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)

How Could America Have Squandered the Gold of Ancient Egypt and the Incas?

Gold has been the store of human endeavor since ancient times. While each ounce of gold can hold only a finite amount of labor, perhaps 1,000 hours in non-industrialized nations, some of the gold locked in Fort Knox has touched millions of hours of labor from civilizations untold. For gold’s greatest benefit, as with all money, is not its storage of value but its lasting ability to temporarily hold value in the exchange of non-coincidental barters.

For millenniums, money was the interchange commodity for simple trades as between farmers and herders. The farmer gave the herder a coin in winter for meat, and the herder returned the coin at harvest time for a bushel of vegetables. Farmers and herders relied on the value of gold because precious metals took effort to mine and purify, were tested for weight and purity, and could be stamped, coined and carried. With such a universal appeal, precious metals became synonymous with storage of value and dominated the world’s choice for money.

At one point, America held within its coffers 70% of all the gold that has ever been purified from ancient Egypt and the Incas through modern times. But it was our misjudgment as to the true value of gold that robbed our forts of ingots and brought America to the precipice of ruin. As history’s greatest superpower, why did America not learn from ancient empires that tumbled down the path to insignificance, and why did we allow our government to amass more debt than has ever been owed by every other soul that has ever lived?

1964 marked an accelerating turning point in America’s misfortunes. In 1964, President Johnson was elected to enact Great Society reforms just as America was increasing her involvement in Viet Nam. Baby boomers were entering the work force just as multinational corporations were beginning an upsurge of direct foreign investment and the transfer of jobs to overseas markets. America’s use of oil was peaking just as political undercurrents were coalescing around oil as a geopolitical force.

Six simultaneous assaults on the American dollar joined to fuel the American financial malaise; a lack of fiscal adherence to a gold standard, military excursions in support of American interests, funding of the great society, a lack of will to respond to oil cartels, multinational corporate indifference to the plight of the American worker, and a financial industry gone wild.

America did not Steward Its Gold

Even though, for 600 decades of recorded history, gold was the stable base of transactions, the world has temporarily abandoned this gold standard for the last 5 decades. Our abandonment was not because of the world’s enlightenment that gold is an unnecessary physical impediment to the electronic age of finance. It is because, with no viable alternative, the world has clung to the hollowed out American dollar that inflated beyond the discipline of the gold standard.

In the 20th century, industrialized nations twice attempted to redistribute wealth through great wars that left all of Europe bankrupt. Afterward, America held 70 percent of the world’s processed gold, and became through Bretton Woods the gold-backed, paper money guarantor of the free world. During the next 15 years, America squandered her gold to cover currency imbalances, until by 1960 the dollar lost its legitimacy. Interestingly, it took Spain over a hundred years to squander its 20,000 tons of Inca gold.

From 1971 until now, America and the rest of the world have had little choice but to allow our currencies to float, giving up the imperfect discipline imposed by a gold standard. As a result of America’s freewheeling monetary policies, it is now encumbered by a spend drunk Congress and an obliging central bank that have conspired to reduce the value of America’s 1971 fiat dollar to a mere 17 cents today.

Scholars suggest that the reason for the dollar’s fall was the inevitable Triffin dilemma which requires America to carry a current account deficit to provide the world with reserve currency. Yet debt financed trade imbalances are not required to provide reserves. Reserves could just as well have been sold to other countries as given to them through trade shortfalls. No, America’s post war monetary policies quickly gambled away the historical hegemony that was bestowed on us at the end of two world wars.

This five decade hiatus from a gold standard will prove only temporary. Gold’s appeal as the engine of financial growth has not been lost on China. At the end of World War II, U.S. gold reserve was over 18,000 tons but has since reduced to 8,000 tons. China is executing a strategy of purchasing approximately 250 tons per year and, as the world’s largest producer of gold, producing 320 tons per year, and now has surpassed all but the U.S. as the second largest holder of gold with 2,000 tons.

Military Excursions Drained America’s Coffers

Without the ability to borrow vast moneys, earlier civilizations relied on warring, exploration and conquest to quickly expand their stores of gold. This strategy was not without consequences. To fund war, Rome engaged in coin clipping and smelting with lesser metals to reduce size and value of denarius in attempts to pay soldiers with coins of veiled value. After 200 years, the Roman denarius reduced from 100 percent silver to only 5 percent just prior its army leaving Rome unprotected from invasions and fall. Interestingly, it has taken less than 100 years for America’s dollar value to plunge that amount.

As all empires have before, America found that its wars must be financed with inflation. The Fed supported an excessive expansion of the money supply (dollar clipping), creating debt to fund each of America’s wars. The Civil War added 2.8 billion. WWI added another 21 billion. WWII created another $216 billion. The Korean War was financed with taxes. Viet Nam increased the debt $146 billion. Cold war expenditures cost 1.6 trillion. The first Gulf War cost a mere $7 billion. In contrast, Iraq cost $786 billion and Afghanistan cost $397 billion. Not including the 700 foreign soil U.S. military bases that contribute greatly to America’s balance of payments deficit, her major wars added a total of $3.4 trillion dollars of carried debt.

The Great Society Became the Broke Society

President Johnson outlined The Great Society in his State of the Union Speech on January 4, 1965, saying “The great society asks not how much, but how good; not only how to create wealth but how to use it.” Notwithstanding the good that was done by these programs, they drained America’s future potential GDP growth and the money that would fuel her economic engine.

46 years later, Great Society initiatives touched education, health, urban renewal, transportation, arts and culture, Medicare and Medicaid, the Food Stamp program, Project Head Start, The National Endowment for the Arts, The Corporation for Public Broadcasting and federal aid to public education for a total expenditure of $9.5 trillion dollars.

America’s Addiction to Oil Made Us Slaves to the Oil Cartel

Oil enabled powerful nations to create a world order that flowed money from agrarian nations to those that controlled hydrocarbon powered machines. Oil was the catalyst that propelled the 20th century’s world leaders into fortune and thrust the world into war. Oil is a finite fuel, controlled by a few nations that are barely separated geopolitically and have common ancient civilizations and modern goals.

Already struggling from Viet Nam and Great Society debts, America found herself the object of a politically motivated oil embargo in 1973. Fuel prices soared and supplies tightened to cause the 70’s stagflation in America. From then until now, America has not found the political will through fluctuating fuel prices to organize an intervention away from oil dependence.

Since the embargo, America has consumed 250 billion barrels of oil at a total cost of $11 trillion dollars. This debit line in our national budget has only one trade, oil for dollars. Had America given our energy war a smidgeon of the effort of placing a man on the moon, we could have easily reduced energy consumption by 20 percent for the same productive output, transportation, and environmental comfort, and saved 2.2 trillion dollars. Surely, the costs to achieve such a modest conservation would have to be netted from the gross, but those costs could have been internally generated and added to America’s GDP.

America’s Multinational Corporations (MNC) were Indifferent Citizens

While America fought the war on poverty, her political leaders surrendered to the war on American jobs. Certainly, with the relative world peace supported by America’s military, globalization was bound to occur. With the risk of direct foreign investments reduced, the last five decades have unleashed an acceleration of money flow and intellectual capital from America to other countries.

While over 4 trillion dollars have been invested overseas by American uberwealthy, America has also been a receiver of investment, so that the net outflow has only been 0.7 trillion. However, the loss of America’s wealth and jobs has been much greater, contributing to a stagnant workforce where one in four able Americans has been idled. MNC direct foreign investment has indirectly added $4 trillion dollars to America’s debt.

The Fed Financed MNCs and Saved Banks but Failed to Keep America Employed

During most of the 17th century, Europe embroiled itself in wars that killed 30% of its population. Some of the world’s largest banking houses failed as royal debtors defaulted, including England in1672. Finally, in 1694, the king agreed to give the Bank of England authority to print all of England’s bank notes in exchange for bank loans to support his war with France. The newly created Central bank, having transferred its risk of loss to British subjects, profited simply by printing money for the monarchy. However, this excess printing did not stop the emptying of England’s coffers.

After America revolted to escape the monetary control of the Bank of England, Hamilton, the United States’ Secretary of the treasury, proposed a charter to a create a similar central bank for America. Against Thomas Jefferson’s insistence, the First Bank of the United States became the precursor to America’s Federal Reserve. Some say major banks manufactured a bank run in 1907 to destabilize the Treasury and instigate support for the Federal Reserve Act of 1913 establishing the Fed, a quasi-agency, private enterprise with a quasi-public board.

From the establishment of the Fed until today, many have argued that major Fed decisions have enriched banks at the expense of the American People. An example is the erroneous decision the Fed made to keep interest rates high for an extensive period of time as America and the World clearly were entering the Great Depression. Also of heated debate was the decision to bail out the banking industry at the start of the Great Recession.

Nonetheless, Fed decisions combined with lobbied efforts to reduce financial regulations, allowed Wall Street to orchestrate multiple financial bubbles that consecutively destroyed value in American portfolios. It cost taxpayers $88 billion to bail out the S&L crisis. The boiling and bursting of the dot.com bubble evaporated $5 trillion dollars. Notwithstanding that the credit default bubble lost the world $30 trillion in value, it has thus far cost America $51 billion in bank bailouts, $787 billion in stimulus, $1.5 trillion in quantitative easing, $5 trillion in lost property values, and with over 5 million bankruptcies and 5 million foreclosures, ruined trillions of dollars worth of wealth generating credit.

In Conclusion

Adding up the numbers versus our $15 trillion dollar debt, it is amazing that the resiliency of the American economy is thus far holding ground:

10,000 tons of gold: $0.5 trillion
Wars: $3.4 trillion
Great Society: $9.5 trillion
Lack of Energy Policy $2.2 trillion
MNC DFI: $4.0 trillion
Banking Debacles: $12.4 trillion +
Total $32.0 trillion

The idea of currencies unsupported by gold reserves is not in itself troublesome. Whether Crowley shells, tally sticks, or paper money, if the market has trust in its role as a place holder for non-incidental barter, any money will do. However without the external discipline imposed by a gold standard, America must instead substitute gold’s imposition for a President strong enough to stand for American sovereignty, a Fed subjugated to defend a stable currency, a Congress selfless enough to impose its own financial discipline, and a willingness of American businesses to defend American jobs. Otherwise, America’s five decade reign over this short lived worldwide fiat money dollar system will come to an end.

Is Bankruptcy in America’s Future?

Pat Robertson, as controversial a televangelist as he has been, ran for president of the United States in 1988 with a platform of a constitutional amendment for a balanced budget. America’s debt in 1988 totaled a “mere” 2.6 trillion dollars. One of his controversial presidential platforms was a call for the Year of Jubilee, a biblically historical reference that every 50 years, all debt was cancelled, all land went back to its original owner and all slaves were set free.  Mr. Robertson stated that the Year of Jubilee would be a less harsh way to deal with depressions of capitalism for the United States.

His solution for the path he predicted would ultimately lead America to the precipice that we now face was a Year of Jubilee for America. The idea was such an anathema to our firm societal view of debt repayment that it branded him a marginal candidate and cost him the control of his media empire.

Eleven years ago, after 24 million petition signatures were gathered worldwide for debt relief, the World Bank and IMF participated in Jubilee 2000 and forgave debt of approximately $90 billion to 22 of the world’s poorest nations, freeing them from a form of indentured servitude. This foretelling of restructuring of world debt gave credence to Pat’s solution and vindicated his thoughts, but could not begin to support the idea that America might join the ranks of defaulting nations.

23 years after Mr. Robertson’s suggestion, America has a much different social psyche. While a few percent of our elite have prospered during the past 23 years, many of Americans have struggled. When Wall Street decimated much of the only vestige of the American Dream in which many Middle Americans could participate, home ownership, it changed the bargain between classes.

A great many Americans are now choosing to walk through the social stigma of bankruptcy and foreclosure and to self direct their own personal Year of Jubilee. If this social movement takes hold, a new “Pat Robertson” claiming America’s biblical right for a Year of Jubilee 2016 could gain the White House, defeating the financial defenses of our political structure, and catapulting America into a nation that considers default as a valid option.  It is critical for our nation, that our political leadership presents a fiscally responsible budget, supports an economy that will provide jobs to all Americans, and restores confidence in the democratic and capitalistic contract that has been the basis of wealth distribution for our society.

We Can Regain Jobs That Left With The Multinationals

Early on, our nation made the strategic decision to outpace all others in military superiority. With a military budget that now exceeds all other nations combined, America declared and exercised our right to quickly defend the sovereignty of our allies from over 1,000 U.S. bases that extend our dominance throughout the world. We pursued our goal with such steadfastness that we are now the sole super power on earth. Our military influence has created a worldwide economic bastion that has allowed all nations to far surpass the economic output that could have been produced had not such a peaceful expectation existed.

While this exertion of power created great peacetime dividends for this country, it also created unexpected results, the birth of multinational corporations, or “borderless nations”. Our strategy of military dominance created a much safer, stable world that lessoned the risk of U.S. based companies investing abroad. With risks lessened, businesses could more easily justify moving traditional industries overseas. Unprecedented peace allowed multinational corporations to gut factory towns like Detroit, Youngstown, and Pittsburgh.

While our manufacturing strength was slowly eroded from our shores, our citizenry was lulled into the belief that our future was sound by the successively reassuring waves of the savings and loan bubble, the stock market bubble, the internet bubble, and finally, the Wall Street derivatives bubble. By the time the suds cleared, our nation was left without a significant means of traditional production. While we were being seduced into the belief that our country was financially sound, many of the trade secrets, core skills and financial wealth of corporations had been shifted to other countries.

Meanwhile, our citizens believed that the bubble value of our homes and stock market portfolios would support our needs to consume. Instead, when the bubbles finally stopped popping, we found that our consumer debt was of historic proportions and that our federal, state, and local governments had ballooned to consume bubble inflated tax revenues and were awash in deficits. We now have the unenviable position of being the greatest debtor nation that has ever existed.

While it will be painful for all to reverse this trend that threatens to quickly topple America from its century of hegemony, acting decisively with the right prescriptive tools, we can decide that our nation will not endure a decade of languishing high unemployment. However, if we are to escape the fate of our grandparents, government must partner with American business to create historic advances in innovation and productivity.

A partnered solution that can accelerate our country toward full employment is my voucher plan. It replaces extended unemployment payments with hiring vouchers. Small businesses can hire voucher employees at their unemployment rate. In return, voucher employees can work twenty five hours per week and receive the same pay they would have received through unemployment. The federal government can then reimburse employers the employees’ wages without increasing the federal unemployment budget.

A few benefits include: Employees learn new skills and can continue to seek full employment. Employers lower risks of hiring new employees, spur innovation, and reduce prices of goods and services to compete in the global market. Government supports job growth through direct infusion of dollars into small businesses, and lets the free market determine how to maximize resources.

This idea can employ all Americans now, and can move many from the sidelines of our economy onto the field of American ingenuity and global competitiveness. I ask your readers to share with their representatives thoughts about this voucher plan in hopes that a leader might champion its concept now when we need it most.

 http://www.youtube.com/watch?v=8yUhBBxHGTU

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