Tag Archives: baby boomers

America’s Baby Booming Bombers and Bongites Must Agree That Our Babies Will Not Be Burdened by our Budget Battle!

With a country whose budget is not sustainable, responsible citizens would and should have a national debate about the level of entitlements, social services and military that we will have. When 43 cents of every dollar spent by the U.S. government is borrowed, we know that we are increasing the burden of taxpayers who will later replace us in the national debt repayment cycle. Yet are we really going to continue to argue about cutting spending?

With both our WWII vets and flower children of the 70’s arguing about the right direction for the country, neither could gain an extremist lead in Congress so instead of compromise, both stomped their feet for more military, and more socialism, and more freedom from our own debts. Certainly we knew our parents had spent a few years out of WWII making up for lost time and had achieved as a result a glorious human bubble of baby boomers clogging the political system and speeding down the pipeline toward retirement. Yet did we plan for such drains on the entitlement system? No!

Instead, we decided that we wanted what we wanted when we wanted it, including too high a level of socialism and imperialism combined. We reduced our population growth claiming it was over our concern for how the earth’s environment would fare around the time that our replacement taxpayers would begin drudgingly repaying our debts, yet we really knew that it was so we could pursue our higher level of consciousness, and of course “living in the moment man” without planning an exit strategy.

So, I am afraid my comrades that we must join our brethren from Europe and rip the red bands from our socialist arms because we binged on heady levels that would kill a purist Libertarian who had not been tripping along with us for the past three decades. And for those who want to police the world without paying the cost of intercontinental squad cars, we must adjust our world views to the size of our pocket books lest we are left without the ability to defend even our own shores.

p.s. I made up the word bongite…refers to one who uses a bong

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Filed under American Governance, American Politics, Federal Budget, social trajectory, U.S. Tax Policy

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…

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Filed under American Governance, American Politics, China, Federal Budget, Federal Reservre, Foreign Policy, Free Trade, Multinational Corporations, U.S. Monetary Policy

Surprising Causes of Our Budget Crisis

As I have watched America’s deficits swell since the beginning of this Great Recession, the numbers haven’t added up for me. How could our country’s budget swing from a surplus of $300 billion in 2000 to a deficit of 1.4 trillion dollars in 2011? I searched for straight answers, and found some surprising conclusions.

As the banking fiasco rapidly created a crisis that crushed millions of American families, I first imagined it was the huge bailouts so pilloried by the media that must has caused the deficits. It turns out the bailouts have little to do with our current deficits. Even though our debt has ballooned from $5.7 trillion to $14.7 trillion since 2000, short term interest rates have fallen due to the worldwide recession, resulting in only a minor increase in interest payments of $11 billion. Frighteningly, the impact of Wall Street’s misdeeds has not even begun to directly affect the budget yet. When the effects of Wall Street finally hit Main Street, we may likely see the deficit double!

Of course, I thought the horrific loss of jobs resulting from the collapse of credit in the banking debacle must be a major cause of our deficit. Certainly, it has significantly harmed our country, not only financially but psychologically as well. However, the combined costs of $74 billion to fund unemployment and housing along with the additional $70 billion in federal income taxes lost from reduced employment would only place a sizable dent in the $1.4 trillion dollar deficit.

As the recession slowly dragged on without a Congressional focus on jobs, I like many Americans, frustratingly tried to follow the partisan bickering regarding extending the Bush tax cuts for the wealthy. While letting them expire would have helped the deficit, all that political maneuvering for votes would have forced the wealthy to contribute a mere $31 billion more, certainly not attacking the root cause of our country’s predicament. And the recent Congressional compromise on cutting $38 billion in discretionary spending, well it cut into a portion of the budget that had only climbed $18 billion over the ten years.

No it turns out that these more publicly scrutinized areas of debate are not where America should focus its attention if we are to solve our dilemma. While this debt crisis has given cover for political maneuvering inside the beltway, our deficit is largely the victim of four deadly horsemen that have trodden upon America with combined and simultaneous force; military escalation, demographic shifts, healthcare inflation, and the expansion of the Great Society.

Military Escalation:

With the addition of the Iraq and Afghanistan wars, our military budget surged from $378 billion to $730 billion, representing over half our discretionary spending and dwarfing our next largest discretionary budget line item cost of $107 billion for education. Our nation spends more on military than all other nations on Earth combined. We have over 700 bases actively policing the world, some in regions that are no longer at risk of attack post cold war. We have over three hundred U.S. bases and numerous weapons development projects, many that have been criticized for expending budget purely for the benefit of propping up local economies. With our budget crisis threatening to take down America’s hegemony, our military should now propose more than its minimally stated goals of budget reduction.

Demographic Shifts:

Over the last several years, a major cost driver has been the shifting of our baby boomers from wage earners to retirees. From 2000 to the present, the ranks of the over 65 population have grown 15% compared to a population increase of 9%. During that same time period, social security payments increased 46% and Medicare increased 96%, both increasing at rates that are severely unsustainable. The combined cost to support our seniors has grown from $806 billion to $1289 billion, a 60 % increase. Over the next 12 years, the senior baby boomer population will bulge another 30% while the working population to support them will drop 10%, significantly exacerbating an exponentially growing problem. Our under 13 year old population has actually decreased in the past ten years. Without an aggressive immigration policy that brings the best and brightest into America, our ponzi system of entitlements will ultimately fail at a point in the not too distant future.

Our aging population is right to be concerned for their security as they retire. They have partially contributed to their entitlements and should expect to benefit from years of contributions. However, America cannot sustain current projections of costs to maintain our aging population. Having failed to save for this known event, our federal government must collectively approach our seniors with hat in hand to apologize. However, if we fail to significantly and quickly reform Medicare and Social Security, we do so at our nation’s peril.

Healthcare Costs:

Whether it involves taking care of our elderly through Medicare, our less fortunate through Medicaid, or our returning veterans, health care costs are our single largest budget item and they are escalating out of control. We all have experienced inordinately inflating health care premiums and this segment of our public trust is no different, with costs surging from $486 billion to $943 billion since 2000.

Congress was right to attempt to solve the single line item that most threatens to bankrupt our country as baby boomers race toward retirement. However, many Americans have questioned whether Congress lost its way. With over half our nation’s debt now held by foreign countries, it seems to many Americans that Congress is gambling with America’s sovereignty while attempting to simultaneously and rapidly expand coverage to all Americans.

Expansion of the Great Society:

Since the 1970’s, nearly half of our nation’s $15 trillion debt has been incurred to fund an expansion of programs to help our fellow citizens. I was surprised to see that recent expansion of programs greatly expanded our deficits at a time that our debt is reaching crisis proportions. Including means testing entitlements, food and nutrition assistance, housing assistance, community development, earned income transfers, and Medicaid, assistance has grown from $283 billion in 2000 to $568 billion in the 2012 budget.

In addition, while important elements to rebuild America’s future competitiveness, budget items such as education, science, energy and environment, justice, and international affairs have grown from $161 billion to $267 billion. Increasing these budget items by $381 billion at a time when our financial ability to support change has dwindled has created an unrealizable goal when added to our other three horsemen.

Together, these four deadly horsemen have added more to America’s budget in the last ten years than President Clinton’s entire budget. America has now a short window of time to decide how to confront these apocalyptic purveyors of decay. I fear that our representatives will continue to hide in the dark crevices of our severe budget crisis instead of confronting these four horsemen head on and defeating them for America. Now is the time for bold action from our leaders and for support from the American people for what must come.

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Ron Paul is America’s Winston Churchill

It has been said of Winston Churchill that while he did not win the war, World War II most certainly would have been lost without him. During the war, President Roosevelt called him the most important man on earth. And yet, for a decade prior to the war, Churchill was sent out into the political wilderness by his party and country. His staunch, bull dogged, steadfast ideas were not yet right for his time.

During the thirties, as Germany’s war machine increasingly telegraphed its war intentions to the world, Churchill continued to speak out against the Nazis only to be labeled a warmonger by the appeasing British leadership. When war finally fell upon Europe, Churchill was once again called back into service and led the world through one of its greatest crises in history.

The United States is now facing a greater threat than at any time since that war. We are in great need of our Churchill who will unite both political parties to defeat the enemy of our time. The world must only turn a few degrees more on its political axis for America to finally align with the steadfast political views of Congressman Ron Paul. Like Churchill, Ron’s message has been steadfast and is the remedy for America’s return from the abyss.

His views are the prescription for America, albeit complex and interconnected. They are not a simple pill that will quickly bring us back to health and they must be adhered to holistically. His policies cannot be deduced to sound bites. Each component is critically interrelated and requires a disciplined analysis. As Churchill’s expensive conservative hawkish rearming prescriptions were understandably sidelined by the British people during the midst of the Great Depression, it is also understandable that Ron Paul’s holistic cost cutting prescriptions would be sidelined by the press, the opposition, and even his own party during America’s seemingly prosperous previous bubble decades.

As our baby boomer and borrowing fueled bubble economy seemed to prosper during the previous three decades, Ron’s stern warnings for America seemed ill placed, especially when our leadership pointed toward the shining city on the hill and dismissed his message as irrational. Amongst the noise of complex issues we faced, it was no wonder that the American People placed him to the side of national politics. Yet during this time of faux prosperity, Ron prophesied about rising debts, rising trade agreement imbalances, rising trade deficits, rising job losses, rising inflation, rising unfunded Federal budgets, rising Medicare and Social Security differentials, rising Fed abuses, rising military costs, rising federal work forces, rising anti-sentiment for dollar reserve currency, and rising gold prices.

As Great Britain hoped in the 1930’s that appeasement of Germany would allow England to escape the cost and aggressive stance of military preparedness, America hoped that our political leadership would steer us clear of the coming financial crisis that increasingly telegraphed its inevitable certainty. Churchill’s best prescription was plucked from political obscurity to lead Great Britain miraculously out of certain defeat. It is now Ron Paul’s destiny to implement the holistic prescription that he has contemplated for decades. It is time for America to finally fully contemplate Congressman Ron Paul’s hopeful solution.

What is the complex crisis in which America finds itself and what is Congressman Paul’s equally complex but holistic prescription?

Years of excessive government budgets have slowed our GDP growth below its ability to support our growing work force.

For three decades, multinational corporations have escalated direct foreign investment, transferred jobs overseas, and returned low price foreign goods, causing escalating trade deficits, government and private debt, and unemployment compensation.

Our government gave multinational corporations free trade agreements, tax incentives and R&D subsidies that created and transferred innovations overseas, further eliminating jobs in America.

Our Congress continues to spend 80 percent more than it taxes the American public. Our election process and Fed allows Congress to spend without managing our exploding debt.

A private consortium of banks runs the Federal Reserve and supports Congress’s irresponsible spending by printing money. It creates inflation, a silent tax that hurts our seniors and poor the most.

Our Social Security and Medicare entitlements that had 40 workers per retiree when enacted, now has only 3. In their current form, they are unsustainable.

America spends more than the entire rest of the world on defense. Yet given realities of modern warfare, we do not need 700 foreign bases.

Without intervention, America’s housing crisis will drag the country through stagflation for another decade.

Ron’s steadfast, decades-long prescription includes:
• Reducing the size of government now
• Amend the constitution to require a balanced budget.
• Protect our position as the world’s reserve currency by balancing the budget
• Live within our means and begin to reduce the debt
• Reduce and reform taxes to support domestic business investment and job growth, and that provides enough
capital for future GDP growth
• Reduce our military budget to protect America from Invasion and provide for technology improvements ahead of
our enemies.
• Eliminate the majority of our foreign military bases
• Use extreme vigilance to ensure our military is not used for non-national security purposes.
• Reorganize or eliminate the Fed so that printing of money will not be an option to cover taxing short falls and
that artificial inflation will be eliminated
• Create more efficient and cost effective solutions for employment than massive government stimulations that
exacerbate our Federal debt.
• Correct the home mortgage crisis by reforming bankruptcy laws to allow home mortgages to be reduced to the
market value of the home so that the housing market can once again operate efficiently.
• Eliminate incentives to obfuscate the American public by making all government actions transparent, like
ensuring that all Federal spending is on budget, and that the Fed transparently reports the M3 money supply.
• Eliminate or minimize Government manipulations of markets that create inefficiencies and loss of jobs. Unions
should not be restricted from organizing but should not get special treatment. Subsidies should be eliminated if
possible. Minimum wage should be eliminated and social protections should be covered in other ways.
• Eliminate multinational corporation low cost loans.
• Redirect R&D funding on small businesses that create more jobs for America.
• Significantly reduce our overseas budget of over a trillion dollars while our economy is in crisis. Foreign aid
should be reduced or eliminated. The Koreas that were forced apart by Russia and the U.S. should be
allowed to reunite. Nation building should cease.
• Eliminate government intervention of the medical industry that hinders competition.
• Eliminate departments like the Department of Education that should be managed by the States.

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Sincere Politics May Force Walton’s Mountain For America To Recover

Our leadership has been steering the ship for the last forty years on the premise that we will choose  fiscal and social priorities, acquiesce to the political realities of not raising taxes, and print money to make up the difference.  Our country must now act upon a different order.  We must set a budget maximum and then set highest priorities to reach that budget.  

This budgeting process is completed collegiately every year by all private sector businesses without gnashing of teeth.  Each year we set budgets and debate which items on our wish list must wait another year to be implemented.  The painful truth is that some items will be slashed.  

When times were good, I took my entire company and our families to Disney for a Christmas Weekend with gifts and visits to dinner from Mickey himself.  In tough times, the lavishness has been replaced with a subdued dinner.  This year we are talking about working together at the salvation army breakfast.  Our mentality of teaming together for survival is the mentality yet to surface fully in Washington, but it must.

As disheartening as it may be, tough debates must begin to reach consensus on how to slash  the federal budget holistically.  Noone gains when Republicans play idiotic games cutting pet budget items to beat their war drums for their political base or when Democrats clamor that no cuts can be made to sacred cows.

If Steven Tyler and J Lo can slash and burn Idol pets to keep the top 24 out of over 150 singers in a week  at Hollywood then our nation’s brightest leaders ought to be able to mull over the top 60 cents of every dollar we spend to keep the very highest priorities.  

What happens to the rest of our critical priorities?  They get pushed to the states and then the cities, each that have no money and that will be forced by crisis to slash even further.

Critical priorities and charities will go unfunded and families and communities will have to take up the slack.  Scenes from Walton’s mountain will play out again in America.

We will have orderly retreat from the high water social mark we set in the previous baby boomer generation, remembering our path so that we may return.  The alternative will be a full scale chaotic retreat into reckless abandonment of our duties to society as our economy collapses for want of disciplined retraction.

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Baby Boomers Force Dramatic Shift in American Social Contract

I was born in the census year of 1960 at the tail end of the baby boomers. A half century later, I frankly submit that our nation was naïve about the consequences of this historic generation’s path through American history. In 1960, as our boomers entered the workforce, they became the focus of capitalists worldwide, and their economic and social decisions shaped what appears in 2011 to be our nation’s retreat from world leadership.

In 1960, America’s bustling population was 179 million. Economic times were good. Even though the number of workers per retiree to support the New Deal social contracts of Medicare and Social Security had dwindled from 42 in 1935 to only 16 in 1960, the purchasing power of the average family had more than doubled in that time. While government spending had increased from 20 percent to 28 percent to support our strategy of world military dominance, solid economic growth still seemed inevitable for generations to come.

America’s social awareness was growing as well. Led by the likes of Kennedy, King, and Johnson, America began to advance government to rectify historical social ills, and to cause capitalists to pay for their social impacts of growth. A decade later, influenced by the seeming senselessness of Viet Nam, in an attempt to ferment President Johnson’s Great Society, boomers began an expansion of government that would grow from 30 percent of GDP in 1970 to over 43 percent today. In that effort, Americans diverted capital into government social programs, slowing economic growth to a level that could not sustain boomers’ retirement years.

In 2011 looking back, it seems that our representative democracy left us unprepared to support the boomers’ last stage of life. Even though the 2010 census swelled to 309 million Americans, our worker to retiree ratio dimmed to 3.2 and is falling still. And while rising wages from 1940 to 1960 lessened the impact of changing demographics, wages during the last forty years stagnated, leaving middle class boomers inadequately funded for retirement, and leaving young people with inadequate income to support them. While these changing demographics knowingly loomed for years, America failed to plan. As a result, a socially divisive wedge has been driven between the boomers and our youth.

This view of our boomer dilemma leaves me with unanswered yet glaring questions such as:  Why did our government levy social impact costs caused by our capitalists but not fulfill their fiduciary responsibility to levy financial impact costs on capitalists’ MNC investments?  Why did our government create only limited regulated retirement investment opportunities to funnel our boomers’ frenzied savings into stock investment bubbles?  Why did we then deregulate debt financing to further funnel now desperate boomers’ savings into mortgage derivatives?  Why did we allow capitalists to siphon these boomer funds into overseas investments without creating sustainable good paying employment in America for the young people who would be called upon to support our boomer retirees?

 Why were American capitalists allowed to lobby for free trade, and transfer boomer wealth overseas without paying forward the retirement impacts of those investments?  Why were our primary educational systems, designed to feed an earlier industrial economy, allowed to fail a third of our future taxpayers as our capitalists instead focused on funding adequate primary educational systems in emerging countries.  Why were our secondary educational systems allowed to inflate the real cost of college education by 150 percent during the last 30 years, beyond the reach of many Americans, when our government’s stated strategy to combat emerging economies was to use innovation of college graduates to create new high paying jobs?  What is the responsibility of our wealthiest Americans to the rest of our society in creating a feasible path through what will most likely be less than golden years for our boomers?

 Answers to these questions need to be transparently debated as we now prepare for the legacy of our extraordinary generation.  The paradigm of entitlement that gave boomers false hopes and that now embolden our youth to vote for change will soon end.  We now are at pivotal moment in American history in which our diminishing demographics will change America’s societal paradigm forever.  In its place will be the painful national discussion that must take place to pave a way forward.


Filed under American Governance, American Innovation, social trajectory

China’s Reserve Currency Strategy

In two previous posts, I discussed a fishing village in which some of the men in the village were required to sit on the bank and not fish because the fisherman from the other village were willing to fish for them at a lower cost.  The eastern village in that story represents the Asian economy, with its powerful core being China, which is willing to accept and some say manipulate undervalued exchange rates in order to grow through exports. But is China manipulating its currency?

Assuming China’s industry has identical productivity to the U.S. and the Chinese worker is conditioned to accept $3,000 annual wages to our worker’s $43,000, then China could conceivably sell anything to the U.S. for a lower cost than we can produce, cover the costs of direct foreign investment, and yet make a profit. If China chooses to keep its profit in hard U.S. currency and build a war chest over time, why would the Yuan need to revalue? China is setting the rate at which it will provide value to the west, and we as consumers are accepting their price. 

The world is flooding China with capital, allowing it to continue this wealth accumulation strategy at the United States’ expense. We are countering by quantitative easing to devalue their store of U.S. value but in the process are exacting payments from all countries that hold dollars as reserve funds.  And now the experiment of the Special Drawing Rights reserve currency has begun.   Countries are banding together to end America’s reign as the provider of reserve currency When that finally occurs, we will have lost a strategic advantage.

We have continued to devalue our currency over the years and holders of our currency have lost value each year as a result.  Nevertheless, developing nations have increased holdings of our dollars as a hedge against downturns in their economies.  Our continuous devaluing through the years could be argued as an appropriate payment for our military’s defense of worldwide peace that has allowed unprecedented trading wealth for all countries. But it’s a stretch to charge the world for our inability to surge real growth during the last quarter century to support the demographical spending desires of our baby boomers and our lack of regulatory oversight of the financial shenanigans of Wall Street.

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Filed under China, Free Trade