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Uncensored Opinions

Monday, December 13, 2010

The Sins of Alan Greenspan

When Mr. Greenspan appeared on a recent BBC documentary and was forced to concede to major misunderstandings of certain market phenomena, he was being quite modest. He not only had misunderstood many economic factors, but had wittingly committed every single major blunder leading up to our current “great recession”. He bet the future of the American working class against the interests of his supporters and lost. He kept his job and the country (and half the world) went belly up. He faced the same situation as Mr. Churchill when he, as Chancellor of the British Exchequer, had to reestablish the exchange rate for the British pound when Britain rejoined the gold standard regime after the First World War (in 1926). During the war Britain had suffered a major relative productivity loss via the rest of the world (to the U.S. in particular), and should have devalued the pound to preserve British wage rate competitiveness. But the rich, Churchill’s major supporters, did not want that to happen. So he went with the rich and failed to devalue the pound, and the British economy went into a tailspin. Churchill had the decency to face the facts that he had blundered, calling this decision the second biggest mistake of his career (Gallipoli being the first). He was well aware of what he was doing but took his chances. Mr. Greenspan was also well aware of the chances he was taking, and chose to likewise support his rich backers. The only difference is that he has refused to admit his mistake and, worse yet, is continuing to encourage our current financial leaders to follow the same practices. This article covers each and every move he made and the consequences.

It’s all about the foreign exchange rate, and the desire of Mr.Greenspan’s rich friends to maintain a high value of the dollar. The dollar has been maintained at a highly-overrated value for the last 30-some years in order that the rich could buy foreign luxury goods on the cheap, take inexpensive luxurious foreign vacations, and hire foreign labor at exploitative rates (to do the manufacturing work that American workers had previously been doing.) The exchange value of the dollar had been manipulation by the FED and foreign central banks for decades, and more recently by China, leading up to the dustup over China’s meddling in exchange values! What hypocrisy! These manipulations had produced a wide and distorted difference in exchange values between Western currencies and the currencies of countries of Southeast Asia, virtually guaranteeing that all tradable goods would be produced overseas. Mr. Greenspan must share at least some small credit for this lamentable circumstance with the (uncontrolled) hedge fund traders who managed to further drive down the currency values of many otherwise financially-sound countries of Southeast Asia These practices have led to the continuing and unaddressed mammoth U.S. trade deficits which will shortly impoverish America (except, or course, the very rich).

The major screw-ups started when George W. took office. During Mr. Clinton’s presidency Greenspan had maintained interest rates at around 5 percent. A Democrat was in office and he did not want to make a Democratic president look too good, so he kept the interest rates relatively high. But in order to create a healthy economy under a clueless Republican president (who needed all the help he could get) he started in early 2001 to drastically lower interest rates, finally reaching 1-1 ½ percent around mid-2001. Establishing this ultra-low rate was foolish. Bankers will normally not want to lend money to even the most credit-worthy businesses at a rate of, say, 4 percent (a reasonable 3-percent spread over the 1 percent cost of funds). This was amply demonstrated by our recent experiences with U.S. banks facing the same circumstances. At the then-current ultra-low interest rates they could make plenty of money simply by buying risk-free U.S. government securities. It would have been more responsible if Mr. Greenspan had lowered interest rates to, say 2 ½ percent, but hey, anything to help a friend.

The banks were not anxious to lent any money to businesses based upon a 1-percent interest rate considering that interest rates had nowhere to go from there but up, and an increase of just a few percent would quickly wipe out most profit spreads from most of their loans, and could very-well quickly lead to mammoth loses. But there was one exception, loaning money at ultra-low rates against real estate. It had no obvious risk because price increases would cover any shortfalls in interest payments even if the borrower was a flake. But even this contingency was covered. The banks, thanks to Wall Street’s creation of mortgage-backed securities, were now able to lay off risk on these ill-considered loans to outside investors (as well as with other unsuspecting gulls like Fanny May and Freddy Mac). The rating agencies were also compliant, and all those risky loans blossomed. Now the stage was set for Alan to make his big bet.

The problem with low U.S. interest rates, short term as well as long term, was that foreign investors would not be content with these returns, given their exchange rate as well as interest-rate risks. When foreign investors (individual and government) began to resist purchasing bonds and bills at these ultra-low rates (around late 2005), Mr. Greenspan feared that the dollar would fall on the foreign exchange markets, given the outlandish foreign trade deficits which needed to be resolved. Alan’s employers, the rich, did not want the dollar to drop at all. When the dollar’s exchange value went down, they called it “inflation”. Of course it had very little to do with the type of stateside “inflation” everyone worried about, that caused by too much money in the hands of the general public, driving up the prices of consumer goods. In order to prevent a fall in the dollar, Mr. Greenspan started raising interest rates to prevent a fall in the dollar, citing “inflation” as an excuse, pretending the inflation he was invoking was the kind leading to consumer price increases. That kind of inflation was nowhere in sight, evidenced by the market-driven low interest rates previously prevailing, and by the prevalent sluggish wages and stagnant money supplies experienced over the preceding decades. Proof that he was well aware that inflation was not really the issue was provided when he constantly mused at the time about whether the rate hikes would cause a recession! To worry about “inflation” and “recession” simultaneously is like a physician worrying that a bulimic patient he was treating might become obese. It’s insulting and dishonest!

But he went ahead and quickly jacked up interest rates in 2005-6 to the 5-6 percent level, well aware that it could very well push an economy already on the verge of recession into a full-blown one. This was a blunder of far greater impact than even Mr. Greenspan had expected. Raising interest rates have more consequences on the economy than just the cost of credit to businessmen. What Mr. Greenspan should have been aware of, as a banker, was that low interests rates were the driving force behind years of sub-par (“liar” as well as adjustable rate) loans whose owners could only survive if housing prices went up, and a rate hike would (and did) put a screeching halt on rising real estate prices. These rate hikes doomed these home-buyers, as he should have known it would.

As a banker he should also have been well aware that as changes in the bank’s cost of money (short term usually) went from 1 percent to 5 percent, as bank examiners forced the banks to value their loan collateral to “market”, bank equity would immediately disappear and the balance sheet would show the banks to be insolvent (bankrupt). Even if the bank examiners refused/failed to do this, equity would be slowly siphoned off as money income derived from their loan portfolio would be more than consumed by the costs of funds. This would occur regardless of whether these loans were performing or not. There was no way out when banks were collecting even 6 percent on mortgage loans when their costs of funds jumped to 5 percent. What would they be paying their employees with? their oh-so-valuable executives? A margin of 3 percent would normally have been minimal (even for prime rates loans) to keep a bank viable.

Perhaps Mr.Greenspan was not aware that when the value of the collateral backing any investment or loan instrument heads south, the value of the investment does as well. And many investors depend on the earnings of their investments for normal operations (endowments, brokerage firms, local governments, and insurance companies, et. al.). Those holding mortgaged-backed securities would not receive even reasonable dividends/interest on securities backed by non-performing loans, as well as experiencing the permanent loss of the principal. He should have known of the horrendous consequences to these entities as well. As one of the most trusted public servant he was irresponsible if not criminally negligent.

So that’s the sordid story of Mr. Greenspan’s involvement in our (and the world’s) current mess. To make matters worse, he is still trying to stop the dollar’s decline in the interests of the rich, and has apparently persuaded even Mr.Geithner, the Treasury secretary, to take up the call. By citing the danger to long-term interest rates caused by recent money-supply expansion by Mr.Geithner, he is again promoting the same actions that caused our current crisis. Ratchet up interest rates once again in an economy in recession? Can’t he be content with having caused the worst financial crisis in 80 years? Does he want to repeat his generous gift to the rich with little regard that it will further impede an escape from the current mess?

An associated situation jeopardizing the future success of the country is one involving the establishment media in the U.S. They have not only never called him on these screwups but now, even after he has publicly confessed some complicity, are again soliciting his economic advice. Don’t those media types listen to the news? Didn’t they hear him confess? Paul Krugman, arguably the finest economist alive today, has strongly criticized his actions and pointed out his responsibility in this crisis. What more do these pampered and overpaid media types need to get it straight? The answer to this puzzle is that the rich have taken control of the media (as well as the Congress, the courts and the FED.)
The media pretend that only a few select “gurus” have valid opinions (and these gurus consist almost unanimously of lackeys of the political elite.) So the establishment media continue to solicit their opinions and pretend that they have any credibility.

Amazingly, no one, not even our beloved congressional representatives, has contested the notion that the chairman of the FED should be a conservative, preferably a Republican. Mr. Greenspan, in his book “The Age of Turbulence” makes no bones about his allegiance to the Republican Party and its programs. He was an ardent supporter of Ayn Rand and her advocation of selfishness, which goes well with Republican “virtues.” Does anyone really want someone devoted to his own selfish interests, over and above that of anyone else, to make decisions affecting the well-being of all the citizens of the entire world?

What is badly needed is a change in the role of the FED as well as in the choice of its directors. What are needed are public spirited individuals (what a novel idea), perhaps chosen by ballot, who will be subjected to public scrutiny and control (no, not that type of insulting act that Mr. Greenspan put on for Congress’s sake but a real grilling).

Saturday, October 23, 2010

Fox News – The Spin Stops and the Lying, Distortions, and Insults Begin

Fox News has created the finest propaganda machine since the glorious days of that favorite Nazi propagandist Joseph Goebbels. And done it in the time-honored Republican way, using big bucks provided by the crowd whose sole interests they will pursue, the idle and greedy rich. The coming election has been purchased long before the voting begins by a master plan to gull the public with false claims, ridicule of liberal candidates, mischaracterization of the issues and who caused them, and lavish spending on entertainment designed wholly to keep the viewing public’s attention while indoctrinating them with a totally dishonest version of the truth.

Bill O’Reilly starts the lineup presenting a “no spin” version of events according to how he perceives them, selectively presenting versions differing from his views, that is, until the other guy starts getting the truth out, at which time he is referred to as a “pinhead” or “bloviator”. Everyone at Fox should be very familiar with “bloviators”. They have and all-star lineup of them featuring Sean Hannity, Glenn Beck, Rush Bimbaugh, ops!, I meant Limbaugh, and pinch-hitter Newt Gingrich, by far the finest group of “bloviators” money could buy. But still many viewers (too many) fall for the “no spin” “fair and balanced” reporting Bill O’Reilly claims for Fox’s team, and are passed on to Sean, preconditioned for further gulling. Sean shifts the attack to a middle level of pretence, managing to throw the concept of “socialism” into the mix, and, now that the elections are fast approaching, slip in the word “Marxism”. Wow! One can only wonder who is still hanging in there after this blatant mischaracterization of reality. Frighteningly, there appears to be many still hanging in there and begging to be gulled.

So you end this set with Glenn Beck, a buffoon of the highest caliber, whose act would make P.T. Barnum green with envy. His homey, down-to-earth presentation of outlandish claims and insults are designed to put an exclamation point on the wild (but slick) assertions of Sean. If you keep telling the same lies over and over again, sooner or later they will be received as gospel truths.

After Glenn’s grotesque burlesque of reality is finished, those viewers who have had the stomach to make it that far will be treated to an assortment of blond talking heads. Don’t those guys at Fox know any brunettes, or did some wild peroxide salesman find himself trapped at the Fox News site? But of course it’s just more of the “playing to the gullible” that is Fox’s trademark. Blonds, beer, and big boobs are what attract the general guy-in-the-street, and that’s the crowd to which the whole performance is directed. Sean, as part of his act, throws a small football around just to look like one-of-the-regular-guys. Sorry guys, he’s goes to bed with a suit on and real football would certainly mess his expensively-coiffed hair. I’m just hoping they don’t throw in boob jobs for those blonds, to complete the seduction of the public.

The last ploy they use is just plain “I’m just one of you down-home guys” when they hire the most popular current entertainers to put on free shows for the public. It costs big bucks I’m sure but when you are buying an election, money is no consideration. Everyone who puts up the dough will be quickly (and quietly) paid off many-times-over as soon as those whose offices have been purchased get down to business.

What is missing from this whole scheme is any attempt to deal with news of any substance, or a discussion of what can be done to correct the current mess previous administrations got us into. The main thrust seems to be to convince a gullible public that after 28 years of “conservative” government misrule and screw-ups, 20 of which were under Republican administrations, and the last 8 years under a clueless Republican president, that any administration can turn things around in little over 22 months. After the last great depression it took 4 years to even come close to solving the problems caused by the 12 year rule of similarly-incompetent Republican presidencies. And the programs implemented then were responsible for social benefits we all share and can be justly proud of, like social security, welfare for the disadvantaged and unfortunate, and freedom from fear of poverty in old-age or due to unanticipated disabilities. FDR’s programs were popular and successful, saving capitalism from its excesses during a similar period of capitalist-inspired greed, but it took money, and lots of it. The current mess involved far more serious financial problems and the Fox crowd would have you believe that it won’t take a lot more money to be corrected.

What they don’t discuss is how and why we got into this mess in the first place and what can be done to avoid similar problems in the future (and just how much money would be appropriate to remedy our current mess). It suspiciously occurred when the rich were becoming filthy rich, and the working and middle classes were just getting by. Could it be because of globalization? Fox appears to be unaware of even the term “globalization”. I have never even heard it mentioned by Fox “reporters”. Uncontrolled capital flows? Laws that made it easy to move production overseas? Laws that gave legal status to foreign workers taking over American jobs (and sending the proceeds back home)? Practices which allowed foreign corporations, setting up operations in the U.S., to evade their fair share of taxes? Or even laws that allowed U.S. corporations to similarly evade taxes? Or failure to establish rules to prevent or penalize U.S. corporations from moving their headquarters overseas simply to avoid U.S. taxes? Tax cuts for the superrich even when we were running mammoth fiscal deficit? These are the issues which any honest news organization should be investigating because they are the real issues. Budget deficits are simply the result of the give-aways (well paid for) that Republican administrations have been granting for years and that are the direct cause of our current problems, problems that won’t go away until they are addressed. The Republicans created them, have no intention of correcting them, and which, to hear them talk, they apparently believe will correct themselves, costing nothing! These are the questions sadly missing from the Fox News reportage.

Monday, October 26, 2009

Money, the Root of All Evil

All recent 'bubbles' including the current one in real estate have had two (avoidable) causes. One was the result of tax policies instituted under President Reagan, the other was one of the unfortunate consequences of Globalization. The politics of greed, the basis of these actions, has place the entire middle- and working-classes at risk of becoming the 'second nation' warned of by John Edwards in his bid for the presidency. Both policies have lead to unchecked asset inflation worldwide. The ultimate consequence of this worldwide will be societies of rich and poor, with no middle class, similar to most poor countries today. The poor will be outbid in trying to obtain access to any of the activities or privileges currently enjoyed by our elites and a slowly-dwindling middle class. In trying to participate in any public event the average citizen will simply have not the funds.

Over the past decade or so the prices of admission to the most commonplace of events, like sports events, theater tickets, or just local social activities, have already increased to the point of unaffordability by the general public. Activities which used to be of the order of 5 dollars now cost 25 dollars, too much for many middle class families today. This is thanks to President Reagan's tax policies in the 80s allowing the rich to avoid paying even the government's expenses at that time (even though they were the main beneficiaries of government spending.) Changes in estate taxes during this same period have added to this problem. The rich are getting richer and the poor poorer. These same policies unfortunately were adopted by the Brits under Margaret Thatcher and later, to a lesser extent, by most other western European nations. Bush Jr. has further supported and extended these policies, justifying tax giveaways to the rich on the discredited supply side 'theories' of the Ronald Reagan administration.

Globalization, a scheme to 'equalize' worker wage levels worldwide, is in the process of driving western workers' wages down to those of the poorest of countries. The low bidders of the entire world will have the privilege of performing the world's labor as the world's population increases and the efficiencies of automation minimize labors’ part in production. For western workers to compete with Chinese and Indian workers today (whose wages are in the 65 cents to a dollar fifty range) would require hourly wages of 3 or 4 dollar at best (regardless of productivity differences.) So eventually these western workers will either have to be supported by the dole, or end up living in the street if they are unlucky enough to not have a friendly relative with a basement available. It is only a matter of time before this sad event takes place, 20 years at most. What will happen with the children of the current middle class will be a real tragedy. In many poor countries 'death squads' have been frequently employed to solve the problem of those unemployed and aggravating street people.

The recent stock market ‘bubbles’ and current real estate one are the direct consequence of these two policies. The rich worldwide with trillions (9+ trillion dollars in U.S. money markets alone) of financial capital, looking for even minimal returns, have participated worldwide in purchasing whatever real estate they could get their hands on, and along with financial institutions (also foreign as well as local), have purchased the (securitized) mortgages underlying most of this same real estate. Thanks to Globalization, American dollars have provided foreigners the funds to participate in this speculation in U.S. real estate and financial assets. They have driven up prices on what should be a home for a family, turned it into a speculative asset in which the actual inhabitant has little equity (only has to pay the interest on an exorbitant loan) while the real owners are the rich throughout the world and the financial institutions who have underwritten them. Unfortunately this speculation by the world's rich have put the banks into the unpleasant position of being the real risk-takers in this enterprise and are inhibiting them from currently making much-needed new loans. When all said and done, the banker took the risk and is now left holding the bag. Wall Street and the bond-rating agencies are just as guilty if not more so, but the rating-agencies have at least not suffered (except in credibility). The Wall-streeters were unfortunately victims as well, apparently believing their own sales pitches.

What needs urgently to be done is to reverse these two policies and remove the excess capital which is the real culprit in this entire mess. This would require a highly-graduated income tax and heavy estate taxes and an end to the consequences of unbridled globalization. Under a democracy, tax policy should be designed to collect the amount necessary and appropriate for the needs of the entire citizenry. Lightly taxed capital gains should be limited to only that amount of capital necessary for real sustainable capital investment. Any remaining capital gains are simply unnecessary and would result in undesirable speculation and foolish consumerism. They should be highly taxed. Estate taxes should be limited to a reasonable amount for remaining heirs, not supportive of the unborn in perpetuity. The current population should not remain in debt to the no longer living. These measures, which may seem unfair or impracticable to many, are simply a variant of those tax policies adopted during the Second World War and continued until the Reagan economic fiasco. Even while under these highly-graduated estate and income taxes, the U.S. became the richest country in the world.

In order to save western workers from the same exploitative wages and substandard lifestyles currently prevalent in S.E. Asian economies, one of two things need be done. The U.S. Government should either require their foreign trading partners to require employers to provide a worldwide living wage and worker- security laws (something the ILO, the labor-regulating agency of the U.N., should have done long ago), or the U.S. government should unilaterally impose import duties to effect the same. The U.S. government's primary duty under the Constitution is to protect the interests of all its own citizens, not the interest of foreign citizens under WTO rules. To argue over 70 percent duties on imports when there are differences of 900 percent in labor rates is truly amusing if t were not so pathetic. The WTO’s ‘free trade rules’, under these conditions, are truly a joke. No decent employer anywhere in the world should be allowed to pay an exploitative wage to its employees. If a worker does his best, working in good faith, he should be entitled to a living wage sufficient to raise and educate a family. Good governments worldwide should accept this responsibility as their paramount goal.

. Without these changes, each year more than $1 trillion (from foreign and U.S. investors) will be added to the mountain of financial asset currently available for investment in the U.S. They will be available to purchase already-overvalued assets causing new 'bubbles' wherever they are invested. Appropriate federal tax policy should limit federal budget deficits, which have been a major cause of this otherwise superfluous capital. 'Fair trade' policies under Globalization should be designed to entirely eliminate those current trade imbalances which have resulted in these destabilizing investments in the U.S. If these policies were implemented, all future speculative crises could be avoided. If not, they will continue to plague the U.S. and world economies, becoming even greater in the future

Sunday, October 18, 2009

Government Deficit Spending is America's Last Best Hope for Recovery

It was most amusing for me to see Alan Greenspan explaining on the BBC to an otherwise trusting viewing audience that the world economies would experience severe economic crises every few years as a matter of course, and this was quite 'normal' and inevitable. Although the economies of the world will experience many ups and downs over the years, they are not at all 'normal' but usually the consequence of central bank and government screw-ups. If the government would try to support their average middle- and working-class individuals and not just their rich 'sponsors', future economic crises could be avoided. The government simply must accept the basic realities and paradoxes of capitalism and abstain from following those 'voodoo' economic theories proven time-and-time-again not to have worked as advertised ( but profitable to the rich). If they would simply regulate the economy in accordance with sound economic principles the consequence and extent of future crises would be significantly reduced and workers worldwide could experience the high standard of living that they deserve.

The factor of capitalism most misunderstood is that, if people want to get richer in money terms, someone else must take on debt. Capitalism is all about getting richer. Financial assets are obligations assumed by some second party, individual or institution. There is no invisible genie who borrows from the rich and will magically pay then back in the future from some secret funds source. Rich Republican's claim that they don't want the U.S. government to take on more debt is simply a misunderstanding about what has made them rich. The greatest increases in wealth always occur when governments assume large deficits, most commonly during a war or recession. Private individuals and businesses have limits to the amount of debt they can assume. The U.S. government has fouled its own nest by sitting idly by while Americans lose their jobs, savings, and the ability to take on further debt. Businesses likewise have been put in a position in which they no longer wish to take on debt by investing in the U.S., this situation also caused by government mismanagement of the economy. The U.S. government doesn't have these borrowing limitations and, if it is unwilling to take on more debt, capitalism in the U.S. is in serious trouble.

But of course there are non-financial assets to consider. People get wealthier by buying shares in profitable businesses and in the purchase of other assets such as real estate. In the case of real estate, these assets are limited by nature and have values now primarily based upon speculative demand and far in excess of reasonable valuations. In the case of shares in a going business, value depends upon earnings, which in times of recession normally decline. The wealth of U.S. citizens in this case is limited to its share in the value of going businesses. The U.S. has, for some time, been losing ground in this area due to the deindustrialization of the U.S. economy while jobs and production move offshore. The middle- and working-classes possess few assets of this sort, and real estate was their last substantial asset. We all know how that turned out. This loss of capital is evidenced by international balance of payments accounting which shows the U.S. economy is losing around $700 billion per year in assets. That will continue lacking any government action. In this case, capitalism in the U.S. has not only been stopped dead in its tracks, but what capital assets are remaining will soon be taken over by foreigners.

Both Lord Keynes and Milton Friedman were aware of the fundamental facts underlying a capitalist economic system. If the economy in general and stock markets were to survive and prosper, yearly consumer spending had to increase over the previous period. Likewise the GDP. They both knew this would require a greater money supply. Consumption (and GDP) have held a fairly constant relationship to the money supply over the years by a factor called 'V' (the turnover velocity of money) which varies little over time. According to Friedman's basic theory, called 'monetarism', the only thing necessary to increase consumption was to increase the money supply. That is correct as far as it goes. Friedman simply thought an increase in the amount of bank reserves by the FED would in itself be enough to stimulate the banks to increase their loans to businesses and individuals, thereby spurring increases in spending. He did not contemplate a situation in which the banks would not lend it out or that someone would not be willing or able to borrow it. Keynes knew about the importance of the FED's expansion of the money supply some 40 years before Friedman postulated it. He not only was aware of it, but suggested how it could be done. Keynes knew what our current economists have learned the hard way, that the FED alone could not increase the money supply. Almost half of M1 (the simplest measure of our money supply) is money lent by the banks (creating bank deposits), the rest being cash. For every dollar the FED supplies the banks in terms of reserves, the banks can lend anywhere from 7 to 10 times as much to its potential borrowers, namely businesses, individuals, or the federal government. Lately the FED has provided the money but he banks have not lent it out. This brings us back to the basic problem. If the banks will not extend credit to businesses and private individuals, then the money supply and consumption (and production and profits) will not increase unless government itself borrows it. Lacking this, the U.S. money supply would remain constant and the country would remain in recession. So Keynes solution was that whenever the private sector (businesses and individuals) would or could not go into debt, the only other borrower remaining was the federal government, which would have to assume more debt to keep the economy healthy. The banks are more than happy to lend to the U.S. Government.

The reason that businesses have resisted making substantive investments in the U.S. is two-fold. First and foremost is the fact that the U.S. consumer is plagued by past debts and his job at risk because of the current credit crunch. In addition, actions by the FED under Alan Greenspan, and continued by Ben Bernanke, designed to reduce consumption (and preserve the value of the dollar), had severely damaged the economy. These consisted in successive claims of non-existent inflations 'forcing them' to raise interest rates, which brought on the ever-more-serious recessions leading to the final collapse in the economy. Secondly, foreign competition stimulated by Globalization has made it unprofitable for most businesses to invest in the U.S. U.S. multinationals are borrowing and investing primarily in South- and S.E Asia. Foreign Direct Investments (FDIs) in the U.S. are minimal and pretty well limited (80%) to the purchase of going businesses in the U.S. (i.e., little additional foreign capital investment). With wage rates in these Asian countries 10% of those in the U.S., who wouldn't be setting up shop overseas. Hint, the answer is nobody.

Workers in the U.S. have lost their high-paying industrial jobs and have had to accept service sector jobs at considerable decrease in wages. In order to sustain their lifestyles (generally fixed costs assumed when times were good), they had to take on further debt (credit card as well as real estate) to cover this income shortfall. Many have had to cash their IRA's, Keoghs, and 401-Ks as well as saving previously put aside for their retirement and children's education. Now that the middle- and working-classes are reaching insolvency and can't take on further debt, a further increase in spending by them is highly unlikely. So if the political elites, supported by their major propagandist (Fox News), think we can pull out of this recession without government deficit spending they are living in LaLa Land.

Properly regulated deficit spending can create a positive economic environment in which American businesses and workers will be able to resolve their debts and resume consumption and spending. This must include a solution for the problems caused by Globalization and by limitations on Federal Reserve meddling with interest rates (which should depend solely on market conditions). Lacking these government actions, the economy will be entirely dependent on continuing government deficits. That is, if the rich want to increase their wealth they will have to accept some changes in the way the government does business.

For this reason I hope those chronic carpers on Fox News and their paymasters will stop their attacks on government deficit spending and harping on the taxes their children purportedly will be saddled with. If this crisis is not solved, many of their children won't be saddled with high taxes at all. They won't have jobs. The entity previously known as the middle class will likewise be paying little or no income taxes, having had to accept minimal wages in the service sector (or will be a further drag on the economy if unable to find employment at all). Under current tax laws, a family of 4 with a yearly income of $22,000 pays no federal income taxes, and would have little ability to pay for tax increases caused by interest on future government deficits. Unchecked globalization will ultimately result in all those engaged in world commerce to accept wages at this level (or lower). Service sector wages will likewise be adversely affected by the disappearance of previously high-paying jobs in the U.S., in this case producing a valid 'trickle down effect' on incomes. Who then will pay for any and all taxes necessary to run the federal government in the future? The rich, who are resisting increases in current government deficit spending (one of the remedies necessary for recovery), will end up paying for everything! Fox News and their rich patrons will find that they have simply been shooting themselves in the foot with their tirades against current deficits. As the old ad went 'you can pay me now or you can pay me later'. Later may very well be too late.

Tuesday, December 30, 2008

Globalization and its Contribution to America’s Economic Catastrophe

The promoters of Globalization, in their headlong and single-minded lust for profit, have exhibited one major flaw, a complete ignorance of the basic economic principles underlying capitalism. While marginally lowering prices on products by replacing decently-paid western workers with third world workers at exploitative wages, they have killed the proverbial “goose that laid the golden egg.” The displaced workers, those middle income western wage earners, were the backbone of world consumption. The exploited workers could not buy the products which they created. Now, as his wages are being increasingly undermined by product outsourcing and tariff policies (NAFTA, CAFTA), the previously middle class wage earner is gradually becoming unable to keep up the consumption necessary to support production. Only the rich, beneficiaries of the increased profits generated by these policies, can afford these products. They have the gold but the goose has been cooked. This article explains the phony “principles” supporting Globalization, the reasons for its “success”, and the danger that it represents.

Practically all well-known U.S. economists and policymakers have supported Globalization as if it were the Holy Grail, resulting finally in our current international economic crisis. There were two well-publicized reasons proposed to justify Globalization, and one (secret and undisclosed) which was the real reason for their wholehearted and sycophantic support. One of the former was the concept that free trade under Globalization would end trade competition among nations leading to world peace. The other was based upon an ideological concept derived from one of Ricardo’s economic theories called the Law of Comparative Advantage. This “law” was predicated upon the idea that the world as a whole would benefit when each country produced only those goods that it was most efficient in producing and leaving to other countries those products they excelled in. Both of these concepts have been proven unworkable in actual practice, but the economists and politicians have not given up on them regardless, mainly because they really were only pretexts for Globalization and whether they worked or not was immaterial. Why let reality stand in the way of a good story? The third and real reason that these "professionals" endorsed Globalization was that it was profitable for them to do so. Few writers or economists can propose anything contrary to the interests of the politically connected and be published or promoted. Only writers of inordinate prestige and integrity, such as Naomi Klein and Paul Krugman, can afford to take the risk. Naomi’s The Shock Doctrine: The Rise of Disaster Capitalism and Paul’s The Conscience of a Liberal are among the few books which dare to disclose the truth about the U.S. government’s unfair and damaging policies and practices. Conversely, the way to riches is by puffing lazy and incompetent “elites” and touting any program financially rewarding to them. Most honest economists, columnist or reporter will eventually end up poverty-stricken under these circumstances.

In dealing with the premise that world peace would be assured under free trade and Globalization, there is a claim that World War II was caused by excessive tariffs among the combatants causing a lessening of trade and friction between them. In reality, the war in Europe was contested between countries which had considerable friendly trade prior to the war. Germany and Great Britain were major trading partners. In the case of the Pacific conflict, it was not tariffs but an embargo against the Japanese established in response to their aggression against China. Tariffs took no part in the conflict. Imperialism was the culprit in the Pacific as well as in the European conflict. Today, thanks to an economic imperialism over third world countries resulting from policies forced upon them by the IMF (as directed by the U.S.), no country need attack the resource rich countries fought over in the past. For the most part, their assets are already owned by the multinationals, in the interests of the world’s shareholders. Economic Imperialism under Globalization is no less offensive and improper as Imperialism by force.

Another convenient claim, the concept that tariffs established by the U.S., the famous Smoot-Hawley in particular, were the basis of the economic collapse worldwide ultimately leading to the war, was also specious. The Fordney-McCumber Tariff (a Republican tariff) was passed in 1922 and had been in effect without problems for 7 years before the stock market’s collapse. Smoot-Hawley was just the last of a series of high-tariff law in the U.S., simply a continuation of U.S. trade policies prevalent throughout the history of the U.S. and primarily responsible for our great economic successes.

Many countries will be peace loving and friendly to the west as long as they are doing well economically. If not, they can be expected to revert to “uncooperative” competition and to acts offensive to competitor governments. What is happening in Russia today is an example. Public dissatisfaction caused by poor government policies and corruption, but blamed upon the U.S., has resulted in “unfriendly” acts by the current government. The gap between "have" and "have nots" worldwide, regardless of the causes, will tend to cause instability and aggression in many countries. The idea that Globalization will miraculously change this is pure fantasy.

The concept that the entire world will benefit from “free trade”, as derived from Ricardo’s laws, had been soundly refuted prior to the current world economic meltdown. Alan Greenspan in his paean to Globalization, greed, and the Republican Party, The Age of Turbulence, cited “well-documented evidence that competitive markets over the decades have elevated standards of living for the vast majority of Americans and much of the rest of the world”. He apparently had never seen or heard of Detroit, Bethlehem, or any of the eastern cities ruined by the loss of entire industries (textiles, shoes, electronics, steel, autos, et.al.) which had been the direct result of Globalization prior to the current economic debacle. Certainly with the economies of the entire world in disarray he would not now be able to claim this improvement in the standard of living for practically anyone, anywhere.

Ricardo's Law of Comparative Advantage was based upon the concept that countries share production, with each concentrating on those products for which it had a relative advantage, and relinquishing to its trading partners those which they were best at. It was based upon a balanced trade with each country trading enough of its products to afford those of their trading partners. If this tradeoff was not observed, there was no problem in those days, There being little else to swap for, such as the shares of corporations, government and corporate bonds, commercial properties, and “bundled” assets (such as REITs) which are currently available, the balancing factor was invariably money. The country experiencing a sustained trade imbalance would quickly run out of money, and the trade imbalance would automatically disappear (simultaneously bankrupting the country involved). Ricardo did not even contemplate that happening in his day. No government would survive if it allowed it to happen. Trade had to be based on comparative advantage, not absolute advantage, with a balanced (equal) trade between all countries. Each had its own specialties which their trading partners had to respect. An unfortunate result of this needed “reciprocity” was the forced opening of China to the opium trade by the British in the mid 19th century. Great Britain was running out of sterling having few products to sell to China in exchange for its silk, tea, spices, etc. If citizens of the U.S. had not possessed substantial non-monetary assets, accumulated throughout the history of the U.S., the U.S. money supply would have disappeared long ago, with a corresponding drop in the American citizens’ standard of living. Today, these assets are now being sacrificed for the benefit of foreign corporations, as the trade deficit problem remains unresolved.

In dealing with the “efficiency” issue supposedly leading to such great improvements in worldwide standards of living, much of what has been claimed, such as the actual across-the-board implementation of “free trade” and its purported benefits, is fallacious or distorted. The low cost of foreign goods is not due to fair competition based upon the productive capacity of individual workers, but strictly upon worldwide wage levels determined primarily by international exchange rates. These exchange rates have been consistently manipulated by foreign governments in order to make their tradable products more competitive, a practice called “beggaring thy neighbor” in the past. This practice is a direct and significant violation of “free trade”. Japan’s spectacular economic success over the past 50 years was based upon the establishment of an undervalued Yen (established by U.S. authorities) designed to reestablish it as a powerful U.S. ally in the East. China‘s devaluation of the Yuan in 1993-1994 and peg to the dollar was not contested by the U.S. government although it was obvious that it would allow China to gain (and hold) a long-term supremacy over the U.S. in most manufactures. That too was done to “pacify” China. As a side “benefit”, these devaluations were the principle initiating cause of the Asian financial crisis of 1997, ultimately resulting in drastic losses of assets by other Asian countries, and deterioration of their already exploitative wage rates. If giving up worldwide supremacy in manufacturing (and its associated world economic and political leadership) is the cost of gaining friends, the U.S. has made a splendid bargain. The folly of this policy will become painfully evident when China’s GDP (and consequent military strength) overtakes that of the U.S. (about 2028 according to recent studies).

The major consequence of Globalization and “free trade” will be a lowering of wage rates (and worker and environment standards) to an exploitative one worldwide. Exploitative wage rates are simply rates insufficient to provide workers a "living wage", one that will not compel them to force their children to work and sufficient to provide money for their education. In Asia almost all workers have been exploited because of massive unemployed or underemployed populations in these countries. Each country has been desperately trying to employ its citizens at whatever wage rates are offered, and foreign multinationals (exploiters) have taken advantage of this.

In the interest of fairness for all workers worldwide, “equalizing” tariffs should be imposed by all countries on all imported goods which the home country itself could produce. An “equalizing” duty should be levied on all internationally-traded manufactures at a level designed to compensate for differences in worker’s wages and benefits. Those citizens unsatisfied with the quality or price of products produced locally would be free to buy foreign-made products but would have to pay duties in cases of unfair wage rate differentials. If no substantial wage differentials existed, there would be no duties. An equalization of effective worldwide labor rates was, in fact, a major feature of the Fordney-McCumber Tariff Act.

The manufacturing advantage enjoyed by current low-wage countries would be eliminated as the leaders of these countries realized that they were contributing funds to foreign governments (in the form of duties) which would not be necessary if they arranged equitable wages and benefits for their own workers. For all countries, local competition should result in the hiring of the most competent workers but at wages appropriate to any worker worldwide. Any worker anywhere, working in good faith, deserves a living wage. Anything short of this should be recognized as obscene. In addition, innovation would increase because new products developed under local competition would augment products developed abroad. The resulting income policies, coupled with fair tax policies, should eventually provide wage levels appropriate for workers worldwide.

One other consideration need hardly be mentioned but has dire consequences. Under Globalization, it will be necessary to “homogenize” the economic policies and social practices of the entire trading world, a relinquishing of sovereignty in many areas of government and society. It will require social-welfare oriented countries and conservative capitalistic ones to find common economic ground; religious and ethnic groups to agree on social policies contrary to long-held beliefs and traditions. To accomplish this will prove to be not only illusory but dangerous. How would the U.S. be better off by adopting those “international” wage policies which have left workers in the rest of the world poverty-stricken and unhealthy?

Globalization is 100 percent baloney. Globaloney, a term coined by Claire Booth Luce more than 60 years ago when it was first proposed, was baloney then, and is baloney now, only packaged in a different wrapper. Each country must be able to choose and support its own culture and be free to independently choose its own interests, pursuits, and way of life. Universal decent and fair trade practices will permit this independence and will do it without sacrificing these sovereign rights. If the U.S. government fails to face up to the consequences of its current policies of “free trade” under Globalization, we can all kiss off the “American way of life” that we have created and been so proud of.