Tag Archives: monetary policy

We must Retool the World’s Economies or Risk Capitalists’ Return to War

After American refuse centers fill with rubbish, we just build new ones, placing them far away to ensure their gases and seepage don’t leak out to bother our consumerism. We know our western culture’s buy and toss mentality is unsustainable, and yet it is our entrenched framework of capitalism that may only be reversed by crisis. Now, in parallel with our capitalistic trash piles, we have grown a nationalistic debt pile. The “hide our trash” mentality that has been successfully used to cognitively disconnect our consumer culture from its ramifications will now most likely be transformed from a physical trash mentality to a financial trash mentality.

What is required to minimally sustain the world at least at its current health and welfare level is a revolution of thought regarding commodities and human capital. Unfortunately, instead international banking will stop heaping financial debt on the spent, Western refuse piles and will simply transfer this debt to new seeping, gaseous financial and physical trash piles to the East. Capitalism will not be transformed but rather transferred at least as long as commodities exist in sufficient amounts.

However, during the next two generations, as commodities follow their parabolic rate of decline and world demand increases exponentially, the resulting accelerating cost of commodities will either drive capitalism to its risk precipice causing the captains of capitalism to once again stir their nations into reactionary world wars, or, on a more hopeful note, as new, enlightened capitalists take the helms of their strained organizations, they will encourage an alternative transformation of the world’s culture to conserve commodities and to produce end materials of lasting value.

Alternative transformation will require redesigning our world’s industrial based primary education system to support conservation. It will require reengineering our consumption cycle that during the last four decades of globalization, transferred infrastructure eastward, collected worldwide commodities, sent them through the East’s production, and distributed the quickly obsolescing end products by massive transworld shipping for consumption and trashing in the West. It will also require retooling entire civilizations to add higher human capital value per unit of product instead of higher volume of products per employee. How can such a massive undertaking occur through billions of invisible hands of competition?

How can the world preserve remaining world commodities while maintaining high employment and increasing the world’s standard of living? Its first attempt in Kyoto at preserving commodities resulted in regional attempts to punish old world oil consumers while giving new economies a leg up in future fuel consumption. Kyoto’s problematic focus, similar to WWI victors attempt to right the world through war reparations of the vanquished, resulted in the cynical knowledge that the world’s politicians were not yet up to the task. Without collective political action, is the world destined for war as has always been man’s knee jerk solution?

The ultimate consequence of a failure to retool is widespread disease, famine and destructive reduction of an unsustainable world population. Does the U.S. Government have a proactive role? Yes, it can leap frog an economically violent transition by sensing the government supported changes that will be needed after an upheaval and simply move to put them in place beforehand. Examples of such moves could include changing the tax policy to influence the reduction of planned obsolescence and the byproduct of trash. Another would be the inculcation of values and capabilities in the school system toward the commodity problems we face. While government will not replace the billions of invisible hands required to force change, it most certainly can work in concert with them to affect a less violent outcome.

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Filed under American Governance, American Politics, social trajectory, World Sustainability

Ironically, Trickle Down Economics Trickled Down America’s Future

America is a land of irony. We are filled with capitalists whose intent is to accumulate all the wealth the world has to offer, and at the same time, we also have an altruistic nature that tears at our capitalistic infrastructure. We defend our great society and fund outreach to other nations through our tax dollars. We support our dreams of a united earth through a funding of the United Nations and fund our version of world peace through 1,000 military bases dispersed throughout the world. To grow our middle class, for the past thirty years we have supplied enrichment to our upper class to have it trickle down.

Supply side economics is an irony of political invention as well. Its invention of thought intended to provide extra capital to America’s private sector, the sector that creates taxpaying, productive jobs that extends America’s know how, innovation, skills, and gross domestic product. In our world’s current economic system, when a venture is started, some seed capital that has been accumulated by the world’s elite is then combined with borrowed money created from thin air by banks through the venture’s promise to repay. This devised modern structure of government and banking thus provides the investment needed to fund the venture’s infrastructure and start up expenses, including the financial support for job creation.

The wealthier of our country are those that have traditionally been able to accumulate more money than they need to fund their daily expenses, and thus they have provided the seed capital for ventures through their investments. Instead of the entrepreneurs that risk all to build real wealth and create the jobs, Supply Side economics instead provides tax incentives to the wealthy, ironically giving credit to the capital providers for producing America’s jobs. However, capitalism knows no patriotic allegiance. Investment capital will flow to the highest risk adjusted returns regardless of national borders.

After America’s obsessive military buildup made international investments safer, international business became safer investments in the sixties. Opportunities grew wildly after China opened its borders to investment in 1978, creating a gold rush that attracted loose investment capital from the entire world, building tens of thousands of factories that enriched international investors dearly.

So when Reagan Supply Sider legislators passed tax breaks to the “rich”, their trickledown theory wasn’t wrong, it was just decades late in adjusting to the realities of risk adjusted investment opportunity. Ironically, instead of trickle down, America’s tax policy resulted in pouring out, not a trickle but a fire hose gushing toward foreign shores. Trillions of dollars, created by burdening our middle class with excessive debt, left our economy and were converted into factories and other infrastructure such as roadways, bridges, and cargo ships to enhance China’s economy and to increase their employment base.

It appeared at least temporarily that America profited from our supply side doctrine. An entire industry was born to find ways to collect the extra capital and distribute it to the East. America surely got interim jobs in the financial sector to support this fire hose of foreign directed money flow. Yet, decreasing taxes for the “rich” created much fewer permanent jobs in America than it could have, passing the greater load of jobs to the East. It provided America interim financial and deal flow processing while accomplishing the opposite effect than was hoped for to America’s real economic future.

Ironically, Trickle Down Economics Trickled Down America’s Future…page 2 of 2….Worse, when those permanent jobs left our shores, so did decades of investment in our schools and education that every American has paid for through our contract with America. Each of us has voted to contribute thousands of dollars to our school systems to educate our youth. We do not publicly fund our educational system out of altruism. Americans understand that in educating our youth, they will learn the lessons provided by educated Americans before them. They will carry forward the knowledge that grows in our businesses to learn new theories and methods and to discover new scientific breakthroughs that will extend American technical capabilities. We invest in our children to grow our country’s GDP and to support both those that have come before in their turn at retirement and those that will come after who will raise their families in freedom and who will extend our great country’s experiment in democracy.

Ironically, beyond those trade secrets and innovations that are deemed highly responsible for national security, America does not have a policy about those innovations created in America that have been funded by at least 12 years of public schooling if not more through Pell grants, student loans, state school subsidies and other methods. America has an equity stake in every innovation created by Americans and yet we let them go as freely as we let our commodities be dug up from our patch of earth and be sold out from under us through private, foreign country based businesses operating mines on our public lands today.

However, the greatest irony is yet to come. In letting our capital be funneled to China, in letting our jobs transfer to her, in freely handing over our trade secrets, our innovations, and our scientific breakthroughs, we have transferred decades of core skill and national wealth building capability that will now build in China and not in America. The tax base that would have supported our great society social needs will now support those of China. The extra funds that could have supported our government’s international outreach will now support hers. Our altruistic capability will diminish purely from our trickle down tax policies.

And the great investments that our capitalists hope will provide gold rush returns from the trillions of dollars of investment extracted from the debts of all Americans, turns out they may be the greatest Ponzi of the 20th century. Those trillions of dollars now rest on China’s soil as hard assets. They cannot be dug up from the earth and planted back in America. The financial returns that investors hope for count on China remaining strong to honor her commitments. If China defaults, no one will travel to China and take a piece of the infrastructure back home. There is no international bankruptcy court that can enforce repossessment or repayment.

China’s ability to produce repayments of direct foreign investments depends on America’s ability to stay solvent and to continue buying Chinese goods, yet our solvency rests close to the precipice. If our current economic crisis is thrust off the cliff by short sided, self seeking politicians, America’s default will lead to China’s default and all the profits that our investors dreamed of receiving will disappear in the crash. The underlying assets and intellectual capital that transferred to China in the 20th century gold rush will remain there for China’s eventual rapid recovery while the trickle down and fire hosed out financial capital that left America’s shores will have ironically vanished with our gold strike dreams.

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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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Could Africa’s Failures Hold Secrets for America’s Future Success?

Why is it that the African continent holds an abundance of natural resources yet remains the poorest of the continents? Could its failures hold secrets of success for America? African leaders say that it is a lack of money that keeps their nations from succeeding, yet money is a commodity that can be printed from thin air by any nation that holds a printing press.

While both China and countries on the continent of Africa have the ability to print money, China’s star has risen while Africa remains peering up from the earth below. Perhaps it is the quality of money that creates success.

Before the modern age of banking, value was created and then exchanged for money. In today’s world, money is created and exchanged for the promise of value returned. It is the quality of this promise of future value that sets the exchange rate of money. In the global money market, China’s promise has been deemed a higher quality.

Countries of high quality value creation can create money velocity that expands chains of money to create more money. Strong rule of law, limited corruption, protection of citizens’ health and education of their young, giving voice to the people and purity of government’s purpose to regulate businesses for the good of all, these national qualities tend to make good on promises to create value. Fulfillment of promises creates value, grows money, and sustains a nation.

Combining high quality with high savings rates accelerates a country’s growth. Early civilizations forced excessive savings through wars and conquest. Then came mercantilism and colonization. America’s Captains of Industry concentrated savings by reinvesting industrial output through two great wars. Japan instilled a sense of state over self that inspired sacrifice and high personal savings during its rise. China, by her mixture of authoritarian rule and shoreline capitalism, has forced saving through foreign exchange manipulation and managed labor rates.

With her high savings and a well executed strategy of four modernizations, China has climbed toward hegemony. China has added education, infrastructure, and modern law to support business growth. She has opened up her shores to investment, requiring all who enter to bring gifts of innovation and trade secrets. With a credible belief in China’s future by both her people and the rest of the world, China has created a high quality of value creation and her wealth has grown.

Unlike China, many countries in Africa have suffered from a lack of credibility that translates into a lack of faith in future value and a corresponding lack of money creation. However, unlike the days of old when money was a physical commodity commandeered through battle, money is no longer outside of Africa’s grasp. Countries within Africa need only to commit to a path of higher value by building national qualities that will create money from thin air. And if this is a good prescription for Africa, it most certainly is for America as well.

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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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In the World’s High Stakes Game of Chicken, Bernanke May Have Just Blinked

In Ben Bernanke’s first ever news conference, he stared down reporters with his boldface rejection of a QE3, but my guess is that in this international game of chicken, Bernanke will soon blink. He disclosed that he will not begin a QE3 after QE2 finishes on June 30, and that the Fed funds target rate may buoy from its near zero rate. His reasons for this decision were that his concerns for inflation have overtaken needs to prime the sluggish economy, and that QE2 has been “effective” and “successful”. With Bernanke’s finger on the button of the world’s economy, has he really forsaken quantitative easing?

Pumping a previously unimaginable $1.5 trillion into the economy certainly had to be “effective” on some level but unfortunately, not on the level that would ease anyone’s mind that America, or the world for that matter, has dodged imminent danger. With all of the stimulus and quantitative easing that encouraged it, the U.S. economy crawled ahead 1.8% in the first quarter of 2011, well below the rate of a normal recovery. Meanwhile, unemployment claims are edging higher as a quarter of the U.S. suffers unemployment or underemployment, and the recent moderate gains in housing prices have peaked and are retreating once again.

The recent rise in commodities signaled the expected results of America’s monetary intervention, inflation. America’s consumer’s goods consumption is import driven and those prices are going up. If Bernanke actually holds true to the promise he gave America prior to testing his monetary theories, and pulls dollars from the economy in response to rising prices, America’s economy will turn down a more diligent path of squeezing out its excesses through a hard double dip recession combined with inflation.

The combination of Japan’s recent tragedy and a continued potential for a downturn in the U.S. may lead to a softening in the growth of worldwide demand, thereby reducing the potential for real demand inflation. However, as the unprecedented flood of dollars multiply in the market, we will see the lagging effect of a continuing drop in dollar purchasing power that will more than offset the soft economy to produce inflation. Commodity prices are the leading indicator of future general inflation as the QEs work their way through the economy.

America will then have stagflation similar to that caused by the currency expansion and oil embargo of the ‘70s. Our import consumer goods prices will accelerate higher, while our domestically captive service prices will drift lower leading to reduced wages and higher unemployment, as commodity inflation saps the energy out of our service driven domestic economy.

Bernanke has the choice of funding a QE3 to pay for rising interest rates that are bound to occur as a result of previous government intervention, or of pulling the plug on this bad monetary experiment and potentially having some frustrated economist coin a phrase with his name in it to mean a “really really bad stagflation”. My guess is that rather than be known for the Bernanke Splits, he will blink and a third, perhaps more moderate, round of QE3 will begin to assist inflation even higher.

That’s my take, what’s yours?

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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?

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