A Triumphant Cake for the Return of China’s Empire

When making a cake for a great celebration, the baker uses the same ingredients as when baking a small 10” diameter cake, he just uses a lot more. When the world first saw China stirring up batter, they thought somehow this poor country surely was beginning to make a little 10 “ diameter cake. Now that they see the size of China’s great celebratory cake, some view it as so great that it could feed all of their cake eaters back home five times over. Surely this cake must be too big and therefore China’s baker must be on the verge of closing shop for having so foolishly made such a big cake. For those that still think China’s cake is too big, they just haven’t yet grasped the size of her guest invitation list.

When China began implementing her modernization plans in 1978, she hadn’t planned a 10” diameter cake. She planned a cake for the size of China. And it wasn’t one of those cheap, store bought cakes that we would have expected her to bake given her finances in 1978. It was one fit for a triumphant party celebrating the Empire’s return. In fact, the cake would be so big and would use so many ingredients that parties back home would have to shrink their party plans. The world’s storehouse would not have enough ingredients to throw elaborate parties for both China’s guests and the world’s.

No matter, if there was one thing China learned over 5,000 years, it was how to plan a celebration. China planned her strategy to ensure that on the day of the big celebration, she would have enough ingredients. This certainly meant she would have to manage party conflicts with those back here at home at some point. However, if parties back home didn’t have cake factories to make their cakes, they wouldn’t be able to compete at the appointed hour of China’s celebration, and if they didn’t have cake factories they surely wouldn’t be competing for ingredients at the appointed hour. China would implement her plan to ensure her guests would have their cake. But, she needed to implement first things first.

Reviewing her strengths, China noted she had plenty of baker’s assistants. They simply needed to be trained. She would definitely need more factory space to make the cake and more roads to get the supplies to the factory. And because she didn’t have all needed ingredients in-house, she would have to make arrangements with cake ingredient suppliers to ensure that she would get the ingredients even if others competed for them. Critical to her success, China needed baker’s secrets to make such a great cake. Most importantly, because China had many more bakers than she needed but not enough money or know-how, she would need to trade her strengths for the others.

With strategies set, China set out to implement her plans. She first told all comers that they could build a cake factory in her special cake factory zones, and that they could bake cakes for all of China’s people. With the announcement of this cake bonanza, Bakers came from all over the world for the chance to make cake for China. When asked how big to make the factories, China said to make them ten times larger than they first imagined. The bakers would need access to money and lots of it.

Oddly, While China had such big plans for cake factories, no one in China could afford to buy such magnificent cakes, and no one in China knew how to make them. So if the baker wanted to make cakes in China, the baker would have to teach Chinese baker assistants the secrets to baking a cake. The baker would also have to go back home for bank funding and for free markets to sell the cakes made in China back at home.

Of course, when presented with such a sweet deal, the banker could not pass it up. Together, the baker and the banker convinced everyone back home of the sweet deal from China. China would sell the cake for half the price of home prices so that everyone would be happy. The baker could get a great factory, at least one in China, and had the hope of selling cake to the Chinese some day. The people back home could get a cake that tasted just as good because the baker used his secrets in China to make the cake. Of course the financier back home was happy. Increasingly, cake factories back home seemed to be having trouble selling cakes at twice the price of Chinese cakes, and with cheaper prices and free markets, China cake factories promised great banking returns. The only people that seemed upset were the baker’s old assistants back home who no longer were employed to bake cakes, but no matter, everyone else was happy.

China was happy that her plan was progressing. She would get a grand cake factory that could be used for the great celebration. China could also begin to build relationships with all the worldwide cake ingredient suppliers. She now needed to spread the icing for the next layer of the plan. The baker assistants back home were the ones buying the cakes made by the cake factories in China. If they didn’t have a way to pay for the cakes, all would be lost.

China knew, when planning for her modernization party, that in order to make a cake big enough for the triumphant celebration, she would need so many factories, roads, ingredients, and educated cake bakers that it would take all the expendable money in Europe and America combined to build them. In fact, it would take much of the world’s stock market value and even the equity in people’s homes if she were to be able to throw a truly triumphant party. She needed the baker assistants back home to borrow from their savings, their homes, and their future earnings if the plan was to succeed.

No worries, China had studied capitalist boom-bust cycles of the past. She knew it was very possible for bankers to create the boom once again, in the exact same manner as Europe and America had fallen prey to many times before, and that during the short boom, she could fund her party. Given the opportunity to fund all the cakes in China, bankers back home repeated their very sins of the past. Their patterns had remained predictable for centuries, reacting in a frenzy every time a cake bonanza presented itself. This time they dropped interest rates, made crazy loans, created IRAs and 401 Ks, and escalated not one but three bubbles to draw out as much money as they could to fund as many cake factories as they could in as short a time as they could.

The feeding frenzy occurs because there is only so much time the batter can rise before it falls. When the bubbles finally popped, China had her cake factories, all the baker assistants back home had borrowed more than they could ever pay back, and all the bankers back home had made enough money to live happily ever after.

Now came the appointed hour of the triumphant party for the return of the Empire. By this time, China had been building ingredient relationships unabated, because the bakers back here at home no longer bought baking ingredients. China had built the world’s fastest, largest most efficient ships to bring all the needed ingredients to her shore. She had built massive highways to transport the ingredients to her impressive, massive, modern cake factories. She had educated all her people to fill the ranks of cake bakers. She had saved historic amounts of money from the cheap baked goods she sold to the baking assistants back home and now could buy all the ingredients she needed.

But wait, what about the party back home? Now that it was time for her great celebration, China bought up all the ingredients that were supposed to be for the party back home. The baker’s assistants back home no longer had money to buy cakes, so the Chinese cake factories now could turn their focus inward on their country to bake for the celebration. But really, Chinese cake factories hadn’t any competition for ingredients. The baker’s assistants back home had long lost their knowledge of cake baking. The cake factories had long fallen into disrepair and could no longer be used to make cake. The roads back home were in disrepair. The cake baking schools back home had fallen behind without local businesses to spur them to excellence. The ingredient suppliers had long ago built relationships with China’s bakers and knew where their bread was buttered.

As the triumphant party was being held in China and the great cake was being presented to her party guests, back home all that anyone could do was watch from afar. The bakers had lost their market for cakes back home. Without demand, they could not make the payments on the bank loans and they defaulted. Without sufficient buyers, they turned over their factories to the Chinese. Without customers back home and without money or credit to pay for new cake factories back home, the bakers now became unemployed themselves. The bankers, now without payments on their loans, well they closed up shop as well.

Can the Coming World Depression Learn anything From the Great Blackout of 1965?

Does the 1871 interaction between Europe and America predict a great monetary blackout from which the world may need to borrow from the electric industry’s grid model to recover? 1871 suggests that because of some trigger, like perhaps Greece defaults on the world’s CDSs that are lined up like dominos stretching ten times around the world anxious for someone to ignorantly tilt the first one over, America will draw the rest of the world into depression.

In 1871, Europe drew America into a long depression from which America recovered first after four years, our longest down cycle, but we went on to prosper until our capitalist model once again created a housing and stock bubble that popped at the end of the 20’s. Europe, however, took 20 years to recover from the 1871 depression.

This time, it may be the entire world that goes down and stays down for the Greatest Depression. Unlike 1871, national economies may not be able to recover, if we attempt as a globally connected economic system to recover together. Somewhere in the world, a country will have to have a strong enough economic engine to restart an isolated region of the world in trade. That region will be the basis of a new money system. I expect that country, with its newfound infrastructure, commodity partners and internal demand, will be China.

East of the Mississippi River, all power plants in North America are connected to one electric grid. Amazingly, all their turbines spin in unison at 60 cycles per second give or take. As power needs come online, electricity is drawn from the grid affecting the spinning momentum of every turbine connected. One day in the fall of 1965, all of New York, New England, and Eastern Canada suddenly plunged into darkness when the entire electric grid system in the region quit. For over 24 hours, subways stopped, refrigerators thawed, and clocks remained still.

After six days of looking for the cause of the region’s blackout, the Federal Power Commission investigators found that one small faulty relay at the Sir Adam Beck Station no. 2 in Ontario, Canada (a fault of the size of a potential Greece default on a CDS obligation compared to the size of all CDS obligations if you will) caused a key transmission line to disconnect from the grid. This small failure triggered a domino effect of line overloads that quickly raced down the main trunk lines of the grid disconnecting more plants from cities and weakening the entire system with each subsequent break. As town after town went dark throughout the region, within 15 minutes the entire CANUSE area went into the dark ages.

Because so large a region was affected, the entire Northeastern grid had to disconnect into manageable grid pockets that could be restarted by individual power plants coming online. Then, gradually, pocket by pocket was re-synced to the rest of the grid after stabilizing individual pocket electricity demands. Without disconnecting into pockets, any attempt to feed the entire system would have sucked the life out of any plant trying to restart. Shortly after attempting to revive the grid, millions of homes demanding electricity would have absorbed any power it tried to create (similarly to how the whole world is sponging the comparatively minuscule effect of QE2).

If our monetary grid goes down, as it seems it may, any attempts to revive the world by barely functioning regional centers of commerce will draw them down similarly to sucking the life out of a single power plant on a massive electric grid. The monetary grid will have to disconnect. Individual financial and economic centers will have to attempt to revive pockets of commerce that function separately and little by little reconnect through safe trades supported by a new monetary system.

It took America four years under the then existing monetary system to recover after the start of the Long Depression of 1871. How long will it take China to recover with a new system? How soon will the Asian market adapt? How soon as a major commodity supplier to China will Australia reconnect to the Asian monetary grid?

They called the grid malfunction the Great Blackout of ’65. How will we restart the monetary grid after the Great Monetary Blackout of 2012? The world should get ahead of this very possible Great Monetary Blackout with a “Preparatory Bretton Woods” similarly to how the free world met even as WWII was being waged toward its inevitable military blackout.

The Housing Crisis “Who Done It?”

As I listen to discussions about who or what was responsible for our current housing crisis, they seem to invariably disintegrate into arguments about which political party was responsible for the mess we are in. Commenters point to one or more specific milestones as the very reason. I am somewhat as simplistic in that I suggest the overwhelming pull of globalization and the capitalistic opportunity to invest in China that created too much of a temptation for investment banks. As a result, they worked for thirty years to drain America of its capital through any way possible including the housing ponzi. My points include:
•Prior to the Great Depression, mortgage securitizations created excessive speculation
• Laws were passed to attempt to separate loan originations and investments
• China’s opportunity created great capital demand starting in 1978
• Investment banks began extracting capital from America including using mortgage activities
• Investment banks made commercial banks willing accomplices by purchasing liar loans, eliminating commercial bank risks, creating the final capacity for the Great Housing Ponzi

However, trying to point to any one milestone as the culprit is just too simplistic. Trying to deny the culpability of any milestone is just as simplistic. How much blame for the housing crisis should be placed on pooled Ginnie Mae mortgages in 1970? What was the influence of Freddie Mac’s REMICs in 1983? How did banking law amendments in 1982 that encouraged private banking securitization impact the future Ponzi, or the Secondary Mortgage Market Enhancement Act of 1984, that put private banks on equal footing with Fannie and Freddie with securitization, affect the crisis?

We know that the Home Mortgage Disclosure Act of 1975, which outlawed redlining, was a factor in influencing subprime loans and that CRA 1977, which added affirmative action to subprime loans, influenced later lending practices. Yet, are we to say they had no influence in the later scandal?

Some analysts deny the existence of President Clinton’s National Home ownership strategy which, with changes to CRA, set up soft quotas in lending to underserved communities, yet his efforts led to an 80 percent increase in subprime mortgages. Did the addition of this new demand have any influence on the housing Ponzi?

In 1994, Blathe Mathers of J.P. Morgan invented the credit default swap to pass the risk of the Valdez oil spill to EBRD. This instrument, invented to subdue a perceived liability of Exxon was shortly after applied to the mortgage industry. In fact Clinton’s subsequently supported legislation that allowed subprime loans to be securitized in 1995 provided banks with much needed cover to remove these loans from their balance sheets into the investment banks arena. Did either of these milestones not have an impact?

Certainly CRA forced commercial banks to take on risky loans that would never have otherwise been taken. However, with the introduction of resale, securitization, and CDSs, these subprime loans became great money makers for all, so much so that in the three years after 1995, the number of banks in subprime lending increased from 10 to 50.

Did the dot com bubble of the late nineties contribute to an overall wealth effect that caused excessive loans including mortgage refinancing? Seems evident. Did GLBA have an impact on accelerating the globalization of securities and swaps? The data supports that. Did the Fed’s actions of dropping interest rates from over 6 percent to 1 percent in the years 2000 to 2003 contribute to the run up? Um yeah. And what about all the buyers of these securities, they seemed inordinately good deals yet organizations as large as AIG did not seem to understand the complex risks they were taking. Could they have slowed the Ponzi’s pinnacle if only their financial experts understood what risks they were taking? Of course.

When I hear the myopic and tinny ringing of political extremists pointing to one side of the aisle or the other as scapegoats for a debacle decades in the making that included one contribution after another, I sense a slight superiority when I settle back on my simplistic answer of “the investment bankers done it.”

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…

Is the China Gold Rush Ending?

In 1849, a rancher named John Sutter sent men to the American River to build a saw mill. Instead, they found gold, starting a rush that brought over 300,000 ‘49ers from across the world to eventually prospect another $12 billion in gold from surrounding hills. The discovery created an enormous expansion in America’s money supply, some by the very gold found in nearby streams. However, much more money was created by debt instruments that funded the Gold Rush. Banks funded the passage of thousands prospectors to buy passage to California, to purchase goods to pan for gold, and later to fund companies that organized for that purpose. By 1850, banks from St. Louis, Boston, New York, London and Paris spurred the growth that created the State of California.

The growth of population in California and Oregon fueled railroad expansion to the West. The completion of the Transpacific Railroad in 1869 started a great railroad speculation, funded both by American banks and European investors. In four short years, investment of track doubled to 35,000 miles. America’s investment in rail and encouragement of immigration spurred a revolution of competitive wheat production and American export of low priced wheat to Europe. Europe now found that the capital it had supplied to build America’s railroads, gathered from its previous decade of speculative housing construction, was the very capital that fueled its demise into a depression which lasted from 1871 through 1893.

With the shortfall of hoped for European funding, American banks became overextended as speculation continued unabated. Jay Cooke and Company, the Goldman Sachs of the time that had funded the North during the Civil War and that had funded the successful Transpacific Railroad, tried and failed to corner the gold market to fund its investment in the Northern Pacific Railroad. Instead, it was forced to file bankruptcy in 1873, triggering America’s Long Depression, collapsing major banks, bankrupting 89 of 364 railroad companies, and an additional 18,000 businesses. The extreme speculation and overbuilding in the one industry of railroads triggered a great depression. This massive over speculation was not seen again until the even greater housing industry speculation in America that ended in 2008.

Similar to California, China has become the land of gold rush for EurAmericans. In 1978, China embraced its four modernizations and opened its doors to the West, creating a gold field of capitalist opportunity. Gradually at first and then in a frenzy, tens of thousands of businesses rushed into China, over ten thousand U.S. businesses in the last decade alone. Similarly to America’s gold rush, U.S. and international banking interests made a fortune supplying MNCs with the capital required for their prospecting.

To feed this frenzied opportunity, American banking interests tapped into the immense financial wherewithal of the American people. Through a Great Ponzi Trifecta, banks accumulated debt derived capital from the Savings and Loan Ponzi, the Dot.Com Ponzi, and finally the greatest Ponzi ever known, the EurAmerican housing bubble. Hordes of EurAmericans were convinced to leverage their future earning ability to create debt that could be flipped through derivatives to fund China’s gold rush.

A dollar multiplicative frenzy sped much of America’s future wealth creating potential into China prior to the Ponzi’s ultimate collapse. As housing prices, and subsequently commercial real estate prices, soared beyond the ability of the American economy to cover the underlying debt, the purveyors of this debt mountain continued to assure investors that a new economy had emerged that supported such imbalances. Yet American wages did not keep up with the rise in housing and counterbalancing forces such as a lost industrial base and historic government deficits finally stripped the Ponzi of its legs, and America’s Great Middle Class funding of China’s gold rush subsided.

Just as Europe lost its wherewithal to fund America’s railroads after America undercut European commodity prices in the 1860’s, America lost its ability to fund China’s growth as MNCs gave China the ability to undercut American industry. However, unlike 1873, America’s Federal Reserve softened the impact of international banking excesses, mitigating the collapse of Bear Stearns, protecting the securitization of AIG, and supporting world banks through massive expansion of its money supply. However, the implosion of the securitization market left China with a weakened EurAmerican engine of direct foreign investment.

June, 2011, marks the supposed end of debt driven EurAmerican speculation helping to fuel China’s growth with the pre-announced ending of Quantitative Easing. If Bernanke follows through on his promise, America’s money supply will begin to contract similarly to America’s contractionary policy following the Civil War leading up to our Long Depression of 1873. Our Congress is also debating contracting governmental spending simultaneous to the Feds potential contraction of money.

Recent reports may have quietly forebode America’s double dip recession with the downward reversal of home prices and downward reversal of job creation. Has China enough momentum to continue its meteoric expansion without historical capital infusion from the West and with a contracting EurAmerican market for its goods? Or, will China face the disruptive consequences of the world’s most recent speculative bubble?

The Wealthy Support CO2 Escalation

What an abundant element this carbon is and yet what trouble it presents the world. So many deaths have occurred trying to control it. Japan was forced into world war with the U.S. in 1941 when we refused its transfer in the form of oil to aid her imperialism. African nations have been at civil war over the diamonds created by its compression. The world possibly is being whipped into a cataclysmic frenzy of environmental destruction by its combustion. And mankind seemingly is accelerating our corruption of the environment with carbon to create, concentrate and defend wealth from others.

Man’s accelerant for creating value has been the combustion of carbon. Thankfully prior to the industrial age, the earth was able to capture CO2 faster than man could contribute it. However, since the early 1900’s, as industries and transportation have escalated combustion, disasters have been escalating both in size and number in correlation to the excess CO2 contributed by man.

Whether there is cause and effect of creating wealth through carbon combustion and the apparent destruction of the world’s environment however is of little consequence. Great concentration of wealth requires great emission of CO2, and political and business powers will continue to accelerate CO2 production to consolidate the world’s wealth. To accelerate their wealth creation, they will continue to globalize wealth creating (carbon burning) assets to producers many miles and oceans away from the ultimate consumers, and will exacerbate carbon combustion through greater distribution distances.

Carbon changes will continue to impact us at both the macro level (wealth creation) and at the micro level (health). The human body needs to consume carbon to live and the brain has a set point that tells us to exhale when carbon reaches its upper limits in our blood stream. A quarter of the world will die as this exhaling mechanism fails us and we slowly suffocate to death through the ravages of COPD brought on through years of inhaling carbon from the tobacco industry.

We know that man’s internal set point for carbon in the bloodstream has been constant for millions of years but so has his lower set point. On a macro level it appears that higher atmospheric CO2 is causing global melting. On a micro level, what is it doing to the molecular workings of the human being? Since environmental CO2 has edged slightly higher in the air we breathe, what has that done in evolutionary terms to our body systems? Our industrial revolution has not given the world much time to compensate, e.g. melting polar ice caps, and what have living organisms been able to do to compensate for its detrimental effects?

Whether or not carbon combustion is destroying our ecosystem or our biological compensation, this element carbon in its liquid form will be the engine of mass transfers of wealth and world destabilization for years to come. The international banking system will continue to support capital flow in pursuit of carbon transfers. And quantitative easing II has only helped to clear a temporary but sizable log jam in that transfer system while destabilizing America’s future.

The Wisconsin Battalion Fired the Loudest Shots in the Battle of the Bulging Government

Our country will soon be jolted by successive economic shockwaves that will ratchet down consumer confidence as our states and local governments are constitutionally forced to remedy historic revenue short falls.  With public opposition rapidly mounting against tax increases, most governments will be faced with the monumental task of slashing budgets.  The state of Wisconsin fired one of the first nationally heard shots across the bow of this newest American crisis.

In the state of Wisconsin, senators are attempting to bring to the floor a bill to give maximum flexibility for crafting a workable budget.  One line item of the bill caused half the senate to walk out, and sparked a teacher rally that filled the senate floor.  Public primary education teachers in Wisconsin make approximately $100,000 compensation, including salary and benefits. They can retire after 25 years service and receive a one time payment of $950,000, plus approximately $100,000 each year for life after that.

The Wisconsin state senate has 19 Republican senators who have vowed to reduce this budget line item.   However senate rules require 20 out of 33 senators to be physically present for a quorum to vote. All Democrat state senators staged a walk out and left the state for Illinois to avoid wounding the state teachers union. However, they must physically step onto the Senate floor to collect their checks. If even one Democrat defects, a vote will occur. Makes interesting politics.

In Sarasota, Florida where I live, the county’s tax revenue will not cover public employee retirement benefits this year. How did Sarasota, Wisconsin, and the rest of the country reach this seemingly overnight crisis?  During the economic bubble decades from 1980 until recently, government spending grossly outpaced our population and grew to spend revenues that had been inflated by economic bubbles and consumer borrowing. 

When the Great Recession hit, state revenues from most sources shrank, including federal transfer, sales, and income taxes.  All these sources had been artificially buoyed by successive bubbles, and now popped simultaneously along with our latest and greatest housing bubble.  With shrinking housing prices, plunging ad valorem revenues just added to the fray.  When tax revenues shrank to fit our sustainable private industry job base, decades of excessive government spending left an overwhelming shortfall that exposed both our governments’ lack of understanding of bubble risks, and their willingness over thirty years to spend increasing tax windfalls rather than reduce tax rates.

As an example, our local and state governments escalated public employee ranks and pay scales to match escalating revenues; increases that well outpaced our population increase.  During the last three decades, the U.S. population increased 37 percent, but our local government employment increased 56 percent, and state government employment increased 68 percent. 

State and local budget line items increased well beyond our population growth as well.  As an example, while an increasingly older and poorer population could partially explain a 100 percent increase in health/welfare spending in real dollars, the vast majority was spent to increas staffing, compensation, and programs.  Also, educational spending increased 50 percent in real terms when the school age population only increased 11 percent. In the last five years of the great housing bubble, total state spending increased 30 percent in an attempt to keep pace with accelerating home prices. 

Because of 30 years of escalating state and local government spending during the boom years, we now face yet more waves of economic crises, the first of which will be successive slashing of state and local budgets that will cause economic backlash and social unrest as a poorer public is forced to adjust to fewer government services.  Governments will have little choice but to reduce public employee ranks by 20 percent to right size government to our population size.  To balance budgets, remaining public employees will be forced to take 20 percent compensation cuts to match resulting sustainable GDP.  When the suds clear from this latest bubble burst, 4 million public servants will lose their jobs and an additional multiplier of parasitic jobs will be lost as well, exposing America’s latest of its coming destructive waves.

Are Americans Entitled to Extended Unemployment?

Tea Partiers are ignited about the idea of abolishing long ago formed agencies that have been cemented in stone buildings along Constitution Avenue. They believe that good government concepts never really die and eventually become entitlements that stymie original intent.  However, once formed, these ideas take hold in the American consciousness and we begin to believe we are entitled to them as unalienable rights.

Take unemployment insurance for example. Like defense, education, and the rule of law, unemployment compensation has its roots in increasing the efficiency of capitalism.  With a temporary stipend, unemployed workers are free to move from businesses that are sliding past their plateau of usefulness to those that are innovating.  Without the fear of losing their homes and other assets, employees move to healthy businesses even during economic downturns.  Because this idea supported the beliefs of both parties of congress, unemployment insurance passed by an overwhelming majority in 1935 as part of the Social Security Act.

In most downturns, the unemployed are able to find jobs within the insured period of 26 weeks. However, an underlying sickness gutted our sustainable job base during the last thirty years as we borrowed our way through successive economic bubbles.  Only after the credit default swap bubble collapsed our economy did we understand that our jobs were gone.  Not only had our manufacturing blue collar jobs been shipped overseas, but our technically skilled jobs were exported as well. Our average period of unemployment has now swelled to 37 weeks.

It was only natural that Congress quickly adjusted the unemployment period as a stop gap measure when faced with the Great Recession.  They rightly protected our longer term unemployed to keep them from losing all they have gained in contributing to our country.  Now that the ranks of the 99ers, those that have fallen past the safety net of extended unemployment, are swelling, America is debating if unemployment benefits should extend further, and whether the unemployed are entitled to a longer benefit period.  

The debate on entitlements needs a paradigm shift.  Instead of discussing whether unemployed should receive more than two years unemployment compensation, we should be creating a process that allows our citizens to quickly re-enter the workforce and once again contribute to America’s success.  

My voucher plan is a paradigm shift.  Instead of paying unemployed to sit on the sidelines of our economy, America instead invests in our future by getting our people back to work.  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 unemployment budget.

Tea Party members will be concerned that this voucher plan will become yet another entitlement. They can rest assured that the voucher plan will be a relic of the Great Recession, created to automatically expire as the economy improves. Voucher dollars will decrease as the percent of unemployment decreases, requiring employers to cover more of voucher employees’ wages.  As a result, voucher employees in barely sustainable businesses will transfer to healthier ones.

Some claim that the unemployed feel entitled to remain unemployed, collecting extended payments.  While we can all find a few examples of misuse of American altruism, I have found that most people want meaningful employment.  The entitlement argument stems from the disincentive our unemployment system creates for rejoining the workforce.  It’s not unreasonable to compare available jobs with current unemployment payments. When a worker leaves a job that paid $14 per hour, is getting $8 per hour for unemployment, and is faced with a job that pays $9 per hour, their incentive to work is only $1 per hour; substantially less than their former job and only a dollar more than unemployment. Unemployment should not create a re-employment inertia differential.  My job voucher plan creates the largest re-employment incentive because unemployment extension payments end.

Americans might be concerned that my voucher plan would be used to balloon what they believe is already too large a government providing too many entitlements.  They cite previous government programs that raised social benefit costs without creating profit generating, taxable products or services. My job voucher plan, however, grows jobs only in private sector small businesses, and can be supported by existing government agencies without expanding their budgets. 

Others claim that my voucher plan is just an entitlement to small business, creating an inefficient makeshift set of jobs for the unemployed.  While I agree that my plan can rapidly employ all Americans, and as such may create some early, inefficient placement of workers, it nonetheless will also create a micro-venture capitalist function for millions of small businesses.  Some of these ventures will successfully create taxable revenue, and some will be incredibly successful, paying back America’s investment through future taxes on corporate profits and employee compensation.

Finally, concerns have been raised that any program such as this may create an entitlement mindset that all Americans must work.  Government work programs have been abused by some to collect compensation while performing work at subpar levels.  This problem is self correcting in my voucher plan.  Employees would still be governed by private sector principles.  If the job is not a good fit, employees will not find safe harbor in this program. For the program to be successful, government intervention will have to be restricted to current EEO and ADA requirements.  But, in the end, one entitlement should fly true.  America will find it is entitled to renew its future.

Has China Usurped America’s Era of Hegemony?

  When I travelled to China in the early nineties, I saw hundreds of Chinese citizens near Beijing carrying wet cement in cloth sacks on their backs to dump in front of other workers who smoothed out the globs of cement with wooden utensils to build ten lane highways, when no Chinese owned cars nor had the income to buy them. I saw scores of men, climbing dozens of stories into the air on bamboo scaffolding, building the skyscraper city of Shenzhen when China yet had no office dwellers to fill their glass towers.

These were my witness to China’s strategy of ascending to their position as the 21st century hegemonist; a strategy that has been executed with a decade’s long horizon since the late 70s. While China fed our baby boomers that were entering their demographic spending years in the eighties, she patiently accumulated financial strength on behalf of all Chinese that had come before, and of all that would thrive in the future. While China exercised discipline on behalf of her citizens, our Wall Streeters demonstrated sophistication over that same extraordinary demographic to lead our country through one bubble after another, achieving societal instability and accruing immense personal wealth in the process.

Yes, our country’s leadership was outmaneuvered by a Wall Street banking system that has gone unchecked for 30 years. But it has also asked for and has been self-servingly supported by an enabling central banking system that feeds congress’s compulsive appetite for debt. As a result, America’s role as the world’s orchestrator of monetary policy has been undermined, our wealthy are seeking safe haven in the next world order, and our citizenry is at a loss for why our standard of living seems to be entering the community or European nations. Can we, as a pluralistic democracy, gain the discipline that the dynasty to our east has shown, or is our century of hegemony over?