Tag Archives: Capitalism

Cautious Worldwide Win-Win Solutions Should be Sought

Vaclav Havel, Former Czech President, Commencement address at Harvard University
Cambridge, Massachusetts, May 1995

The problem with the premise of Vaclav Havel’s speech stating that we have essentially reached a single global society is that he contradicts himself throughout as if to say that it is merely his hope for future global achievement. I do not see evidence that mankind is evolving toward his ideal. Havel idealists can point to certain social structures and advances in the precedence of laws to suggest that we are progressing as a species. For instance as of 1981, all nations on earth have passed laws against slavery. And yet, others would point out that the earth contains more slaves in 2011 than at any other time in the recorded history of mankind.

We can point to the relative peace that has been achieved since WWII but this peace is not without precedence and has been at the extraordinary cost of the United States as hegemonist spending more than all other nations combined on military assets and personnel and creating technologies that could destroy the world many times over. And yet, with all this extraordinary expense of national will power, the number of battles has not decreased nor has the atrocities committed by nations or men.

We can point to the evolution toward democracy intertwined with capitalism as a trend away from the captive ideas of feudalism and mercantilism, yet where on Earth does true democracy exist? Globalism has reversed any trend toward economic and social freedoms envisioned by those that espoused the virtues of free enterprise of capitalism back toward even larger geographies of quasi-feudalism and mercantilism.

The nature of man is unfortunately not evolving at any measurable pace. The capacity of all is toward evil although 99 percent seek our better natures. The 1 percent who are ruled by their own sociopathic desires find positions of power when opportunities arise with which to pursue societal evil played one nation upon the other. The tools with which to accomplish this evil are unfortunately far outpacing mankind’s social progress.

To protect ourselves from those evil doers who have successfully harnessed other nations or societies, our societies have evolved to nation states and even larger civilizations of shared histories, shared cultures, and shared socioeconomic futures. However, because of the nature of mankind, we are far from evolving to a society that encompasses the entire world.

So mankind must cautiously move forward accepting as best we can winning compromises that allow others to win as well. Cautiously because we do not know if like all other bubbles of this period, that relative peace and cooperation are a bubble as well.

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Filed under American Governance, European Crisis, National Security, social trajectory, War, World Sustainability

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

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

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

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

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

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

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

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

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

The American capitalist system allows:

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Will We Let Free Trade Finish Its Gutting of America?

Tariffs have long been both the nemesis and the whipping boy of the advocates of free trade. Whenever America falls into recession, advocates of jobs tout tariffs yet free traders nonetheless target them as enemies of consumers. They point to low cost goods that have helped American consumers during our recessions as a universal benefit. What they cannot show is whether the benefit of low cost goods offsets the millions of American jobs that have been lost as a result of free trade. But if free trade with the East has severely harmed America, free traders have somehow thus far escaped the scathe of America for having put free trade in motion and having failed to reverse direction when their message was proven hurtful to our national security.

A disciplined look at the use of tariffs would show that win-win free trading between nations of equals is indeed helpful to both nations and requires no tariffs. However, that same objective review would show that free trade between dissimilarly wealthy nations allows the less wealthy nation to extract the wealth and jobs of its trading “partner” and when this principle is put on steroids, the less wealthy nation can collapse the wealthier nation.

In the case of America, a lack of tariffs allowed China to create a lending practice of “live filleting”. She stripped the meat of America‘s economy right from our bones without even using western anesthesia. Instead she fed us our own dollars as loans to keep our interest rates down while artificially suppressing her currency to keep her product prices low for our consumers, a unique kind of Eastern financial acupuncture.

She is now setting about to pull the free trade needles from the pressure points of America’s political nervous system, having instructed her credit agency Dagong to start this credit downgrading slippery slope. When she does, we will all feel the stinging pain of a raw economy stripped bare of its future. The higher prices of American goods that we thought we escaped through our addiction to China’s low priced goods were just temporarily delayed through borrowing three billion dollars of debt from China. The price we will now pay for decades of higher interest rates as we struggle to rebuild our economy will more than offset the folly of our “free market” dalliances.

Could American’s rights to own property have combined with free trade to allow China’s gutting of our country? Property rights were as an essential capitalist core of our Constitution as they were for the ancient civilization of Rome. Property rights are critical for the creation of elite’s wealth and without them capitalism cannot exist, globalization cannot thrive, and a nation’s elite cannot transfer the wealth of their country to other nations for personal gain. Therefore property rights allow gutting.

How so? People that own the value of a country, let’s say U.S. capitalists, transplant that value as factories to another country, China, who uses them to create goods for the U.S.. That transplanting of capital transfers competitive advantage to China so that American jobs are lost and America’s middle class loses purchasing power. To buy China’s goods, Americans then borrow dollars from international banks and exchange the dollars for the goods created in China. Because jobs are lost, America’s government loses tax revenue and borrows dollars from China who then loans some of those dollars back to the people through their government. The U.S. government then gives the dollars to government employees who buy more Chinese goods.

Some of the dollars that are given to China are given back to the capitalist who then borrows more dollars from international banks who create those dollars from thin air. The capitalist then uses both the dollars given by China and those created by the banks to transfer them back to China as more factories which displace more American workers.

As this cycle repeats over and over, 40,000 factories are transplanted, 8 million workers are displaced, $3 trillion dollars are borrowed from China by the U.S. government, and $8 trillion dollars are borrowed by the American people from international banks who multiply this $8 trillion into $45 trillion of credit default swaps to extract even more capital from the capitalists to invest even more into factories in China.

In the end, China has a bunch of factories to make goods for their 1.3 billion internal customers and has hegemonic relationships with the world’s commodity suppliers because America no longer has factories that need them. China raises her currency’s value because she now needs her citizens to buy her factory goods and she stops funding America’s deficits so that our interest rates rise. The American government and American middle class are indebted to China and now must pay more interest.

The American capitalist has his net worth sitting along China’s shore in danger of being nationalized when China’s currency raises to the point that American people can no longer afford to buy China’s goods. The international banks have a good amount of value invested in these dangerously leveraged Chinese factories and their financial assets, loans to America’s middle class, are stretched wafer thin by Americans who borrowed more than they could afford and by corporate credit default swaps that also rest on a house of cards of American middle class debt.

Middle America’s debt is in danger of default as it is supported less and less by jobs that are pouring one by one as sand granules through the neck of an hour glass to China. When the last grain of sand needed to keep the cycle going slips through the neck, the Western financial system collapses, China retains the factories with over a billion internal customers, and America’s elite and middle class are left to fight over who will continue to pay the debt and who will escape financial calamity through default.

So when we talk of property rights, we are talking about the rights of a country’s elite and international bankers to create massive capital flow engines to drain the wealth of one civilization to another. Absent government intervention of tariffs and other financial tools or ultimately of war, when wealth differentials exist between civilizations, property rights and banking create the opportunity for wealth differential arbitrage. When nations of relatively equal wealth trade or exchange value through direct foreign investment, free trade creates a marriage of sorts. However, when wealth differential exists, arbitrage can destroy the value of the wealthier nation in favor of the emerging one.

This is the awesome power and the fatal flaw of capitalism when combined with international property rights. In 1871, Europe’s power was transferred to America through this frenzied flaw and they were left with a 20 year depression before recovering. Now it is America’s turn to suffer the flaw of property rights that were cemented in our rule of law by the Supreme Court of the United States. Most of the horses are already out of the barn. That does not mean we shouldn’t dust off a modern version of tariffs to reverse what outward flow remains.

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Filed under American Governance, American Politics, Foreign Policy, Free Trade

Will China’s Breed of Capitalism Survive Mankind’s Corruptibility?

Before, considering a post describing potential cures for modern capitalism, I should begin by describing my observation of its current state. Before I begin, let me start by saying that human nature is at once both fair minded and selfish. Many Americans including myself believe we are given unalienable rights by God and we support all who seek to protect these God given rights from being trampled by anyone. Yet within this context, most individuals seek personal pursuit of happiness above the interests of others. This is the nature of man.

The founders of our constitution understood man’s nature when they created our republic. They constructed a government that would allow each faction to pursue its self interests while being kept in check by other factions, other parties, other branches of government and by the votes of constituents. Adam Smith, credited as the father of American Capitalism, knew also that the nature of man must be kept in check by a fully functioning competitive market. In his infamous book, “The Wealth of Nations”, Smith cautioned against businesses forming a cabal, or monopolies, in which they would conspire against a nation’s people. Given a limited government and a small business environment, both containing checks and balances against man’s corruptible nature, American capitalism became an economic powerhouse.

Even with man’s flawed desires, capitalism has proven over the centuries to best align the motives of men with the goals of the nation-state and, in practice, provided a more productive economic system than twentieth century Marxists, Leninists, Stalinists, or Maoists that espoused proletariat dictatorship purported by Marxist disciples. However, while capitalism’s progression has proven thus far to outperform other forms of human productivity including the centralizing dictates of communism, its historic results should not be ignorantly interpreted as having proved capitalism’s infallibility. We in the West have tended, as the victors of economic ideology, to let the warnings of capitalism’s market failures or global excesses expounded by Marx and others go unheeded as if they were without basis. Yet in the 21st century, we are witnessing Marx’s warnings played out in our markets.

Marx concluded that feudalism, in which the agrarian worker was tied to the feudal land and lord, gave way to capitalism that freed the worker from the bonds of feudalism to sell his labor into a commodity market governed by the capitalist. He believed that capitalism was only the second of four phases, and that its phase would end when workers, tiring of the concentration of wealth of capitalism, rose up with the help of the socialist state to regain power. He believed that ultimately the state would corrupt, concentrating power in the few political elite, and that this would give rise to communism in which workers equally shared labor without the limitations of state boundaries.

Yet, having lived before the preeminence of international banking, both Marx and Adam Smith viewed capitalism not as the free flow of currency across international borders, but as the growing influence of machinery and its owners in the economy. While capitalism did emerge as the dominant mode of production, what eventually occurred was the increasing symbiotic relationship between capitalists and socialist nation-states, in which nation-states protected the growth of capitalists and fed off the taxation of these newly prosperous entities. This symbiotic relationship fed ever increasing boom-bust cycles that led to 20th century financial capitalism, to a divergence of the partnership between capitalists and nation-states, and, finally, to the emergence of Asian capitalistic mercantilism and the rise of China as the master of this newest form of economic power.

From 1853, the year of the world’s first commercial oil wells, through the beginning of America’s long depression of 1871, commercially developed combustion engines super-charged America’s participation in the western world’s industrial revolution. During these two decades, America’s agrarian population decreased from 77 percent to 44 percent as millions were freed from a rural life to sell their labor to the growing class of capitalists. As Marx had predicted, capital concentrated in the hands of a few creating a real estate bubble-bust cycle not unlike that of 2008 precipitating the Long Depression of 1871, with subsequent capitalist bubbles forming in approximately 20 year waves from the Long Depression of 1871 to the Depression of 1893, followed by the Recession of 1907, and the Great Depression of 1929.

Each capitalist wave garnered increased productivity leading to higher wages and displaced workers, increased innovation leading to new worker opportunities, and greater concentration of wealth amongst capitalists. The uneven development between innovation and productivity led to pockets of unemployment, unions, social unrest and European socialism. It also exponentially increased capitalist productive capacity that led to late nineteenth century international competition for new consumers and eventually to World War I in a futile, tragic, military attempt to sort out winners.

In 1890, seeking protection from European competition, American capitalists urged Congress to pass the McKinley Tariff Act, which imposed 50% tariffs on imports and lead to a depression in 1893. Following severe labor strikes in 1894, the next decade became a battle between hundreds of capitalist American trusts that formed under the protection of tariffs to gain virtual monopolies on all manners of American industries, and the beginnings of American socialism formed to protect workers and consumers from monopolistic power of the trusts.

At the turn of the 20th century, the financial panic in 1907 and subsequent lengthy market contraction was thought by many to have been contrived by international bankers as the means to create a new American financial dynasty, built around a Federal Reserve that could create money to “provide liquidity to mitigate market corrections”. Formed in 1913, America’s central banking system, the Federal Reserve, enabled America’s newest form of financial capitalism to emerge. America now had the makings of her three great 20th century capitalist rivals.

The first of these rivals was America’s socialist nation-state. By 1930, only 21 percent of Americans remained on the farm. Coming out of the Great Depression, our Federal government became increasingly socialist, adding to its socialist policies in the 1960’s with the Great Society and turning more so with the Elections of George Bush and Barack Obama and the enactment of their agendas.

The second rival was the emergence of globalist multinational corporate Industrial-states. After enduring two world wars and the Great Depression, America’s capitalists finally emerged, compensating for an increasingly socialist state by crossing geographical boundaries to reduce America’s regulatory grasp, to expand capacity unfettered by the symbiotic reliance on the nation-state, and to gain access to low cost labor and untapped markets.

The third rival was International banking. Restructured through the depression, given world status through Bretton Woods, and severed from the bondage of the gold standard from an earlier era, banking was now free to size up each individual, company and nation as to the value of their future capitalist production. Banks could then provide money from thin air to indenture these individuals and entities, earning interest from the sizing up of credit, creation of money, and transfer of financial capital to nations and their businesses that would most likely provide the greatest returns.

As the 20th century progressed the EurAmerican nation-states became increasingly impotent, as financial capitalism assisted the expansion of physical capitalism across international boundaries. The concept of capitalism as the physical means to produce real value was replaced by an abstract goal of accumulating financial capital through the manipulation of physical capital and the production of goods and services.

This newest form of capitalism, unencumbered by the mortal limitations of physical capitalism, gave way to the excessive bubbles of the late 20th and early 21st centuries. Rich with the financial capital afforded them through relatively new central banking systems and relaxed capital formation policies, banks emerged as the purveyor of financial capital to fund emerging nations. Yet unhappy with even the limitations of this newfound financial power, they created financial capital that benefited purely from the manipulation of other financial capital, building one capital formation upon the other. It was this new financial capital system that created the greatest of all capitalist bubbles, the credit default swap bubble, which eventually cracked in 2008.

The Asian nation-states were not encumbered by the laissez Faire checks and balances of the EurAmerican systems. The eastern cultures provided a much closer knit relationship between government, banking, and business that had the potential to create a more competitive economic system if they could overcome the very corruptible nature of mankind that caused America to limit this potential in the first place. Japan tried unsuccessfully to rise but was thwarted by her banking policies. Then the ASEAN nations created a boom-bust cycle during their attempted rise by the unintentional effects of excessive capital formation.

Finally China emerged with a strategy that promised to learn from the dictates of the various factions of feudalism, mercantilism, capitalism, socialism, and communism that had come before. China would put forth a new brand of capitalism, the capitalist-mercantilism model as a means to transfer wealth in preparation for a new phase of her Marxist system. Believing that perhaps Marx was right that the world would have to naturally progress through capitalism and socialism and not be forced through it by the likes of Russia or even its own preceding governance, China first embraced capitalistic special economic zones as engines of growth.

Yet, instead of allowing the divergence of capitalism and statism that occurred in EurAmerica, China enforced a blend of new capitalism and mercantilism of old to grow her nation-state. Instead of adopting the West’s view of property rights regarding intellectual capital, China traded access to her market for access to the West’s innovations and trade secrets. Instead of adopting the West’s concepts of currency valuation to balance trade, China instead turned the West’s newest concept of financial capital on its head, maintaining a contrived lower purchasing power of her currency to create a trade imbalance that mined the West of its financial capital in exchange for cheaply priced goods.

At the right time, when holding Western financial capital was a greater risk than allowing Western interest rates to increase by cashing out her holdings, China began to unwind her positions of the West’s financial capital. China is exercising her understanding that capitalism is the gathering of the means of production and not the transitory collection of financial units of accountability of future production from indentured persons, companies and countries.

Will China inevitably suffer a downturn in her meteoric hegemonic rise? Did America suffer through several great wars including her own civil war, multiple depressions, innumerable recessions, the struggle of slavery and suffrage amongst other strife on her journey? The answer to both questions is of course yes. However, the more important question is how will China fare through this upset in her quest? If America’s founders were right about the corruptibility of mankind, then no race, civilization, or nation-state is immune from that corruption. The test during her upcoming downturn will be whether or not China’s new hybrid of capitalistic and statist governance is up to that task.

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