Why Can’t America Sue the Federal Reserve and Banks for Violating Their Fiduciary Responsibilities?

The United States of America is claimed to be the wealthiest nation on Earth. Certainly, our GDP is the highest by some measures, our accumulation of long lived assets and infrastructure is historic, and our country is abundant in natural assets and commodities. Yet do the lives of our citizens in terms of material well being and quality of life reflect this great wealth? If a nation’s health is proportional to its material wealth, are our financial liabilities that are four times the size of our GDP degrading our nation’s health? Many are concerned that no matter how America’s wealth is measured, that we have reached our pinnacle and are now in decline. Some suggest that globalization is the cause.

When Adam Smith first penned “The Wealth of Nations” in 1776, the concept of wealth existing within the organism of a nation was not questioned. Nations had grown from their feudal beginnings into mercantilist empires and had begun to develop industrial capitalism within their mostly agrarian societies. However, the concept of businesses being melded to the future prosperity of their growing nations was the accepted paradigm.

Now that globalization is upon us, this marriage of business and nations is no longer a given. The traditional measurement of a nation’s wealth as that of the output of its businesses no longer fits now that cross border transfer of financial, physical, people, and intellectual assets are fluidly afforded multinational corporations. If we can no longer measure a nation’s wealth as that of its corporations, what is the paradigm shift that replaces this measurement?

If we divorce a nation’s wealth from that of its businesses, then a new picture of its material wealth emerges. The sum of a nation’s true material wealth is its natural resources and commodities, its capacity to maximize the value of these resources, and its ability to protect them from plunder. A nation’s wealth depends on its distribution infrastructure, its fixed assets that are capable of production, and the strengths of its people; their legal infrastructure, learning institutions, accumulation of national core strengths enhanced by interconnectiveness of innovation and production, and their accumulated learnedness and capabilities.

In addition, a nation’s material wealth depends on financial liquidity to transfer these assets to their highest and best use. Currency is the oil that lubricates a nation’s wealth producing assets. It provides for the efficient and fluid transfer of commodities, people and productive assets to create a maximum efficient output that will both meet the demands of consumers and that will simultaneously produce profits to feed current consumption and future growth capacity.

A nation’s ability to grow wealth depends not only on maintaining its output at maximum efficient levels but on investing a portion of its output into extending its future capacity. Once again, currency provides liquidity as the medium of capacity extension. Currency is created through debt contracts. A nation’s businesses and individuals enter into contracts to accept debt and, through this process, its banks create currency to supply transactions. Therefore, a nation’s ability to grow depends upon its ability to add debt and to create adequate currency.

A nation’s ability to add debt depends both on its current debt level and on its maximum debt capacity. It can add debt up to its ability to repay it while maintaining current consumption and while providing for future growth at a level that will allow future consumption to be maintained. Adding debt beyond this level will result in excess currency and consumption that lessens its future growth and future consumption, and that heightens its probability of repayment default.

The difference between a nation’s current debt and its maximum debt capacity is its available credit. If a nation adds more debt than its available credit, it adds more currency than its productive output and therefore dilutes its currency, increasing its probability of inflation. Therefore, it is critical for a nation to manage its debt below its maximum effective credit level while growing its available credit through reinvestment in infrastructure and education and through development of concentrated hubs of innovation and productive core strengths.

A nation’s credit capacity is the cumulative capacity of its citizens. Each individual, by his or her own development of education, skills, aptitude, and desire develops an individual maximum credit capacity that grows as these attributes build. An individual’s income reflects his maximum credit and his ability to obtain currency in advance of earning it through loans that add debt. Cumulatively then, a nation’s liquidity is the additive ability of each of its citizens to accept more debt.

Liquidity is provided to a nation through currency distributed by its banking system. Once again, the “Wealth of Nations” paradigm of a commercial bank’s primary mission is to match a nation’s currency to its wealth creating activities in adequate measure. In this paradigm, banks are tasked with the responsibility to evaluate a nation’s entities’ and individuals’ capacity to accept debt, and to enter into contracts that ensure that a nation’s and its citizens’ maximum debt capacity is not exceeded.

The “Wealth of Nations” central bank then ensures that the sum total of a nation’s currency supports maximum efficient output at full employment. Through the central bank’s manipulation of interest rates, it controls a nation’s credit capacity. When interest rates are lowered below historical averages, credit capacity is increased and consumers are enticed to add debt to their ongoing purchases by bringing would be future purchases into the present. In this manner, the central bank attempts to offset peaks and troughs of the business cycle.

However, throughout America’s history, and exponentially more so with the advent of globalization, America’s banks have not accepted nor fulfilled the “Wealth of Nations” mission expected of them by the majority of our citizens. America’s banks and the Federal Reserve in fact manipulated debt instruments to support globalization at America’s grave detriment. Doing so precipitated America’s greatest Ponzi ever, our housing bubble, violating their fiduciary responsibility to our nation. They obliterated their “Wealth of Nations” responsibility, enticing America to accumulate debt well in excess of its credit capacity, feeding a bubble frenzy that manipulated Americans into perceiving debt accumulation as investment.

The housing bubble enticed borrowers to think of their increasing debt not as early consumption but as a down payment on rising equity. Individuals were enticed through low introductory rates to take on long term debt well above their asset debt capacity. This became a logical choice because housing prices rose at 20 percent per year, making the housing bubble a logical “short term investment”. Lower introductory interest rates suckered borrowers to reach for higher debt levels than they could endure long term because of the potential to flip their “investment” for profit during the introductory rate period in what amounted to a dangerous Ponzi scheme.

For the two to three year period of watching their “investment” grow, individuals dipped into their savings and covered their short fall with short term consumer credit that was also made plentiful by the banks. To feed the Ponzi, banks enticed consumers to use short term credit in amounts well in excess of their ability to repay by offering introductory consumer credit interest rates as well. This unsecured consumer credit, well in excess of individuals’ total credit capacity, could be used to finance short term short falls in consumption capacity while their housing investment grew. With available savings and additional unsecured credit through credit cards, the “logical” investment choice was to let it ride on the housing bubble.

When the music stopped, many people who were in the game for quick profit lost their savings, destroyed their credit ratings, and maxed out their debt capacity using all of their available credit. Of course most home and commercial property owners that were not playing the game also lost massive value in their long term real estate investments. In addition, as the bubble popped, many credit card issuers increased their interest rates from low introductory rates to as much as 32 percent per annum, further pegging debt at or above sustainable levels.

This housing Ponzi was a manufactured raising of credit capacity well in excess of America’s ability to repay and an enticement to use that capacity to feed the housing bubble frenzy knowing that the bubble would reach an unsustainable height and that greater fools would be stuck in the end with excessive debt that would stagnate not only individuals’ future growth, but that cumulatively would stagnate America’s growth as well.

If China had not enticed American bankers and businessmen to use America’s credit capacity, if they in turn had not manipulated Congress to eliminate regulations that had earlier been put in place to mitigate excessive credit speculation, if social engineering for the poor had not provided initial cover for the banks to create manipulative debt instruments, if the Fed had not manipulated interest rates to historic lows, if banks had not thrown out historical debt-to-income loan criteria in favor of feeding the speculation with reckless housing loan products and hysterical credit card offers, and if Americans had not allowed excessive greed to cloud their thinking into believing that a new economy had arisen, the debt bubble would never have occurred. Yet it did, and America’s debt, and that of its citizens, has far exceeded its maximum debt capacity. As a result, we now are faced with lower future consumption, lower future growth, and a very high probability of default.

Given that the “Wealth of Nations” paradigm America has been operating under has in fact been inextricably altered and that our nation’s material wealth can no longer depend on multinational corporations or international banks to align with America’s interests, is it now time to develop a plan going forward that puts America’s interests ahead of our multinational corporations and banks? A plan to turn around America must include restructuring our debt load, immediately bringing it down to a level below our maximum debt capacity. It must include quickly forcing the repair of America’s business and consumer credit ratings. And it must include the simultaneous and immediate addition of 15 million jobs, not the paltry 1 to 2 million offered by our meek politicians. This turn around, as further outlined in the links below, should be and can be the initial step in shifting America’s paradigm to a “21st century Wealth of Nations.”

http://jobvoucherplan.com/must-reads/

http://jobvoucherplan.com/2011/09/08/yes-america-can-quickly-turnaround-heres-how/

http://jobvoucherplan.com/2011/10/26/our-economy-can-be-re-ignited-like-a-boy-scout-fire/

http://jobvoucherplan.com/2011/09/13/america%e2%80%99s-new-consumption-paradigm-must-divorce-multinational-corporations-and-marry-new-business-partners/

European Bank Announcement is the Latest Step in Deleveraging the China Bubble from Debt to Equity

In 1979 when China opened its doors to prospectors, millions rushed in bug-eyed on the prize. They scurried for trillions of dollars of capital to plop down factories on their newly acquired claims. Those trillions first came from EurAmerica’s savings, that currency that had already been acquired through decades of previous achievements. When that was not enough to satisfy the frenzy, they buggered trillions more in future obligations of EurAmerica’s citizens on the promise that these glorious gold seams of the East would make EurAmerica rich beyond its wildest dreams.

And why not…EurAmerica had grown obese on other stakes plopped down around the world. We created equity from thin air to offset the obligations of third world and emerging countries and spent the arbitrage from our financial creations to feast in our homeland for decades. Yet none of these opportunities held a candle to China’s mother load. China would once again be the feast to engorge all our known senses with pleasure and reward. So EurAmerica indebted herself beyond all reasonable abilities to repay, knowing that this gold seam would pay off by its own merit.

But how could it pay off? Were not these same factories supplying EurAmerica with goods that their own citizens would have otherwise supplied? Were not these same factories paid for by the obligations of “EurAmerica’s citizens to work into the future to pay off the debts they had incurred in order to build these factories? And if these EurAmericans could not work to pay their debts to gain the riches they had hoped for from these factories, how could they buy the products that would eventually pay them the riches they had sought? It seems this time around, the door that was opened in China was the hinge of a Venus Fly Trap and EurAmerica was the fly.

Now that we have incurred this massive debt and our scheme for getting rich was found to be yet another Ponzi of get rich quick avarice to be piled on the heap of human foibles, it is now time to clean up the mess from the last three decades’ party. People will have to pay for this latest excess just as all in human history before us. Europe languished for 22 years after its 1871 financial extraction to fund America’s railroads. Some countries like Russia rose up from those excess in political system revolutionary defiance. Others chose military aggression while still others congregated in socialist shifts of wealth redistribution to deleverage the world from its dilemma.

We cannot yet predict the world shifting power struggle that will ultimately emerge from this great crisis. However, what started as Europe’s riots and later erupted into an Arab Spring in reaction to Wall Street’s grand foray was again played out in yesterday’s announcement by Europe’s leadership as another step in the unraveling puzzle. The information age has shifted the balance of power and bankers can easily see that 2011 will not be a repeat of 1871. Infighting will continue as EurAmerica sorts out who will pay the costs of financial obligations from this great extraction. But Europe’s announcement was a break through nonetheless.

European Banks will eat a distasteful sum. Their shareholders will pay the price as much as they can. Some banks will call upon the European Financial Stability Facility, which will in turn call upon governments, which will look for handouts and push for further austerity, which will in turn lower GDP growth, which will further exacerbate the debt crisis. In the end, a massive debt overhang will have to be managed by all of EurAmerica in a deleveraging and slower GDP growth, if not retracting, environment.

Banks only have so much in reserves and even those may be grossly overstated as a result of credit reserve requirement manipulations during the 1990s including bank reserve sweep accounts and parent/subsidiary loans that have as of now extended bank credits 1.1 trillion beyond bank deposits. EurAmerican governments could take all their reserves and destroy our international banking functions just as banks could take much of the housing stock, destroying millions of lives and our nation’s economic futures. Governments and central banks could print money throughout EurAmerica and destroy national economies for decades. And then what….

When a debt load becomes so excessive that it cannot be paid by the annual output of its guarantors, it becomes in essence equity. All of this past three decade Great EurAmerican Capital Extraction creditors, from our wealthy elite to retirees on fixed incomes, “own” pieces of the thousands of factories on the shores of the East. They may not have bargained for that outcome but that is what they got. Right now, rather than accept this eventuality, creditors are willing to shave their loan returns in order to keep their position of being first to be repaid rather than suffer what is amounting to an even greater uncertainty for equity shareholders. And thus we have the announcement from Europe’s banks.

In the end, accepting that their loan position is untenable and must be converted to equity will be the ultimate solution. That position is hard to swallow for many reasons just yet. European banks and governments had been playing a dangerous game of chicken, both refusing to budge on movement toward resolving this debt leverage. For now, the dangerous game of chicken stalemating any movement toward the final solution and putting the entire world in jeopardy has had a “great” move among many more to follow.

My solution for America’s turnaround: Convert debt overhang to equity. Clean up credit through credit amnesty. Put all unemployed people in domestic work opportunities through free market job voucher program. Turn on the switch and go.