Tag Archives: The Wealth of Nations

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.”





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Will China’s Breed of Capitalism Survive Mankind’s Corruptibility?

Before, considering a post describing potential cures for modern capitalism, I should begin by describing my observation of its current state. Before I begin, let me start by saying that human nature is at once both fair minded and selfish. Many Americans including myself believe we are given unalienable rights by God and we support all who seek to protect these God given rights from being trampled by anyone. Yet within this context, most individuals seek personal pursuit of happiness above the interests of others. This is the nature of man.

The founders of our constitution understood man’s nature when they created our republic. They constructed a government that would allow each faction to pursue its self interests while being kept in check by other factions, other parties, other branches of government and by the votes of constituents. Adam Smith, credited as the father of American Capitalism, knew also that the nature of man must be kept in check by a fully functioning competitive market. In his infamous book, “The Wealth of Nations”, Smith cautioned against businesses forming a cabal, or monopolies, in which they would conspire against a nation’s people. Given a limited government and a small business environment, both containing checks and balances against man’s corruptible nature, American capitalism became an economic powerhouse.

Even with man’s flawed desires, capitalism has proven over the centuries to best align the motives of men with the goals of the nation-state and, in practice, provided a more productive economic system than twentieth century Marxists, Leninists, Stalinists, or Maoists that espoused proletariat dictatorship purported by Marxist disciples. However, while capitalism’s progression has proven thus far to outperform other forms of human productivity including the centralizing dictates of communism, its historic results should not be ignorantly interpreted as having proved capitalism’s infallibility. We in the West have tended, as the victors of economic ideology, to let the warnings of capitalism’s market failures or global excesses expounded by Marx and others go unheeded as if they were without basis. Yet in the 21st century, we are witnessing Marx’s warnings played out in our markets.

Marx concluded that feudalism, in which the agrarian worker was tied to the feudal land and lord, gave way to capitalism that freed the worker from the bonds of feudalism to sell his labor into a commodity market governed by the capitalist. He believed that capitalism was only the second of four phases, and that its phase would end when workers, tiring of the concentration of wealth of capitalism, rose up with the help of the socialist state to regain power. He believed that ultimately the state would corrupt, concentrating power in the few political elite, and that this would give rise to communism in which workers equally shared labor without the limitations of state boundaries.

Yet, having lived before the preeminence of international banking, both Marx and Adam Smith viewed capitalism not as the free flow of currency across international borders, but as the growing influence of machinery and its owners in the economy. While capitalism did emerge as the dominant mode of production, what eventually occurred was the increasing symbiotic relationship between capitalists and socialist nation-states, in which nation-states protected the growth of capitalists and fed off the taxation of these newly prosperous entities. This symbiotic relationship fed ever increasing boom-bust cycles that led to 20th century financial capitalism, to a divergence of the partnership between capitalists and nation-states, and, finally, to the emergence of Asian capitalistic mercantilism and the rise of China as the master of this newest form of economic power.

From 1853, the year of the world’s first commercial oil wells, through the beginning of America’s long depression of 1871, commercially developed combustion engines super-charged America’s participation in the western world’s industrial revolution. During these two decades, America’s agrarian population decreased from 77 percent to 44 percent as millions were freed from a rural life to sell their labor to the growing class of capitalists. As Marx had predicted, capital concentrated in the hands of a few creating a real estate bubble-bust cycle not unlike that of 2008 precipitating the Long Depression of 1871, with subsequent capitalist bubbles forming in approximately 20 year waves from the Long Depression of 1871 to the Depression of 1893, followed by the Recession of 1907, and the Great Depression of 1929.

Each capitalist wave garnered increased productivity leading to higher wages and displaced workers, increased innovation leading to new worker opportunities, and greater concentration of wealth amongst capitalists. The uneven development between innovation and productivity led to pockets of unemployment, unions, social unrest and European socialism. It also exponentially increased capitalist productive capacity that led to late nineteenth century international competition for new consumers and eventually to World War I in a futile, tragic, military attempt to sort out winners.

In 1890, seeking protection from European competition, American capitalists urged Congress to pass the McKinley Tariff Act, which imposed 50% tariffs on imports and lead to a depression in 1893. Following severe labor strikes in 1894, the next decade became a battle between hundreds of capitalist American trusts that formed under the protection of tariffs to gain virtual monopolies on all manners of American industries, and the beginnings of American socialism formed to protect workers and consumers from monopolistic power of the trusts.

At the turn of the 20th century, the financial panic in 1907 and subsequent lengthy market contraction was thought by many to have been contrived by international bankers as the means to create a new American financial dynasty, built around a Federal Reserve that could create money to “provide liquidity to mitigate market corrections”. Formed in 1913, America’s central banking system, the Federal Reserve, enabled America’s newest form of financial capitalism to emerge. America now had the makings of her three great 20th century capitalist rivals.

The first of these rivals was America’s socialist nation-state. By 1930, only 21 percent of Americans remained on the farm. Coming out of the Great Depression, our Federal government became increasingly socialist, adding to its socialist policies in the 1960’s with the Great Society and turning more so with the Elections of George Bush and Barack Obama and the enactment of their agendas.

The second rival was the emergence of globalist multinational corporate Industrial-states. After enduring two world wars and the Great Depression, America’s capitalists finally emerged, compensating for an increasingly socialist state by crossing geographical boundaries to reduce America’s regulatory grasp, to expand capacity unfettered by the symbiotic reliance on the nation-state, and to gain access to low cost labor and untapped markets.

The third rival was International banking. Restructured through the depression, given world status through Bretton Woods, and severed from the bondage of the gold standard from an earlier era, banking was now free to size up each individual, company and nation as to the value of their future capitalist production. Banks could then provide money from thin air to indenture these individuals and entities, earning interest from the sizing up of credit, creation of money, and transfer of financial capital to nations and their businesses that would most likely provide the greatest returns.

As the 20th century progressed the EurAmerican nation-states became increasingly impotent, as financial capitalism assisted the expansion of physical capitalism across international boundaries. The concept of capitalism as the physical means to produce real value was replaced by an abstract goal of accumulating financial capital through the manipulation of physical capital and the production of goods and services.

This newest form of capitalism, unencumbered by the mortal limitations of physical capitalism, gave way to the excessive bubbles of the late 20th and early 21st centuries. Rich with the financial capital afforded them through relatively new central banking systems and relaxed capital formation policies, banks emerged as the purveyor of financial capital to fund emerging nations. Yet unhappy with even the limitations of this newfound financial power, they created financial capital that benefited purely from the manipulation of other financial capital, building one capital formation upon the other. It was this new financial capital system that created the greatest of all capitalist bubbles, the credit default swap bubble, which eventually cracked in 2008.

The Asian nation-states were not encumbered by the laissez Faire checks and balances of the EurAmerican systems. The eastern cultures provided a much closer knit relationship between government, banking, and business that had the potential to create a more competitive economic system if they could overcome the very corruptible nature of mankind that caused America to limit this potential in the first place. Japan tried unsuccessfully to rise but was thwarted by her banking policies. Then the ASEAN nations created a boom-bust cycle during their attempted rise by the unintentional effects of excessive capital formation.

Finally China emerged with a strategy that promised to learn from the dictates of the various factions of feudalism, mercantilism, capitalism, socialism, and communism that had come before. China would put forth a new brand of capitalism, the capitalist-mercantilism model as a means to transfer wealth in preparation for a new phase of her Marxist system. Believing that perhaps Marx was right that the world would have to naturally progress through capitalism and socialism and not be forced through it by the likes of Russia or even its own preceding governance, China first embraced capitalistic special economic zones as engines of growth.

Yet, instead of allowing the divergence of capitalism and statism that occurred in EurAmerica, China enforced a blend of new capitalism and mercantilism of old to grow her nation-state. Instead of adopting the West’s view of property rights regarding intellectual capital, China traded access to her market for access to the West’s innovations and trade secrets. Instead of adopting the West’s concepts of currency valuation to balance trade, China instead turned the West’s newest concept of financial capital on its head, maintaining a contrived lower purchasing power of her currency to create a trade imbalance that mined the West of its financial capital in exchange for cheaply priced goods.

At the right time, when holding Western financial capital was a greater risk than allowing Western interest rates to increase by cashing out her holdings, China began to unwind her positions of the West’s financial capital. China is exercising her understanding that capitalism is the gathering of the means of production and not the transitory collection of financial units of accountability of future production from indentured persons, companies and countries.

Will China inevitably suffer a downturn in her meteoric hegemonic rise? Did America suffer through several great wars including her own civil war, multiple depressions, innumerable recessions, the struggle of slavery and suffrage amongst other strife on her journey? The answer to both questions is of course yes. However, the more important question is how will China fare through this upset in her quest? If America’s founders were right about the corruptibility of mankind, then no race, civilization, or nation-state is immune from that corruption. The test during her upcoming downturn will be whether or not China’s new hybrid of capitalistic and statist governance is up to that task.

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