer’s. How much more of our GDP would we divert to stave off a return to life spans of 40 years? In other parts of the world, 2 out of 3 people still plow their land and live only 60 percent of an American’s lifetime, even in 2011. Their ability to spend even $100 a barrel is limited.

America spends 5% of our GDP on oil. In Weimar Germany for much of a decade, Rapid inflation caused the Germans to dramatically change spending patterns. 70% of Germany’s wages went to food, 25% to energy and a mere 5% went to housing and all the rest. Given no alternatives to oil’s life giving benefits, America will dramatically increase our oil budget.

While America’s way of life depends on oil, the oil spikes less than a decade a way will most certainly dampen our way. At $4 for a gallon of gas, America complains, yet we still live like emperors of old because oil does the work of 500 men for each of us. At $80 per gallon of gas, most of us will lose our kingdoms. The very wealthy will afford the luxuries of oil, but most Americans will return to the Spartan life lived by much of the world. We will be thankful for the Amish that live among us for they have carried forward the way of the land in America. The Amish today benefit from modern science’s applications of oil but use it otherwise sparingly. As America drifts toward the Amish, we will have to learn how to retain the life giving attributes of oil, while remembering its wonderful king making qualities only as a distant memory.

The U.S. is the breadbasket to the world. However, our ability to keep exporting food will end in about 15 years if the trend in population growth and soil depletion continues. As America pulls back on our supply of food to the rest of the world, the rise in food prices attributable to oil and the world’s resulting unrest in 2011 will intensify. The average world citizen, who gets by on a few dollars a day with much of that going to food will rise up against the hoarders of oil. What will happen when oil prices rise beyond oil’s ability to feed the world? What will happen as the superpowers compete for this already declining resource? What will happen as oil prices above the ability of most Americans to consume it? What great conflicts are on the horizon?

In the World’s High Stakes Game of Chicken, Bernanke May Have Just Blinked

In Ben Bernanke’s first ever news conference, he stared down reporters with his boldface rejection of a QE3, but my guess is that in this international game of chicken, Bernanke will soon blink. He disclosed that he will not begin a QE3 after QE2 finishes on June 30, and that the Fed funds target rate may buoy from its near zero rate. His reasons for this decision were that his concerns for inflation have overtaken needs to prime the sluggish economy, and that QE2 has been “effective” and “successful”. With Bernanke’s finger on the button of the world’s economy, has he really forsaken quantitative easing?

Pumping a previously unimaginable $1.5 trillion into the economy certainly had to be “effective” on some level but unfortunately, not on the level that would ease anyone’s mind that America, or the world for that matter, has dodged imminent danger. With all of the stimulus and quantitative easing that encouraged it, the U.S. economy crawled ahead 1.8% in the first quarter of 2011, well below the rate of a normal recovery. Meanwhile, unemployment claims are edging higher as a quarter of the U.S. suffers unemployment or underemployment, and the recent moderate gains in housing prices have peaked and are retreating once again.

The recent rise in commodities signaled the expected results of America’s monetary intervention, inflation. America’s consumer’s goods consumption is import driven and those prices are going up. If Bernanke actually holds true to the promise he gave America prior to testing his monetary theories, and pulls dollars from the economy in response to rising prices, America’s economy will turn down a more diligent path of squeezing out its excesses through a hard double dip recession combined with inflation.

The combination of Japan’s recent tragedy and a continued potential for a downturn in the U.S. may lead to a softening in the growth of worldwide demand, thereby reducing the potential for real demand inflation. However, as the unprecedented flood of dollars multiply in the market, we will see the lagging effect of a continuing drop in dollar purchasing power that will more than offset the soft economy to produce inflation. Commodity prices are the leading indicator of future general inflation as the QEs work their way through the economy.

America will then have stagflation similar to that caused by the currency expansion and oil embargo of the ‘70s. Our import consumer goods prices will accelerate higher, while our domestically captive service prices will drift lower leading to reduced wages and higher unemployment, as commodity inflation saps the energy out of our service driven domestic economy.

Bernanke has the choice of funding a QE3 to pay for rising interest rates that are bound to occur as a result of previous government intervention, or of pulling the plug on this bad monetary experiment and potentially having some frustrated economist coin a phrase with his name in it to mean a “really really bad stagflation”. My guess is that rather than be known for the Bernanke Splits, he will blink and a third, perhaps more moderate, round of QE3 will begin to assist inflation even higher.

That’s my take, what’s yours?