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Source link: http://archive.mises.org/9097/joe-stiglitz-on-the-crisis/

Joe Stiglitz on the Crisis

December 12, 2008 by

So, Joe Stiglitz is weighing in on the crisis with an article with Vanity Fair. His claims? Five major mistakes were made.

#1: Firing the regulator inflation-fighter Paul Volcker in favor of free-marketeer Alan Greenspan
#2: Gramm-Leach-Bliley AKA the “Financial Services Modernization” Act
#3: “Applying the Leeches” – by which he means poorly planned, “ineffective” tax cuts/”stimulus”, that “made” the Fed pump money into the economy to stimulate it.
#4: “Faking the Numbers” – misleading accounting + dishonest ratings
#5: “Letting it Bleed” – bailouts instead of fixing the real problem

Simple responses?

#1: Doesn’t matter who is in charge, the nature of the fractional reserve banking system paired with fiat currency would have pushed us this direction.
#2: I’m pretty sure that Robert Ekelund and Mark Thornton have said the same sort of thing, but with an actual reason: our banking system is filled with moral hazards (fiat money, FDIC, fractional reserves, the Fed), so this “deregulation” amounted to corporate welfare.
#3: “Yes, but…” if the Fed did not exist, then we would have avoided the current crisis anyway.
#4: Agreed. Fraud is bad. Even anarchocapitalists don’t approve of fraud.
#5: Also agreed. Bailouts will make the problem worse, and don’t fix the real problem. The real, root problem isn’t a lack of regulation; it’s the government-sponsored system of moral hazards that eliminates every natural check on irresponsible lending and makes regulation the only way to manage lending risk. Eliminate the moral hazards, and the regulations stop being “necessary”.

So close, and yet, so, so far.


shaneinwy December 12, 2008 at 2:54 pm

It never ceases to amaze me how perfectly obvious all of this is to me, yet the “experts” continually get the diagnosis wrong. They really are like a bunch of drug addicts who insist on blaming their poor health on a “bad batch”.

Maybe it is just because I was kicked out of my local gov’t brain laundry at a young age and therefor am not properly adjusted, but it seems to me that it would take a stupendous and highly labor intensive kind of willful distortion of reality to come up with this stuff. Blaming this on “capitalism”, or markets gone wild, or lack of regulation, etc is like me breaking someone’s legs and then claiming that it is clearly an inherent bio/physiological weakness that keeps them from walking.

mikey December 12, 2008 at 3:28 pm

Greenspans writings from the 1960s proves he was familiar with and agreed with Austrian econ. But the lure of power and prestige was too great.
His words still carry some weight. Perhaps he will appear on national television and recant, call for the abolition of the fed and reintroduction of free banking and gold-as-money.Before he dies.As an act of atonement.

Dennis December 12, 2008 at 3:29 pm

In reference to item no. 1, let us see how much inflation fighting will be done now that Stiglitz’s man is president. My educated guess is that the Obama Fed will be just as, if not more, inflationary than the Greenspan Fed. Moreover, I wonder to what degree Stiglitz supported Volcker’s somewhat tight monetary policy in the late 1970s and early 1980s; my intuition is not much.

DD December 12, 2008 at 3:50 pm

“Capitalist Fools” is the title of the article. “Socialist Fools” would be appropriate.
The mistake the Soviet Union made was that it didn’t call it’s system “Capitalism” also. That way, when they collapsed, they could have said that “Capitalism” has failed us, now lets try Communism.

guy with a rollformer December 12, 2008 at 4:11 pm


Mr. Greenspan advocated a gold standard, even while he was in the position. It makes me wonder whether he decided to let the world learn the dangers of fiat currency the hard way.

Enjoy Every Sandwich December 12, 2008 at 5:22 pm

Pfah, every failure he’s referring to is a failure of government. It’s just yet another proof (as if another was actually needed) that the government isn’t capable of “running the economy”.

Walt D. December 12, 2008 at 5:24 pm

True Marxists would describe the old Soviet system as “State Capitalism” and not true socialism – communism is the end game where the socialist system economy becomes so efficient that every one has all needs met !! Unfortunately, in reality, socialism, or central government control of the means of production, in the absence of market pricing signals, is not able to allocate resources anywhere close to optimally – the communist utopia is an illusion.
Sadly, the US is unable to learn from the mistakes of the Soviet Union. It can only be a matter of time before we have food shortages, bread lines, soup kitchens. If making a good speech about nothing could solve the problem, then we would only have to wait for President Obama to be sworn in. However, I don’t think the problem is that simple. IMHO peter Schiff has it right and all the other talking heads have it wrong.

Wade S. Luther May 9, 2010 at 11:28 am

Stimulating The US Economy
By Managing Social Security
As A Sovereign Wealth Fund

Balancing The Federal Budget, By Creating A Powerful
Alternative to Keynsian & Supply Side Economics

Here is a game changing idea that has the potential to revitalize the economic destiny of the United States and alter the course of human history with respect to Global Warming. Simply put, I am suggesting that the Social Security Trust Fund be managed as a Sovereign Wealth Fund and be used as the vehicle for economic stimulus in the US in place of the Federal Budget.

At this juncture in history, it is painfully obvious that Supply Side stimulus money ends up in capital investments in China and that it fuels consumption in the US. Keynsian stimulus, on the other hand, places an undue burden on the US Treasury, which appears to be unsustainable and politically untenable. Evidence suggests that we are entering a period of long term, persistent, systemic deflation and this poses a serious dilemma for policy makers.

As such, the concept that I am presenting represents a 21st Century alternative that is neither Keynsian nor Supply Side economics. Essentially, the Social Security Trust Fund would be managed as a Sovereign Wealth Fund to fund super-efficient, productivity enhancing energy investments, which would be supported by a government regulatory structure which facilitates a higher rate of return on Social Security investments, creates energy security, and combats global warming on a meaningful scale. The proceeds of these investments would support the old folks by increasing the return on investments held by Social Security and by deriving this income from enhanced energy efficiency and productivity. In short, I am advocating a win, win, win, win, strategy for managing Social Security Trust Fund assets.

In order to accomplish this goal Congress would have to allow the Social Security Trust Fund to Sell approximately 1.5 trillion dollars in US Treasuries per year to the Fed or on the open market for 5 years and finance a new energy infrastructure so that the increase in energy efficiency brings forth significant increases in productivity in the US and benefits the Social Security Trust Fund in such a way that it ensures the long term solvency of the trust fund. The new energy infrastructure would essentially be an asset owned by the Social Security Trust Fund in lieu of US Treasuries. It would pay a higher return on investments, but it would be a safe and stable investment, supported by regulatory structure. A simplistic example of this idea would be to have the Social Security Trust Fund purchase 100 nuclear power plants or tidal power plants and then have the government support this investment with a regulatory structure that favors power plants which do not create greenhouse gasses. This program would create an enormous number of jobs, and create long term investment income for retirees who depend on Social Security because when people pay their power bills each month it will accrue as investment income to the Sovereign Wealth / Social Security Trust Fund. The returns would be higher than US Treasuries and it would meaningfully improve the long term viability of social security. The Social Security Trust Fund could also pay for a new power-line infrastructure that is more energy efficient.

Now that I have introduced you to this concept, I want you to understand that I would actually favor a more complex paradigm which could benefit energy efficiency in our country enormously. You may be familiar with the concept of LEEDS certification. This is a series of certifications for buildings to meet heightened energy efficiencies. An example can be found in the Clinton Foundation’s work to make the Empire State Building LEEDS compliant. The major construction overhaul will be paid for by energy savings over 18 years. In other words, the money which is saved each month on energy bills is enough to pay for the loans on the construction (manufactured materials and wages for construction workers) and there will be a complete payoff of the stimulus expense through aggregate reduction in energy cost after 18 years. But think about this. If we pay for the project, say over 20 years out of increased efficiency, then perhaps we are gaining a 5% increase in productivity on a yearly basis over 20 years, because we are able to pay for 100% of the costs through increased productivity over 20 years. The net cost is zero but we have created enormous employment revenues and enhanced the tax base. What if a portion of this increase in productivity could be structured such that it accrues to the Social Security Trust Fund as secured interest payments? Bingo! You got it. Manna from heaven, or more concisely, investment cash returns from increased productivity. We will unlock sorely needed cash over time with intelligently applied investments. Ok, now, let’s get into the nuts and bolts.

Here is how it would work. The Congress passes national regulation mandating LEEDS certification (or something like it). Preference should be given to energy-efficient products produced locally or out of recycled materials (because there is an environmental and energy benefit to local production). Who would pay for all of this???? The cities and counties would pay for all of this construction. How? You ask.

Congress might have to change the charter of the Social Security Trust Fund, but money would be loaned to the cities and counties by the Sovereign Wealth / Social Security Trust Fund and they would be secured with liens on the property taxes which are coming from the properties that are being improved. Construction could begin immediately if the first iteration of building projects meet a screened criteria for easy and straight forward implementation. For example, you might start with hospitals and university infrastructure to just get things started. As time progresses many new, innovative, locally produced, green building technologies would be seeded with cash from all of this business. As an example, natural gas powered fuel cells in each building might provide a decentralized power infrastructure which is twice as efficient as the grid. New windows, solar lighting technologies, solar panels, and insulation are all examples of materials that might be developed. The money used for construction would be paid back to the Trust Fund through increased property taxes rather than having individual property owners apply from loans to make improvements. However, the increase in property taxes would be offset by a decrease in energy bills. If you are an economist and if you want to run with this idea, here is where you might find potential for a Nobel Prize in Economics. If the energy savings pay for a very large number of national energy saving construction projects on hundreds of thousands or millions of properties, what is the result of massive productivity gains? Answer: low Inflation over the long term, doing more with less …..and jobs, lots of remodeling and construction jobs which have been eliminated in the current economic slump. And remember, this cannot all be accomplished in one day. It needs to stretch out over time, and there should perhaps be an order of priority given to which type buildings are to be retrofitted first. A tangential benefit might also be an improvement in property values and as we all know, that would benefit collateral requirements in the banking system.

Now let us look at the argument that this kind of increase in the money supply might be inflationary. In fact, that is the first thing that the sceptics bring up, including my congressman. But ohhhhhh no. Here is where the idea really starts to gain merit. You cut back on consumption at the same time that this investment stimulus is occurring. It was done (in its own unique way) during World War Two. We stimulated the hell out of the economy, invoked a spirit of common sacrifice and cut back on consumption. In our period of time, we would make it more difficult to get credit cards, raise interest rates, and raise taxes. (Oh, uh, gee but these things are already happening!) Well, we better do something then because all of these things will dampen consumption and our economy is all about consumption. In other words, you might engineer an economic recovery which is based, not on increasing consumption or imports, but on large scale increases in productivity and efficiency in the energy economy. America is dying of consumption anyway. Everywhere you look we have become a nation of fat people. Let’s do a national marketing campaign and change the way we think about ourselves. We are not a consumption economy anymore. We are an innovation and energy economy and we are up and coming. This is just what the Doctor ordered. And listen, if 1.5 trillion per year in Social Security-owned Treasury sales to the Fed is too much or if it is inflationary, then scale it back a bit. But develop the concept. And keep this in mind. Financial reform, mandated by Congress is going to increase collateral requirements throughout the financial system, and dampen the money supply (whether real or imagined) that may have resulted from the lack of regulation in the derivatives market. We will need a way to increase the money supply which is available for investment, especially money which will find its way into the hands of small businesses and entrepreneurs all over the country. This plan will address that need without a lot of borrowed cash from Asia. We have to change that dynamic and a national program of enhanced productivity can leverage our Trust Fund assets in a very nice way to get us out of the current mess.

America does not need to resign itself to a paralytic fate brought on by over-consumption and too much debt which accrued as a result of the Supply Side Economics experiment. We need to grow out of the debt. We can lead the world by invoking a spirit of self sacrifice and being proactive about reducing greenhouse emissions. People are looking for this kind of leadership and the younger generation yearns for the kind of forward thinking that will save their planet and ensure their economic future. Do not underestimate the power of galvanizing high minded public moral support for a productivity led recovery rather than a consumption led recovery. If this is properly implemented then federal budget expenditures and entitlement programs can be squeezed very hard without substantial adverse macroeconomic consequences.

Now let us look at consequences for the American Dollar. Well, first of all, if we use the Sovereign Wealth / Social Security Trust Fund as the vehicle of economic stimulus, we will not have to sell Treasuries to the Chinese, because we will balance the budget. The voters are going to demand this anyway. Second, America is floating on an ocean of natural gas. What if each home or business were equipped with a natural gas fuel cell which would generate electricity (without generating greenhouse gases) and provide both heat and hot water. Hmmmm……… ok, stretch your imagination now. Guess who will get on board with this program with massive job creating investment cash???? Yup, that old environmental nemesis, the Oil and Gas Industry. Yes, leverage the resources of the Oil and Gas Industry to create jobs and get conservatives on board with this program. There are also some promising new technologies which allow the creation of a clear, odorless, non-polluting liquid diesel fuel made of natural gas. We can replace gasoline with room temperature, liquid natural gas. The next phase of development would be to use this liquid natural gas fuel in fuel cells so that we do not create global warming when we drive. By doing this we will eliminate oil imports rather soon and eliminate a large portion of the trade deficit. Automobiles which generate electricity from natural gas fuel cells might even be plugged in at home at night to generate power for our homes. Now that would really be a game changer. Sorry about that OPEC friends. We are taking control of our destiny.

Uh ohhhh. We might just get a little political synergy here. How shall we spin this???? Are we creating “energy independence” or are we fighting “global warming”? Ooooooo Ahhhhhhhh, maybe our leaders might just be able to agree on something here and maybe both political parties could just speak out of both sides of their mouths at one time. We will have a love fest in Washington DC. Groooooovy…….

As you might guess, there are a couple of political prerequisites to this program. First, Congress can no longer borrow money from Social Security in order to fund the federal budget. We need an “Integrity in Budgeting” law. Second, the federal budget can be balanced because it is no longer required to provide stimulus. Military operations in the Middle East (Centcom) could be financed with a surtax on imported oil (a consumption tax, which reflects the real cost of foreign oil). And third, our leaders should call people to make a sacrifice for the common good. We need to create a climate of moral imperative here where energy security (Republican hot button) and global warming (Democrat hot button) inspire a call to action that unites the country. And lets create a gigantic leap in productivity to boot, because that is what is required over the long term to service the current levels of indebtedness that are in this country. Look at it this way. If you could engineer a 5% aggregate increase in productivity per year in the US, then the doomsday financial scenario will fade remarkably into the distance. It would add about 600 billion dollars to our economy each year, and those numbers would compound year after year. Run the math and everything changes, including the social mood in this country. Too many people are resigned to long term decline because conventional thinking about our mounting deficits does not take into account the aggregate long term potential which would be brought forth by a sustained, quantum increase in productivity. In a manner of speaking, over time we have the potential to deal with our current economic situation by going Star Trek. I do not think that this is too much of an exaggeration. Technological progress is built into the fabric of things and it is moving forward exponentially. What is now required is for us to consciously focus on this aspect of technology and to make it the nexus of the new charter for the Social Security Trust / Sovereign Wealth Fund. Instead of increasing entitlement programs, Americans would be more inclined to support an increase in the pie by using technology to do more with less. For many of us, traditional Democrats are making a big mistake by thinking like socialists from the thirties rather than entrepreneurs from the current age. At least, that is the popular conception. If they do not change the message, they will lose control of Congress. Throttle consumption, increase productivity and balance the budget.

So, here it is. Steal my ideas. If you are an economist and you are inspired by this line of thought, go out and win yourself a Nobel prize in economics. Give me a footnote if you wish, but really……… do it for the common good and the benefit of all people. We need to do something about global warming and while we do it we can solve the solvency problem that is currently built into Social Security, put people back to work, balance the federal budget and inspire the world. Use your network. As a footnote, the banks are squeezing small businesses in this country very hard and there is no reason that the Social Security Trust Fund cannot be used like a bank to stimulate productive business that improves energy efficiency. But remember, Sovereign Wealth / Social Security Trust Funds should only go into very secure investments and firm guidelines need to be established. These investments should most certainly be secured by liens on property taxes or by utility income which is supported with a robust regulatory structure that protects this class of investment. What I have in mind is something similar to the student loan system, which makes it impossible to discharge student loans in bankruptcy. If the Trust Fund investments can be protected in this way then the money will turn over and over again once it is unleashed in the form of construction loans.

When you consider what has happened in our political and financial system recently, I would argue that it is morally preferable for the Fed to buy US Treasuries from the Social Security Trust Fund and endow it with cash, than it is to dump so much cash into Goldman Sachs, Blackstone, Pimco and the like through lucrative insider arrangements and funny deals which make their balance sheets look good. The retail banks are not helping us right now. They are trying to save themselves and a large amount of the so-called stimulus cash has ended up in the stock markets, derivative markets and in China. As many of us in the business community are aware, imploding credit lines have a devastating multiplier effect throughout the economy. A Sovereign Wealth Fund, which is dedicated to dramatically increasing productivity over the long term and making significant amounts of seed capital available for energy infrastructure innovation and investment is a game changing idea. It would be similar to coming up with a killer software application that changes everything, or perhaps even inventing a device similar in impact to the internet. This is a systemic, paradigm changing concept which will flow into hundreds of thousands of small businesses, create millions of good jobs, and countless innovative new products Run with it.

In summary, what I am suggesting is a way forward which would
a.) balance the Federal budget.
b.) create a large number of green construction jobs.
c.) stimulate huge investment in green building technologies and manufacturing (preferably in the US).
d.) give preferential treatment to local suppliers because it is more efficient to buy locally and to use building products made of recycled materials.
e.) fight global warming on a meaningful scale.
f.) provide for energy security, reducing imports.
g.) save social security by investing in secure, higher yielding investments which increase productivity.
h.) invoke a common spirit of sacrifice for the future, which would give our people a greater sense of meaning than living for the purpose of consumption. People look to America for inspiration. Americans need inspiration. Inspirational leadership would be a strong card that Barak Obama could play in this regard.
i.) stop borrowing money from Chinese (which is a catastrophic geopolitical disaster in the making).
j.) confront the Chinese government over the reality of a 40% currency manipulation which is decimating our industrial base on a daily basis. Most of us do not work for the government and our reality is deadly, high stakes hand to hand combat with Chinese businessmen who will put us out of business in a heartbeat if we let them. A huge number of jobs, and the entire US manufacturing base is on the line every single day.

The issue of the US-China trade regime deserves special consideration here and must be addressed if the Sovereign Wealth / Social Security Trust Fund is to function as a proper vehicle of stimulus in this country. Under the current trade regime, all of our stimulus cash eventually ends up in China. We get all of the debts and they get all of the assets. If the US is to remain viable as a nation we must have the ability to manufacture. The Government MUST confront the Chinese over myriad unfair trade practices, which stem from their prejudicial legal system, paperwork requirements for imports etc. etc. etc. GW Bush made numerous mistakes, but one of the biggest was the one-sided trade arrangement with China. It has worked well for his core constituency of large, supranational corporations, but it is a disaster for the long term financial health of this country. A financial system that depends as much on leverage as ours, simply must maintain an asset base which can be used as meaningful collateral on the balance sheets of banks. Otherwise the system will implode. We cannot export all of our manufacturing assets to China and take on debt to buy things made over there. Our financial system will not function. The banks need an asset base which has value in order to support our current level of indebtedness. The banks need viable collateral in order to loan money. The trade dynamic with China is far too large to just hand them all of our manufacturing assets and job base. China is vastly larger than the Japan of the 1980s. Our banking system cannot handle this kind of Chinese tsunami because asset prices decline when so much manufacturing capacity is shut down over here. Disregarding this situation is not an option. If we have all of the debts and they have all of the assets then sooner or later our financial system will collapse because bank balance sheets will implode. We have had our wake up call. The banking system can only fudge its balance sheets for so long under current Fed, wink and nod guidelines. Declining asset values are not an option and the corollary principle is that exporting the industrial base is not an option because that value added service (turning raw materials into products), ultimately is what creates value on the banks balance sheets as they look at future cash flows from value added by people with good ideas and productive industrial assets and trained people. Banks cannot count on bubble valued collateral to support debts. We need hard assets. Consuming our way into creating value is a line of thought that only a group of morons would believe over the long run, but a lot of us have been believers during this past 20 years. Now it is time to make up for past mistakes and start producing something. Let us begin a counter attack with the energy economy. Yes, we can turn the tide.

Think about it. Supply Side Economics may have worked to some degree for the US as a stimulus during the 80s, but it does not work for the US in a global economy dominated by the Chinese Communism. It is one thing, to give the US government all of the debts and then give wealthy Republican Americans all of the assets and have them invest in lower cost jobs and manufacturing facilities located in the southern US states as they did in the 80s, but this paradigm has been subverted so that now the Chinese get all of the manufacturing assets (under an unfair and prejudicial legal system) and we are powerless to confront them because they have allied themselves with our own moneyed class which has a 49 percent stake in the factories over there. Politically, it is a very very clever arrangement on their part but the sad truth is that we cannot really confront a powerful country with a basically fascist political system unless we stop borrowing money from them. Allowing this one way cash flow to continue will create an unprecedented geo-political nightmare for the entire world. We should not be in bed with a regime which harvests organs from political prisoners and we must not under any circumstances allow them to suck the Super-Power out of the US through clever manipulation of our system. In many ways we are going into a historical period similar to the thirties. During the thirties different forms of socialism became popular in different nations. Chinese socialism today is very similar to Nazional Sozialismus, which ascended in Europe during the thirties. We need to be cognizant that we are witnessing the rise of a very powerful and dangerous authoritarian political system in China and we have no business handing all of our cash over to them as we are today. We are much too naïve and trusting in this respect. This needs to stop. We need a new trade regime. The intense computer hacking against our military industrial complex is not an accidental or an isolated set of events. If we reach the point where we realize that the US is being or has been disemboweled by a ruthless adversary, it will probably be too late. Look past the PR campaign. This is not a friendly situation. America should be very cautious about the intentions of the Communist Chinese Government. Under the surface there is a confluence of powerful self interested parties in the US and a massively dense and sophisticated, computer savvy police state in China. We need to sit up and pay attention. The US Government must confront China over the current trade regime before it usurps all of our wealth. They are moving very deliberately in that direction and we owe it to the entire world and to future generations to maintain ourselves as a viable geo-political counterbalance to China. We must recognize that, with the exception of a one way transfer of wealth to China which seems to work pretty well, our two systems are basically incompatible and it is time for us to set up import regulations which mirror theirs. The Sino-American Trade Regime must also be remolded to compensate for costs that American companies face in the US when they comply with worker safety laws and environmental regulations. This is essential if we are to use the Sovereign Wealth / Social Security Trust Fund as the vehicle of stimulus in lieu of federal government borrowing. Otherwise it will all be sucked over to China because all of the new green building products will be manufactured there. The US must also develop its own rare earth metals resources, because they are an essential ingredient in many green-tech products. It would be prudent for US Government officials to begin meeting privately with the captains of industry to give them a confidential heads up so that they can unload their manufacturing assets in China. We will reach a point where we must, at a minimum place a 40% countervailing tariff on Chinese imports in order to make up for currency manipulation. American factories in China will lose their government protected special viability and steroid-based profitability. Yes, we will hear blood curdling screams on Wall Street but if we do not do that then we will lose control of our destiny as a nation. Even without the disadvantage of Chinese currency manipulation, American businesses that want to sell in China, die of a thousand paper cuts before they can sell a dimes worth of product in that country. Our business desperately need the government to level the playing field and some big American investment groups are going to whine like there is no tomorrow, not to mention the Chinese. In fact, the Chinese have placed a big bet that super-wealthy US investors can thwart any kind of meaningful political change in this regard. The essential power-sucking tenet of the Sino-American Trade Regime is based on this premise.

As I said, US banks need assets that they can hold as collateral in order to make loans. Our system loans money into existence based on future increases in productivity (return on investment). Cash flow from the crumbling industrial base is the collateral that sustains the banking system. Bubble-based cash flow is non-existent in this deflationary environment because asset values have declined. Sending all of our money to buy products from China will potentially lead to deep, long lasting deflation and destroy the financial system because the banks need an asset base in this country that they can use as collateral. This issue alone is a fatal flaw that lies at the heart of the US-Chinese trade relationship. We must address this issue without delay. We need viable industry and good sales cash flow that will create more value and greater productivity in the future. Our banking system likes to invest in things that will increase wealth in order to service the debts. Our whole system thrives on that. Exporting our industrial base will decimate the financial system, bankrupting state and local governments due to lack of tax revenue. In the current environment, it is very easy to link the rise in state and local taxes to the exodus of industry from the US to China. This Trade Regime is being supported by currency manipulation which keeps hundreds of millions of Chinese working at low wages, in poor conditions and at an enormous cost to the environment. Large Supranational investment groups and hedge funds profit handsomely but in the US the tax base is shrinking so quickly that states and local governments are in a constant squeeze to raise taxes. There is a direct link between rising taxes and the Sino-US Trade Regime. It is not a virtuous cycle. We are raising taxes throughout the system in order to compensate for a loss of industry. When it all comes to a head, it will happen much too quickly. We do not need rising taxes. We need instead to cut the subsidy to Chinese industry caused by currency manipulation and to revitalize our industrial base. We need to support our industries against a massive and ruthless industrial predator which takes a 25% interest in most successful medium and large enterprises in China. We just need a level playing field. The existing Sino-US Trade Regime supports its own collusion of industrial interests but it ignores our need for jobs and political stability in this country. By refusing to take action against China, our leaders virtually guarantee the bankruptcy of a number of large state, county, and city governments in the US, due to the decimated tax base of those entities. It also guarantees massive increases in taxes at all levels to pay future debts and it guarantees future political chaos in the US. This is not at all necessary. We can change this dynamic.

In tandem with handling the China issue, we can use our new Sovereign Wealth Fund to stimulate the economy; balance the budget; install non-polluting natural gas fuel cells in our buildings; create significant gains in productivity through large scale Leeds certification; create millions of new construction jobs; save social security. If we change the way we think, then it will become obvious that our current economic situation is like that of an infant that is drowning in two inches of water. Just turn the infants head for Gods sake! A few policy changes, will not only balance the federal budget, they could also eliminate the trade deficit, because 83% of our non-OPEC trade deficit is with China. It is a nothing more than a transparent and cleverly manipulated transfer of cash from one side of the Pacific to the other. They will yell and scream when we take charge of our own house, but that is exactly what we must do. With regard to oil imports, a simple regulation change in the formulation of automobile fuel, requiring a 20% blend of liquid natural gas as a clean fuel additive would have a large effect on imports and international oil markets. Its time to increase our asset base through domestic stimulation and production. Simultaneously we can cut back on the foreign debts. We have everything we need. We are not helpless. This is an astounding country and here is a way forward. This is an innovation economy.

In any case, if you are an economist take these ideas and go and get yourself a Nobel Prize in Economics. There is enough in this brief piece of pontification to create a new paradigm which could replace or at least augment the other existing two schools of thought, Keynian and Supply Side Economics. We need to begin using the Social SecurityTrust Fund as a Sovereign Wealth Fund which invests in the United States. We can step into it 500 billion at a time. This is the new paradigm, but remember the investments need to also increase productivity, because innovation and increased productivity is what will allow us to get out of our current economic mess. Our biggest economic crime during the Bush era was that our massive debts were used to fuel consumption and bomb rocks. Both are poor investments. We mortgaged our homes for consumption and sent the assets to China. When it became clear that we did not have enough assets to cover our indebtedness, prices plunged. We need to learn from this situation and use a Sovereign Wealth Fund as a bedrock of assets which reinvigorates the manufacturing base. THIS IS A KEY POINT. We need a bedrock of solid assets. Only then can we re-experience the aggregate holographic extension of asset power which is granted by leverage and which is called “Superpower” by the rest of the world. We must remember that capitalism works well for those who have assets; its not so great for debtors; but it is horrible for those whose debts exceed their assets. In the US and for the world, that situation would be defined as systemic collapse. Leverage the asset base of the Sovereign Wealth / Social Security Trust Fund to generate quantum leaps in productivity, but steer clear of increased entitlement programs.

We need INNOVATION AND INCREASED PRODUCTIVITY, seed cash for solar industries and fuel cell industries, but not entitlement programs and undue consumption of overseas goods. It is utterly essential that these principles be enshrined in the charter of the new Sovereign Wealth / Social Security Trust Fund. As I said, this is an alternative to Keynsian and Supply-Side Economics. A different paradigm.

And whatever we do, we cannot subcontract the management of this fund to Goldman Sachs, Blackstone, Pimco and the like. And we must must must level the playing field with China. Otherwise China and the crooked American investment banks will find innovative ways to suck out all of this national pension fund cash in due course of time. As you may recall, the investment banks made a go at that when GW Bush tried to privatize Social Security accounts a few years ago. Fortunately they failed but they still managed to get away with plenty of loot when Goldman Sachs took over the US Treasury. There need to be strong safeguards in this regard.

In conclusion, I have read that during the next 100 years the world has the potential to make 200 centuries in technological development. That is not a linear model that is equal to the last 20,000 years. It is 200 times the last century! Given this torrid pace of accelerating change the future holds potential for enormous dislocation on a continual basis. The key to our success will be our ability to adapt and innovate. We must change our culture from being that of a consumer culture to that of a productivity and innovation culture. If we can get the semantics of this right and if we are all aiming for a culture that increases productivity at 4% or 5% per year, then everything will be just fine over time. We need to spark innovation which, in aggregate and over time would be equivalent to discovering fire or inventing the wheel. I have tried to lay out a program that would help to establish that new foundation. Consumption is out. Productiviy, efficiency, energy security and saving the planet from global warming are in. This is the vision. Now we need a leader to take the reigns. We are all waiting for this. The timing is perfect for a masterful stroke of political leadership. Do we have any takers? The younger generation is waiting to hear from you.

Best Regards,

Wade S. Luther, CEO
North American Technology Exchange
Boulder, Colorado

Charles Alain Taieb August 18, 2010 at 11:41 am

please read my analysis on this topic on the Blog:
Bests regards

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