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

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.