The Healthcare Tax

There is so much argument surrounding health care and the future of the health care system in the United States that it is a difficult venture to take a stance.  Those for a capitalistic health care system argue that government involvement would stifle creation of alternative and new medicines as well as limit care among other things.  Those in favor of a government provided basic health care system argue that it is immoral to deny health care to any person and that the corresponding standardization of the industry will lead to better overall care.  One thing both sides can agree on is that the current system is dysfunctional and inefficient.

Assuming, the American is not a teacher, police officer, politician, in the military or a public servant who receives tax payor sponsored health care as a function of employment, the following is a depiction of the current system at work.  

Since the health care system in the United States is neither capitalistic nor universal, both sides are provided the luxury of blaming the other for the atrocious care available at a premium price.  If one is not poor enough to qualify for government health care, he or she is faced with bills for care that are unaffordable.  It is not uncommon for medical billings to include $25/Tylenol charges and $7,000 diagnostic surgeries (such as a biopsy).  Hospitals, Urgent Care Facilities, and private practices claim they are on the brink of insolvency and must charge exorbitant amounts to cover the costs of the uninsured who cannot afford medical attention. 

The current alternative for Americans is to purchase insurance at levels upwards of 15-20% of their take home pay monthly with $2500-$3000 yearly deductibles on co-pays and hospital bills with most preventative care excluded from coverage.  For families, the cost of an average HMO policy is over $500/month with a responsibility to pay up to $5000/year on deductibles before reaching an 80% coverage.  Year after year, the costs to remain insured rise. As those costs rise, the numbers of uninsured rise and system becomes more strained.  In fact, many Americans who are the most sick are denied coverage and deemed uninsurable forcing them to either attempt to deceive the system by lying on applications for coverage or becoming a ward of the health care system flooding the emergency rooms of hospitals.

For the trained economist, the resulting scenario is quite clearly an agency problem.  Much like in the scenario of public broadcasting, many take advantage of benefits for free, or "free-riding," while those who choose to pay cover the total costs.  In other words, an incentive to cheat exists as people recognize that by not insuring themselves they can still receive care.  At a minimum those uninsured settle their medical bills for far less money than what insureds pay, or avoid paying medical bills at all by bankruptcy protection or collection settlements.  As more people cheat, whether by choice or by necessity, the costs  to those who choose to insure grow exponentially as the medical industry charges higher costs to compensate for those whom they treat without compensation.  

Some Americans further believe that illegal immigrants also take a toll on the hospitals as they pay no taxes and carry no insurance.  While an identifiable target, 50% of American citizens pay no taxes and carry no insurance, so such points are taken, but not overwhelming.

The system can be summarized by "the few, or the insured, carrying the many, the 'un' and/or the under insured."  If one thinks about it, doesn't this sound familiar?  Ah yes, it resembles the American tax structure.  In fact, most insureds have health insurance costs taken directly out of their paycheck like taxes and the charges are taken out prior to State and Federal Taxes.  Further, the majority of the premiums and co-pays paid by the insured is not for the sole benefit of the insured, but rather for the benefit of the system as a whole.  Hmmmmmmmm, a payment directly taken out of a citizen's gross pay for the sustenance of  a common good or service. Yep, it's a tax, no doubt about it.

The biggest problem with this tax is that every year more people opt out of paying it, causing the tax to increase on those left who can actually afford it.  Worse yet, this tax has a massive profit margin built in for its "government," the Providers and Groups, who have an incentive to deny or reduce care to those who pay them to increase profits.  The collateral damage is directly focused on the hospitals who suffer to the point of insolvency as the growing class of uninsureds pile into emergency rooms that cannot turn them away.

While I shall not provide my reader with the solution because I believe solving this problem is quite simple and the solutions are plentiful once the issue is properly clarified, I urge the reader to weigh the following facts.  In the United States, many citizens don't see a doctor for preventative or procedural care due to costs.  Most citizens, won't even consider seeing a medical professional when sick.  Only when a health problem reaches a significant level of severity will the average American seek any medical care.  When a medical problem has reached the level of severity deemed appropriate by the average American to seek medical care, the treatment necessary is usually far more costly than it would have been at an earlier stage. 

Over thirty percent of health care costs and efforts are administrative fees associated with collecting and tracking payment from insurers and the government.  The United States is not even in the top ten in health, but it ranks number one in health care costs.  Health care costs are causing businesses to shutter and our competitive advantage in the world  to erode.  Finally medical bills cause more bankruptcies to our battered consumer than any other cause.

In closing, please consider that a dollar spent on health care has a worse multiplier effect than a dollar sent to the public sector in the form of taxes.  If a dollar spent at a local retailer shall lead to 8 dollars spent before that dollar is completely spent, health care, like taxes hovers in the low 3s as a multiplier because of all its sunk costs.  Once we as Americans admit that those paying for health insurance are simply paying a tax and that dollars spent on health care (like taxes) are less beneficial than other types of spending, we have begun down the path to a solution that benefits all.  Whether we eliminate insurance altogether in a purely capitalist structure forcing medical providers to charge fees in line with society's ability to pay, or induce a standardization of costs for the industry (i.e. 5 cents for a Tylenol, 10 cents for a bandage etc.), or create a single pay medical provider to eliminate the billing waste- the solutions are endless.  While some are more meritorious than others, the system chosen at a very minimum should force medical providers to focus on preventing serious illness as a manner to reduce costs and provide better care; as well as, protect the sanctity of life for all as priorities.  

One last thing, the argument that doctors and pharmaceutical innovators will leave the United States should a capitalist, standardized or a universal payor solution lead to lower pay for such persons is without substance. Where are they really going to go to find a higher wage than the United States?  Oh that's right, there is no where.

The Market is a Means, not an End

Even the greatest proponents of laissez faire economics would admit that the market is not an end, but rather a means.  Larry Kudlow's creed is "Free market capitalism is the best path to prosperity."  That's right, its a path!  So why have so many business leaders and financial media pundits attempted to create a belief that the market is something that must be preserved and nurtured?  Isn't the market merely the collection of opinions expressed by dollars?  If the government or the people choose to encumber, regulate or manage those opinions expressed in dollars is that not just another manifestation of the "market?"  Is not the choice to not encumber, regulate or manage those opinions expressed in dollars also a factor of the "market? Most importantly, does it even matter?

Welcome to the deepest depths of this blog to date.  A philosophical puzzle that seeks no solution other than to paint shades of gray that shall make the reader come to their own conclusion based in logic rather than borrowed rhetoric or sloppy undeveloped thoughts, if one hasn't done so to date.  In fact, if the reader is not prepared for this type of philosophical self-reflection, come back next week and I will be back to suggesting solutions to the chasms in our economy, politics and country.

The point:  The goal of any socioeconomic system, culture, government or process in general is a greater standard of living for its people.  In defining the concept of standard of living, one must not only count wealth, but the purpose that wealth serves.  In other words, standard of living is a mark on a barometer  which measures the ability of a population to live.  It begins on the low end with "attain what one needs" and culminates with "attain whatever one desires."  It is nonsensical, or rather simply incomplete, to state a standard of living is money or tangible goods because the logical question is money and tangible goods for what purpose?  It's money to be free, or it's money to exert power over people, or money to live a life of leisure, or money to create security, or whatever.  Its not the money, its the end that the money makes reality that is the intention or goal.

So, if money and tangible items are a vehicle, and the market is a vehicle to create or multiply that money, and the end is to maximize the standard of living of living of a population- the issue is thus centered around how we as citizens of a society get to that end in the most efficient and/or equitable manner.  Remember, this particular article does not have the purpose of solving what is the best path to reach our end, it's merely to silence the annoying undeveloped statements of many who believe that the market is the end.  

Two days ago I was reading an article from a brilliant financial planner who stated that the market shall prevail in destroying much of the Nation's wealth despite any efforts of the population to stave off such a doom through stimulus, the federal reserve and the treasury.  The purpose of this article is not to argue whether or not the stimulus plan shall work, or whether Keynesian economic tools are effective, its merely to disprove the careless careless conclusion of this highly respected professional.  If the market is not creating a greater standard of living, it is failing and not prevailing.  Remember, the market having its way is nothing more than a runaway car as the intended destination is an aggregate maximized standard of living (not to be confused with an equal standard of living for all which is the goal of communism).

Now I know many readers would argue that in the long run the market is the best path to the end of standard of living, but I argue today that the long run is a summation of successes and failures.  All I ask is that people admit that when the market is destroying wealth and creating a worse standard of living for those exposed to it, that it is in fact failing them at that time.  After all, we should not treat the market as a deity.  It is not always positive, it is not always correct.  It has always worked itself out of its troubles, but it is neither a good or evil, it just is.  In fact, the culmination of people's opinions as valued in money may not even be measurable as a provable existence.  The idea of "the market" might simply be an expression of the common statement "it is what it is."

Whether it's the best we've got or the best we can ever get, the market and the management of its consequences should never be without criticism or reflection.  The market deserves no sanctity or elevated stature.  Its merely a mechanism.  Sometimes it works to its intended purpose, sometimes not.  It is a very strong mechanism; but, nonetheless one for the purpose of making our collective lives better.   From here, the conclusion is yours to write.

The Fix

"Fix it, Fix it!" yells the financial pundit on Saturday Night Live's Weekend Update when commenting on the economy.  Without being presumptuous I believe that all of us echo this sentiment when we reflect on the disjointedness of the economy.  Nothing seems to fit and anxiety is causing a dangerous reluctance among consumers.  So that said, what's the fix?

The fix is actually very simple in theory.  The run up in prices that occurred during the reckless extension of credit from 2001-2006 was not accompanied with equal wage appreciation.  The net result was the extension of credit that the borrower ultimately could not afford.  Prices were thus inflated beyond the means of population, and the only possible effects were a fall in prices to meet wages or an increase in wages to meet the prices.  On the back of massive foreclosures, repossessions and short sales accompanied by wage deflation caused by a foolish reliance on globalization of labor the former occurred.

Now I realize this is quite intuitive, but the solution is bringing prices and wages into equilibrium.  Our choices are 1. allow deflation to continue until the price for goods has fallen to a level where those left with jobs can afford assets in cash or 2. create across the board inflation so that wages increase as well as prices.  If number two is picked, the government must slow inflation once prices reach the desired equilibrium least we be faced with run-away inflation.

Choice 1

Deflation is a monster that destroys everything in its path.  It is the worst thing that can happen to an economy as it counteracts the whole purpose of free market capitalism, wealth creation.  Unchecked, deflation can continue for a decade to  a generation stifling innovation and punishing production (see What's Wrong with Our Economy, this Blog).  In the quickest summation, prices fall and the population still will not purchase.  Businesses fire workers or shutter their operations as they cannot convince consumers to consume.  As businesses close, prices fall further and eventually the production of goods is no longer profitable as the market is littered with unsold inventory.  More unemployment and wage decreases ensue.  Investments, homes and large holdings continue to lose value as the falling wages cannot afford once affordable prices.  This destruction in wealth cools more innovation as banks are not comfortable to lend and people with cash wait for prices to fall further.  Therefore, wage and price reach equilibrium somewhere down the road of massive wealth destruction.  At this point, prices can once again gradually appreciate.

The two problems with allowing this solution is that it can take an extended period of time and civil unrest is very likely.  Under this scenario unemployment will be very high before it corrects, 20-35%.  Markets will not function normally and frustration of the population will create a dangerous scenario.

Choice 2

Since the Great Depression free market capitalism has bee dominated by a school of thought in conjunction with the battle cry of John Maynard Keynes, "in the long run, we are all dead."  The government in using this school of thought has two major tools to set the economy back into equilibrium.  The first is monetary policy.  With the Fed Funds target rate at one quarter percent, clearly interest rates are not having traction against the massive pull back of financial institutions and consumers.  The second tool is fiscal policy.

Fiscal policy comes in two categories 1. direct and 2. indirect spending.  Direct spending is literally the government filling in as the spender of last resort and directly spending money to create the recirculation of money in the economy and reflate prices.  The second category is usually in the form of reduced regulation or reducing taxes, leaving more money in market participants pockets which they can spend and reflate prices.  There is much debate over which of the categories are more effective, but both by definition will stimulate the economy  as there are literally more dollars available in the market.  

As the dollars are spent, the multiplier effect will take place in which one dollar spent will literally be passed from one participant to another up to eight times.  Prices will inflate, and wages should increase with increased profits; that is, so long as corporate policy commits to  American labor (see the Float).

Whether one prefers Choice 1 or Choice 2 the limiting factor is time.  This commentary shall not attempt to differentiate between any of the alternatives suggested as that is a complex argument for another article.  For now I wanted to simply identify the issues we are facing and intelligently explain the possible fixes.  Without bias I will close by stating that it is doubtful the American population has the patience and tolerance to undergo what Choice 1 would take to reach equilibrium.  For now let it suffice that the market disjunction shall be fixed and the how is literally in Americans hands.

National Security and Balancing the Current Account Deficit

Believe it or not, most people under the age of 40 don't even know what the current account is, much less how dangerous carrying a deficit is to our personal safety and the safety of our country. The current account is very simply the difference between exports and imports into our country. In other words, when a country exports more than it imports, the country has a positive current account, or a net export. When its imports exceed its exports, the opposite is true.

Most people don't pay a lot of attention to where a good is produced, assembled and its parts originate. However, it is a massively important factor to the overall safety of a Nation. In fact, Bismarck was qouted as stating, "Free trade is the weapon of the strongest (Makers of Modern Strategy, from Machiavelli to the Nuclear Age pg 223)." When a good is traded, or exported from the producing nation for payment, a number of crucial items are captured, most significantly 1. Greater Purchasing Power for their Currency, 2. Jobs, 3. Production Capacity, 4. Control of Natural Resources, 5. The Deflating of the Purchasing Countries Currency, 5. A General Tactical Strengthening of their Position in the world.

First, the purchase of a widget by a citizen of the United States from a foreign country, for our example Foreignland, causes a boost to the currency of Foreignland. This boost is caused because the US citizen is foregiong dollars for a good. Since that good was originated in a foreign country, the dollars received as payment are traded for the currency of Foreignland to compensate its workers, managers and profit margins. This trading of dollars for Foreignland currency causes the demand for dollars to fall and the resulting demand for Foreignland currency to rise. This causes an appreciation in the currency of Foreignland relative to the dollar and thus gives residents of Foreignland greater purchasing power for goods in dollars (real estate, automobiles, clothing or DVDs). In a functioning free market trade, the appreciation in the currency of Foreignland from goods sold to the United States would eventually lead to a reverse in the money flow as dollars become cheap and therefore the jobs, manufacturing, and goods would soon be produced in the United States as it is now more cost effective to build those goods in the US.

No big deal right? Right. Except, once a country enjoys the jobs, production capacity, control of natural resources, and general tactical strength over the purchsing country they are reluctant to allow the natural reversion to occur. Instead, the exporting country does everything in its power to hold its currency low, thus capturing all the dollars from the trade, as well as, the jobs, natural resources, and tactical strength. A perfect example is China. China refuses to allow their currency to appreciate by refusing to allow its currency to be freely traded or exported out of the country. China represses the market further by demanding that any import or foreign corporation be partnered with a Chinese firm with no less than 50% ownership in order to do business within the country. This is neither a dishonest or dishonorable action, it is statesmanship, albeit at the expense of industrialized countries such as the U.S..

That said, such behavior is not conducive to a free market. It creates a manipulated market with the majority of the societal rewards of trade favoring the country willing to assert itself. The sad reality is that the United States over the passed two decades has taken measured steps to eradicate any governmental regulation on trade so as to proliferate such results. Whether a naive pipe dream of free marketeers, a calculated manipulation by the upper 3% of the United States population to enrich themselves off of artificially underpriced labor, or pure laziness this lack of oversight by the United States as an entity have allowed trade to hinder its citizens rather than enrich them.

Worst yet, because of the number of U.S. dollars the Chinese hold in reserve, China is a significant military threat to the United States and its empire. Twenty years ago, China had no capability to manuever in the world, no economic might to purchase modern military technology, and was little more than a decentralized region of impoverished people. China certainly was not militarily ambitous or sophisticated enough to shoot down United States' satellites as a show of force (which happened in the summer of 2008). The enrichment from the dollars of U.S. citizens, gave the Chinese this capability. The dollars have literally built a formidable threat on the global scene with its own identity, cares, interests and ambitions. With every additional dollar, they grow relatively stronger and the United States relatively weaker.

Jobs, are the second great benefit of being a net exporter. These jobs represent a standard of living and the general contentness of a population. It is a given that a population without work is one which is without stability. Ghandi once stated that, "Violence occurs when there is wealth and no work." Many others have highlighted that there is a general tendancy of the classes to war when the working class of that society is not sustainable in nature. The great growth of the United States from 1941-1990 was the result of a vibrant manufacturing base and an economy where those willing to work were always afforded that oppurtunity. Without the abundance and demand for work, a society will begin to destroy itself from within. Therefore, it is not an exaggeration to state that the ability to import unilaterily into a country, is the ability to poison it.

An importing country becomes enslaved by the exporting country as its population is literally dependant on those imports so that they can resell them for industry (see article "The Float," this blog) and consume them for their sustenance. The exporter, thus, has the capablity to use their goods as a weapon to kill industries dependant on them. This type of attack by trade is an efficient means of asserting one's sovereignty as it devastates the morale of a target nation without having to spend military capital.

Production Capacity follows the same logic as jobs, except that it deals directly with materials instead of human capital. A country's ability to produce atrophes as its production dwindles. Very simply, when a country slows production it sheds equipment, factories, supplies and fixtures used to produce goods. Over a prolonged period, that shedding results in a lack of capacity to "ramp up" if necessary. Manufacturing is massively important in war as supplies and the ability to produce weapons, tanks, carriers and general supplies is a major factor in winning or losing. If a country forgoes capacity in times of peace, a great possibility exists that the lead time to ramp up for war becomes prohibitively long. Least we forget, the American automotive industry were the heroes of WWII as they answered the call of President Roosevelt to build sufficient planes and tanks to forge an attack against the Nazis.

It could not be more eloquently put than how Alexander Hamilton wrote it in his text book, Report on Manufacturers, the goal is to promote such manufactures....

" as will tend to render the United States independant of foreign nations for military and other essential supplies. [N]ot only the wealth but the independence and security of a country appear to be materially connected with the prosperity of manufactures. Every nation, with a view to those great objects, ought to endeavor to possess within itself, all the essentials of national supply. These comprise the means of subsistence, habitation, clothing and defense."

The general concept Hamilton proved was that free and unmanaged trade was a concept that only could succeed if somone was naive enough to believe war was no longer a real threat to the Nation. Economists and business leaders alike refuse to acknowledge this reality as it does not fit easily into their models of measuring profit and loss. Common sense nonetheless would assert that being conquered would trump any competing economic interest or argument asserted from that community. Thus, the balancing act between the benefits of trading between two parties of differing competitive advantages and protecting the soundness of the Nation is the operative standard of judging the best course of policy for a Nation.

Strangely enough, the father of free market capitalism, Adam Smith in his Wealth of Nations maintained,"the first duty of the sovereign was that of protecting the society from violence and invasion of other independent societies." As war was inherent in the understanding of any concept during the late 1700s, Smith was in favor of governmental regulation of international trade when that trade reached a level that was detrimental to the Nation's ability to protect itself in the world. It was Smith who said, "defense is of much more importance than opulence." After all, what is the point of trading if the end result is a net loss of its a Nation's sovereignty.

Control of Natural Resources is along the same lines of production capacity, but with respect to a specified class of items. Over the passed seven years the United States has experienced a tremendous run-up in the costs of natural resources. A significant reason for this run-up, aside from the speculation and margin buying by Wall Street (the reason for the 2007 commodity bubble), is the idustrialization of third world countries. Countries, such as India, China, Vietnam and South Korea had very little demand for oil, gasoline, heating oil, lumber, steel and concrete in the past; however, now due to increased demand for goods produced in these countries a need has been created. This need combined with the general depreciation of the US dollar, as a result of being a net importer of goods, has sufficiently lowered the standard of living of Americans in that they must pay more for essential items leaving less discretionary income available.

Further, this flow of limited natural resources to net exporters to the United States puts the US at the mercy of such countries in a time of conflict or disaster as they control the flow of commodities. For example, how would the United States react if attacked by an independent sovereign and in need of natural resources such as oil, steel, sugar and rubber, but the costs associated with getting those goods was extremely expensive because of a demand in China.  As a result, the United States looks to borrow or negotiate with the Chinese to acquire these items. In this example, assume the Chinese find an alliance with the attacking sovereignty more beneficial than one with the U.S. as the U.S. is vulnerable and without recourse. What would the United States do? Attack? No, we don't have the necessary resources to sustain such an attack. Maybe we could appeal to the business community who so profited off this trade arrangement, would they freely finance the war? Could they even if they wanted to?

Add all the above together and one can easily surmise why a net exporter will gain tactical advantage in the world. Net exporters very simply hold the power to destabilize the importing country from both the interior and the exterior. Eliminating social stability by devaluing the importing country's currency, eroding their substantive work force (substantive jobs are those that actually create a good, see The Float, on this blog), depleting their ability to acquire natural resources, reducing their capacity to wage war and capturing the importing country's reserves of currency all serve to empower the net exporter in the long run. These factors in addition to the forging of new trade and defense alliances with other sovereigns, as the net exporter grows in wealth and stature in the world, create an identity and ability to achieve its own ambitions.

Once strong enough, the United States can only appeal to the newly formed industrialized nation's sense of morality and fair play to achieve fair terms in dealings with them. This situation is the result of a comedy of errors by the stronger country to allow this situation to occur. During the strongest and most prolific years of the Roman Empire, independent sovereigns were reduced in stature to client states of the Roman Empire. These client states were strong enough to withstand their own populations from revolting and strong enough to withstand attacks from nomadic tribes , but never strong enough to pose a threat to the Empire itself. In exchange for surrendering their sovereignty, these client states received a better standard of living and support in protecting their lands from outside attackers. For the citizens of a client state being absorbed under the influence of Rome was a "good deal." They enjoyed peace, relatively stable commerce and a stable life. That said, ambition and ideas of becoming independent were not possible. Its not immoral or dishonest, it is responsible use of power for the greatest good of the citizens of the Empire. After all, isn't the entire point of government to provide a system and framework so that the citizens enjoy the greatest standard of living possible?

What about the "free market?" The answer is: what about it? Many simple citizens forget, or never understood, the free market is merely a mechanism of creating wealth and a standard of living for the citizens of a Sovereign. The free market provides no security to the citizens and clearly cannot exist without, at a minimum, the enforcement of criminal and property laws by the Sovereign. The Sovereignty of a nation is not subservient to a market, but rather the opposite is true. For without a Sovereign, the market cannot functionally exist. On this rationale, a market that serves to weaken and over time jeopardize the ability of that Sovereign to effectively maintain its ability to impose its will on the international scene is a market in need of adjustment for over time it will destroy itself by the same token.

Is the United States doomed? No. Strong leadership could reverse the current trend and restore its prowess in the world. The United States still can be the defining empire in the world, but strong statesmanship on behalf of its elected officials is necessary. Those officials must defy the urge to "do nothing" and allow the status quo to continue. Taking action would certainly force these officials to put the interests of America as a Nation in front of the interests of many powerful lobbyists who will invariably attempt to maintain this course of action. That said, officials must serve their country and citizens as a whole first. In acting in the best interest of the Nation, these officials will actually best serve those lobbyists as well, as their wishes are short-sighted and not sustainable in nature.

After all, the United States must act now while it still can sustain itself without importers. The United States should take back the wealth gifted to these countries by demanding fair ratio of 1:1 exports to imports.  Trading partners who fail to abide by this standard must be punished. The U.S. must support this stance with the full might of its military if necessary. If this occurs, the United States will clearly stand once again as an unchallenged power able to achieve its own ends in the world, peace, charity and abundance.

What is wrong with our economy?

As the 2009 year begins, this site shall provide timely guidance on how to make the economy of the United States viable and eventually vibrant in the long run. Today it is important for a short discussion on the proper diagnosis of what is wrong with our economy so that the proper cure can be developed.

The problem is very simply, deflation. While this word conjures terrible imagery and tends to carry a bundle of consequences that create fear and panic, one should not fear this diagnosis as it is accurate and can be remedied. Law makers, analysts and business leaders will never admit when an economy encounters deflation because it signals the complete failure of a market or economy. Deflation renders the actual market incapable of righting itself through mechanisms such as supply and demand, and necessitates intervention, whether by government, nature or large private players to reset the devastation.

For those not familiar with deflation I shall provide an example. This morning on the AOL homepage an article was titled "Don't buy a Camera Yet." The article went on to state that consumers should put off purchasing cameras, televisions, computers and other large electronic items as prices are sure to fall further. This behavior, while prudent perhaps, is deflationary as it incites hoarding by the population. It sends the message to hold your money as it shall be able to buy you more goods for the same amount later. Once the citizens decide that the "holding cost" of money is less than the fall in the costs of goods and services the death spiral begins. People stop spending and prices go lower. The problem is simply that as the price falls, people still don't buy so the price falls further.

This translates into an economic level where price falls and quantity falls as well. There is no supply and demand correction because price and quantity are no longer inversely related. In other words, price falls and the market does not react. Once the price falls below the cost to produce an item the seller no longer has an incentive to produce that good or service and the company shuts down leaving the market short of that good or service. At this point, the money hoarded by the citizens cannot buy that good as it is no longer produced. Deflation incentivize us as market participants to do nothing and produce nothing so as to prevent losing money.

Another great example of the deflationary environment we currently are experiencing is watching citizens fill their gas tanks half way, because they know they can fill the other half for less later in the week. This behavior, while prudent, shall lead to gas stations to slow or cease ordering gasoline to avoid taking losses. Sellers of gasoline can buy their inventory for less the very next day, and are punished for holding inventory. This leaves the citizen with shortages or without the product altogether at any price as the incentive is to not produce for the seller.

While terrifying, there are fixes. Generally speaking one can see that an economy must place a firm bottom under prices so that sellers can feel confident in producing a good or service. From that point a controlled increase in that price is necessary for a market to function on its own, inflation. Once citizens understand that an item shall not be reduced further in price, and rather, that same item will cost them more money in the future, they will begin to purchase. This translates into a conscious decision by the citizen to use an amount of their money while it still is able to purchase the good or service as it will take a greater amount of money to purchase the same amount in the future. The price increases allow the seller to make a profit and the seller is able to spend in return on innovation, labor and capacity thus creating greater production.

How does a market get fixed? Two ways. The first is that people magically gain confidence and start spending, which generally substantiates prices and creates price appreciation. This whimsical solution is very inexpensive, but not reliable as there is no guarantee it will occur before the entire production of a market is destroyed. Perhaps if the media created a positive environment people would psychologically react and mirror that environment. Studies have proven that people tend to act out the prognosis and tone of the "general consensus" of a population. As the media is the artery that provides the population with its "general consensus," whether agreeable to us or not, its message under this solution is key to the confidence of citizens. In fact, in our current situation it is amazing to note that the substantial fear amongst the population at large is centered around a threat that impacts very few of the total citizens (less than 8% unemployment, less than 2% of homes in foreclosure, FDIC limits of $2ook per account). Moreover, as the media has become increasingly more negative, the overall health of society has diminished and suicides have increased in step with the message.

That said, it is common knowledge that fear sells. Demanding the media change its message to fix the deflationary environment would be challenged by every media source as a violation of the First Amendment. Therefore, short of the media providing this market intervention against its self interest to save the greater good, another solution must be sought.

The second solution is to increase the Money Supply. Government spending, loaning and stimulus shall make the money that citizens are holding less valuable and eventually promote spending which will provide a price floor and an increase in prices in future years. It is not clear how the general citizen comes to understand that the holding cost of their money becomes expensive, but generally as a population sees citizens enriching themselves with goods and services as a result of more money circulating in the market, an increase in the general standard of living occurs in the short run.

The largest challenge to this solution is that it requires diligent monitoring by the Government so as to not create an over supply of money in the long run creating a jolt in prices once they have bottomed instead of a controlled price appreciation as desired. That said, this form of intervention shall certainly increase prices and solve the deflationary situation.

The second solution has been undertaken by the United States and the approximately four trillion dollars of stimulus provided between the TARP, Federal Reserve lending, Guarantees of Fannie and Freddie and a stimulus plan by the next administration to create three million new jobs will reverse the death spiral of deflation. The management of these programs will be crucial in the upside of the price appreciation to follow.

That said, isn't it interesting that both solutions provided here as well as any solution the reader may create will all entail people to act against their financial self interest and act in the greater good of the society or market as a whole. Perhaps the give and take relationship between self interest and common good are more relevant in a capitalist, or free market based economy, than society currently recognizes.

2009 and the Cry for Statesmanship

Beginning today, one will be able to find insight and logical deliberation about current events from the standpoint of a scholarly analysis based in good old fashioned common sense. My perspective shall always be in the spirit of government and policy in favor of the greatest common good and a general spirit of Mills' "Utilitarianism" as a general formula for grading the acts of individuals as well as society as a whole.

As an American, I will not apologize for taking stances that best suit Americans. I will not be ashamed of America being the most powerful nation on the earth, nor shall I ever suggest a course of action that would diminish that title. The ever growing in popularity stance of degrading the American Empire and the opinion of those people that America should be ashamed of its power and prowess in statehood shall find no comfort in my opinions. Whether one believes human rights, morality, equality, corporate profits, markets or just general fairness are ends to be sought before the power and position of the United States of America as a country, my answer is simply no. For no good or concept can be achieved by the power of the United States if the United States is without the sufficient power to achieve or defend such a good or concept.

Americans must realize that achieving any end, from creating a world market for goods to world peace, cannot be achieved in spite of the general power and prowess of America to enforce its will. In other words, a powerful America can impose peace, solve starvation or stem genocide, but an America that is riddled with a dissent of those who put such ends before the power of the vehicle necessary to achieve those goals, reduce the chance of successfully achieving any end.

Over the next year, I will logically write about the importance of statesmanship before any cause, and how government and its citizens should support such an end. I will not hamstring that end by restricting certain means that may be contradictory to the end goal of America's power in the world, a peaceful and abundant humanity. I shall always pursue a course of action that favors Americans and an America that is strong enough to effectively pursue any goal its society should deem imperative for itself and the world as a whole.