Tag Archives: Federal Reserve

Keystone is Absolutely Part of a Systems Solution to Global Warming

Empirical evidence shows that taxation impacts societal decisions. Raising cigarette taxes, for instance, significantly reduces cigarette purchases, especially amongst our youth who have not yet succumbed to their addictions. 

America is now addicted to oil and other carbon energies. However, unlike cigarettes, our true addiction is to energy, independent of whether it is created by release of carbon into the air. Albeit, our energy purchases are influenced most by lowest near term cost, without considering externalities and without considering long term payback on capital. For these two reasons, carbon based fuels continue to be our addiction. 

Could taxation cause our nation to choose alternative fuels such as wind and solar? The answer drawn from empirical tests is yes. However, the idea of carbon tax is not politically viable unless applied within a system solution. System solutions typically do not occur in a political divisive environment for they require compromise of political platforms that are historically based on isolated solutions. 

For instance, the Democratic Party is opposed to the Keystone Pipeline, saying that it endangers a major aquifer, but more importantly because it opens up an entirely new source of carbon that can reign havoc on the planet’s ecosystem. As an isolated solution, the liberals support a worldwide carbon exchange or a carbon tax to make carbon more expensive than alternative fuels. 

The Republican Party, on the other hand, states that global warming is a farce, that the Canadian tar sand oil will come to market whether or not it comes to Texas to be processed, that the pipeline will create and save thousands of jobs, and that the oil will dramatically reduce our dependence on Middle Eastern oil. As an isolated solution, they say build it. 

Both arguments have merit but neither seeks a viable, systems solution. Each party seeks the benefits their constituents want but neither seeks solutions to accomplish an optimum path. System solution achieves Pareto optimization but only when both parties acquiesce to what is best both for the nation and for the environment.

Ultimately, science will win out with global warming. Whether global warming is being caused by man or not, man can slow the rate by reducing our carbon footprint. Therefore, the timing our our actions is all that is really in question. Will we react now by transitioning to renewable energy as part of a system solution, or will we react later to the violent nature of a changing environment? The decision rests with whether or not our politicians will accept their fate of compromise or whether they will be forced by crisis to act.

Ultimately, tar sands oil will come to market for oil prices now support it. While a pipeline to the western Canadian coast can be temporarily blocked awaiting a permanent outcome in America, Canadian citizens cannot hold off forever. Yet timing is such that the pipeline will be built in America, even if not until the next Republican president is elected. Obama’s best strategy is to leverage the pipeline for a system solution that provides the ends if not the means of liberal goals.

A system solution recognizes that the Keystone pipeline is part of an optimal solution. Delaying its completion does nothing to prevent carbon emissions and only hurts jobs. The argument about aquifer endangerment is simply a delay tactic of fear. In fact, shale fracking has magnitudes more potential to harm aquifers, yet our country’s economics will be dramatically changed during the next two decades by dramatic increases in shale oil production.

Interestingly, shale proponents are Keystone opponents not due to environmental reasons but due to competition for oil refinery pricing in a flooded market. Keystone delays are more about politics of pricing than about politics of pollution. Politics makes strange bedfellows.

Given that tar sands and shale oil are now going to be a reality, what then is the systems solution? Liberals, in isolation, suggest that raising the cost of carbon fuel is the answer. They suggest that higher carbon energy relative to alternative energy will change buying patterns and they are right, but at what cost to the economy? They would answer that economic losses are a small price to pay for the sake of the planet, but can you see how this is not a system solution by that answer?

An international Kyoto exchange solution is not part of a national systems solution for it only changes the location of carbon emissions but not the level. However, a carbon tax can be part of a systems solution, or even a national Kyoto type exchange. Yet in isolation, neither are politically viable for they would raise the cost of American business and would adversely impact GDP and jobs.

As part of a system solution, a national exchange or carbon tax could be part of a system solution if revenue neutral. If a business or individual’s net taxes and net energy costs remained the same when switching to alternative fuel, their addiction to carbon could be broken. Tax collection for both business and individuals could be transitioned from income taxes, as an example, to energy taxes that allowed for no net tax increases. Yet even if neutral taxation were part of a system solution, the overall cost of alternative energy, given our capitalist system, is still be higher.

A technical solution to reduce the cost of alternative energy below that of carbon fuels does not yet exist in our capitalist system and may not until depleting carbon fuels begin to run out, raising their costs relative to alternative energy. This of course is not likely for a half a century given new horizontal drilling technologies. Therefore, the system solution involves changing the way we finance and benefit from alterative fuels.

The capitalist system of benefit evaluation depends on the return on capital invested. Unfortunately for alternative energy, there is an abundance of other investments that pay investors a much higher return than ether wind or solar power. However, the cost of alternative energy, in the absence of capital requirements, is less costly in the long run, even without factoring in externalities such as global warming and deleterious health effects of air pollution. But we do have a capitalist system.

Capital returns signal what society values most. In a capital constrained world, society would rather employ capital to manufacture iphones than to saving the planet. But are we really capital constrained? By law, we have a Federal Reserve, a money cartel that constrains capital. And we do as a nation, pass all money formation through this constraining cartel. Yet, isn’t capital constraint really a fiction?

Individuals and businesses also make their decisions based on return on capital. For instance, an individual is deterred from investing in solar power because the payback is too long. If an individual sells their house, their initial investment in solar power is not reflected in a higher selling price, and therefore the buyer gets the reward from the orignal home owner’s investment, while the original owner doesn’t see the return of investment if they sell. But isn’t this bad choice under current financial paradigms also a fiction of our financial system?

A system solution could be devised to provide unrestrained capital for environmental investments. A means could also be created to make the investment in environmental solutions portable, letting original home investors, as an example, recoup their capital upon home sales. The combination of these two financial changes could make alternative energy part of a viable system..

Therefore, a system solution can include building the Keystone pipeline, creating pipeline jobs, ensuring America’s carbon independence, transitioning our tax system to favor alternative energy while keeping the solution tax neutral, creating an unrestrained government capital solution and creating a portable alternative energy investment return for individuals and businesses.

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Why are Our Candidates not even Mentioning America’s Addiction to Candy???

I find it interesting that neither party or candidate has yet to mention the sequestration looming over our country. Will we make it the next three weeks without even a hiccup yet alone a chorus over this critical point that could thrust our nation into yet another crisis?

As a child, I would ride around on my banana seat bike collecting coke bottles out of ditches and then I would pedal speedily to the neighboring town to cash in bottle deposits for enough change to buy some sugary delights. I would peer over the candy counter of the corner store, carefully making the decision of which smorgasbord of sweets would get me high for the long bike ride home.

My choices of which candy to buy were limited for the cash I collected from discarded coke bottles along the side of the road was quite small and not nearly enough to satisfy the temptations that candy counter presented to me. Imagine the belly aches I would have had if America had been even more of a throw away society in the 1960s and I were able to pile my trash bag full of bottles?

Unfortunately, America is not limited today by the amount of coke bottles discarded alongside of the road. Our economic system is fed a limitless supply of coke bottles from the Fed. We are able to walk up to our neighborhood store and buy candy to our heart’s delight, enough to feed the desires of even the grandest of candyholics. America is on a spending spree that will only be contained when our childlike consumerist obsession ends in great sickness and confines us to intensive care. Yet this corrupted system of consumerism isn’t an illness that only befalls America. It has most certainly engulfed the West and promises to spread like an endemic virus to the entirety of the world.

In January, doctors will assess America’s fiscal health as we fail to stop the sequestration and will find us a very sick patient indeed. Yet the sickness that has infected us has infected our brethren nations as well. This health checkup that will force the credit rating of America downward once again, will be an indictment of the West’s indulgences, the results of which will spread rapidly and uncontrollably if not contained. It is as important for America to hear what our candidates are not talking about as it is understand what they are saying.

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America’s Financial Porn

I remember the seedy thrill the day my buddy took me into his garage to pull out his dad’s stash of Playboy magazines. It was the 60s and we were but eleven year old boys. Yet I knew that day that I had become a voyeur into something that was at once both titillating and dreadfully wrong.

Though the thrill factor dulled as I aged, I do recall other events that triggered the same eerie mix of raw emotions within me. It wasn’t until after the smell of burnt timbers left the interior of our car minutes after passing a tenant building engulfed in flames that my excitement turned to shame. My mother let out a gasp of horror as she slowly passed over the rail road track and our family all witnessed this old building lit ablaze. From the back seat, now thirteen, I was still awed by the sight of it. Moments later I realized that what had titillated me was the same monster that had destroyed those poor renters who shockingly watched their life’s possessions turn to ashes.

Quite removed from the magical aura of first emotions, as a young man I still once again felt a confusing haze when witnessing the collapse of the Soviet Union. It was unsettling watching Mikhail Gorbachev being consumed like a noble grasshopper enshrined in swarming ants as the Putin mob emerged from the fall. The collapse of this nemesis empire emoted feelings of both grotesque forewarnings and of patriotic sentimentalities. And my voyeuristic curiosities were once again amazed as I witnessed how the wealthy of even an extremely socialistic society would circle the wagons to protect their own.

And now I can’t help but watch in awe as America follows the Soviets down the Afghani trail and our financial thugs manage to pull the strings of the “Federal Reserve” (as if calling it Federal whitewashes its role as the elite mob’s hit man). Once again, I find myself in my buddy’s garage, at once both titillated by what crudeness is possible of mankind while at the same time drenched in the filth of America’s financial porn.

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Democracy is Foiled Again

In the pre-dawn of reaction to what will inevitably be enforced austerity, the voice of the occupiers was easily drowned out by a few batons. In its stead, 2012 will be a year of uneasy impatience on the part of the American people. Neither party has thus found necessary the urgency to step into the political arena with any real choice. Both parties have been convinced by their benefactors that their chances for winning or maintaining political power are acceptable if they simply put forth status quo policies.

Neither party feels the need to buck their financial backers with bold choices for middle class America’s future. Instead, the Rupublicans, hoping to hand the 1% tax savings and regulatory loopholes, are content with feeding on the margins of “don’t vote for the party that continues to give you 8.2 percent unemployment”. The Democrats, recognizing that those same financial backers are this year telling them to be content with holding onto a majority of the seats they still enjoy, will not rile America’s elite and instead will rely on “women’s bodies will somehow be ripped from them and young ladies will be forced to turn once again to back alleys if America doesn’t give us four more years of tepid economic execution.

2008 was a breakout year of the youngest voting bloc. Sensing the gloom of their financial future, they voted for change. 2010 was a backlash toward the newest generation by the baby boomers pushing back that government costs and services must instead be cut. Both looked to each other for concessions instead of requiring the silent financial majority to participate in the discussion. 2012 is a year in which the 1% has instructed a bloated Fed to find the perfect balance before the storm with further stimulus.

Slight uptick in housing and jobs has confused Americans into unnerved complacency. Both parties speak of patriotism and promise a better tomorrow. Like Charlie Brown, the American public will once again hope that Lucy will not pick up the football to let us fall on our backs dejected.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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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)

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Filed under American Politics, China, Federal Budget, Federal Reservre, U.S. Monetary Policy, 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

QE2 Has Precipitated the End of Post-Bretton Woods Money

The worldwide economy runs on a Post-Bretton Woods concept of money. Central banks create enough new currency out of thin air to provide adequate money velocity. This new money is then inserted into the banking system that then lends it out according to the public’s credit potential to pay it back with interest. The public then multiplies money through purchases of goods and services that create economic output and that redistribute currency back into banks for relending to other members of the public who demonstrate a viable ability to repay.

When an economic shock stalls the money engine, it must be restarted while the economy is on a glide path prior to freefall. When money supply is temporarily pulled from the economy, loan creation that multiplies money is temporarily halted, shrinking the supply of money required to pay back existing loans. When this occurs, although the public still has the skills required to create value to pay back loans, it loses access to money to repay the loans.

If temporary money supply disruption is allowed to fester, enough unpaid debt cycles accumulate to create collapsing credit, toxic debt, shrinking money supply and deteriorating markets. When the economy stalls, one of two government interventions must occur to reverse the trend and right the world’s money growth. Either credit limits must be loosened to allow for borrowing to cover unpaid debt plus future growth, or demand must be increased to create enough credit under existing credit conditions to cover unpaid debt plus future growth. Which process is most viable depends on the extent to which the markets have been allowed to fester.

In the first days of the Great Recession, banks knee jerked in response to collapsing real estate and slammed the credit market shut. Worldwide central banks quickly responded by attempting the first of two interventionist tools. By infusing currency from thin air, they hoped to provide cover for free-falling real estate prices, and to re-establish credit into the market. Had banks re-established loose credit, businesses would have bet on an increasing economy and would have used the new credit to increase production, thereby maintaining employment and multiplying money. However, the toxic asset load from the housing Ponzi was of such historic proportions that central bank loans did not repair bank balance sheets enough to incentivize re-establishment of credit. Without forgiving insolvent bank debts that would have correspondingly collapsed the world’s money supply and depressed world markets, governments indefinitely stalled the traditional banking engine of money growth.

Each month that banks remained functionally insolvent, increased business risk. As money supply collapsed, demand decreased correspondingly decreasing the willingness of businesses to bet on producing supply before demand. When the risk chasm became too great, the economy stalled and then collapsed.

Government Keynesian central planners then attempted a correction through the second of their interventionist tools. However, the stimulus packages they devised to attempt to bridge the demand gap created artificial demand in too concentrated pockets of industry and created too small an artificial demand to restart an economic engine that requires the credit and faith of every able consumer, worker and business in the world pulling on the ropes of credit derived money multiplication.

Both traditional methods of reversing money collapse, central Keynesian planning and central bank capital infusion, proved ineffective. Without effective worldwide government and central banking tools, festering turned parts of the world’s economy gangrene. No single government had the ability to re-start the world’s engine, and no worldwide consensus of political will existed to simultaneously and aggressively create the size of artificial stimulus required.

In desperation, the United States Federal Reserve has embarked on an unrealistic attempt to float the entire world’s money collapse by inflating the world’s Post-Bretton Woods reserve currency through what it coined “Quantitative Easing”. However, any attempt by one country, even the United States, to singlehandedly recover the world’s economy, even with an untried policy as aggressive as quantitative easing, has fluidly dissipated to fill the world’s credit gap without the desired stimulus effect. The temporary momentum created through massive QE creation of dollars out of thin air allowed for a temporary, mild upward glide of the economy, but anticipating the June, 2011 end of QE2, the world adjusted its glide path and its real economy is beginning another freefall.

The Post-Bretton Woods system of worldwide money supply being introduced through fiat currency backed by the simultaneous introduction of credit enhanced value creation has, in effect, been severed. Now that the United States has raced ahead of the world’s traditional money supply, the Fed must either continue down the slippery slope of additional quantitative easing leading ultimately to the collapse of the dollar, or revert to an alternative, non-traditional, never before tried fiscal or monetary tool, to escape from its trap. Any alternative tool will invariably destroy the world’s faith in the dollar as the reserve currency, and will mark the end of the Post-Bretton Woods concept of money.

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Filed under American Governance, Federal Reservre, Foreign Policy, U.S. Monetary Policy, World Sustainability

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

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

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

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

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

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

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

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

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

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

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

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

Fed Chairman Bernanke has to Choose between Three Ugly Paths

One of the fallacies of gross domestic product (GDP) is that it doesn’t differentiate between those activities that advance a society and those that do not. Over a period of centuries, as nations have increased their GDP, they have increased the life span of their citizens, a valid argument for an investment of a people’s national effort to advance their society. Over the last three decades while America has suffered epidemics of obesity, diabetes, heart disease, Alzheimer’s, and cancer, dramatically reducing our national health, our share of GDP for healthcare has escalated, obviously a bubble by societal advancement standards. Similarly, while trillions were spent on housing stock during the past decade, the resulting bubble measured as a grand GDP, yet it actually produced excessive, obsolete housing and a mountain of debt created money that collapsed as the bubble popped.

While Japan’s tragedy will undoubtedly produce jobs for many and wealth for a few as it registers a higher GDP for Japan and her suppliers, all of the expended labor to rebuild what once was is just that. The labor expended is labor that otherwise would have advanced Japan beyond the point of which she will merely return. Similarly, the world’s finite commodities will be lessened just to bring her back to square one. After a period, Japan’s infrastructure will return as a result of expending hundreds of billions of additional debt. However, the leaking nuclear reactors will damage her real value creating GDP for decades. Brands from fish to cars to computer chips may well be negatively impacted by leaking radioactive isotopes.

Japan is a nation of savers and will ultimately recover. America is a nation that is struggling to even determine what marginal debts to expunge from its massive core debt. Unfortunately, as a result of our inaction, Bernanke has a lose-lose choice to make regarding monetary policy. His three choices for quantitative easing no longer can increase America’s real GDP but could destroy it considerably.

If he actually stops quantitative easing and contracts the money supply, as he earlier promised, our economy is going to tank, and inflation will still continue to erode our purchasing power. With a falling stock market, rising consumer prices, lower wages, lower home prices and higher unemployment, Bernanke will singlehandedly give a landslide election to the Republicans in 2012.

If he continues with QE3, he will stave off recession and buoy stock prices for a bit but he will commit America to a path of accelerating inflation. He may be able to postpone a crash until after the election, but without a disciplined monetary policy and implementation, the choice of when America crashes, as Standard and Poor’s has alluded, will be taken from him as the world financial community imposes discipline on America.

If Bernanke simply quits QE2 and begins to slowly raise interest rates to keep pace with the EU, as is his stated course, he will give Congress time to act boldly before the world reacts. But his sacrifice will be for not because Congress won’t follow his lead. He will certainly douse the already tepid economy. With no hope of recovery, and no signs of life from Congress, America’s middle will grow restless and her uberwealthy will use the calm before the storm to race offshore. America’s enemies and opponents will act boldly during our internal distraction.

We now ask Bernanke to decide our fate after a generation of our decisions placed this burden on him. WWII led to too many baby boomers who believed our parents when they told us we would have a better life because of their sacrifices. Determined to create that better world, we continued to fight a two front war against the communists and poverty while choosing to create wealth from ideas instead of factories, and implementing our vision of schools that would fail to graduate a third of our would be thinkers. If our parents created wealth in houses and the stock market, we would create more wealth by borrowing to invest in bigger houses with walk in closets, and in bulging stock markets whose mavens convinced us our borrowed funds would create more wealth in overseas factories than in American workers.

Sure, to have it all, we would have to agree that our government should borrow almost as much as we contributed through taxes to pay for lost jobs, poverty, and a military so gargantuan that no-one who picked on our parents would ever think to pick on us again. Our concepts of wealth creation worked for some, but for most… not so much.

And now that our failed middle aged ideas have threatened to end our dreams of creating a better world through an endless expansion of the money supply, we have pulled the slot machine handle with our last three quarters of Stimulus, QE1 and QE2. Peaking through our government issued rose colored glasses, we hoped to see but failed to get even a single cherry.

After watching our post war babies mature into elected officials who failed to cut even 100 billion from this year’s budget deficit of 1,500 billion, we must now solemnly ask Bernanke to make his decision… in this moment…. just after his first ever Fed press conference. Please, Dr. Bernanke, choose what’s behind door number 1, door number 2, or door numberrrr 3.

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Filed under American Governance, Federal Reservre, U.S. Monetary Policy