Don't Buy the Hype, a Trade War is Exactly What We Need

In the short run, trade wars can cause some pain and some market shortages; but in the long run, one can argue that they strengthen those nations that are capable of self sustenance against those that are not.  While many correctly argue that the protectionism prolonged the Great Depression, protectionism also developed an unprecedented concept, the middle class, which allowed the United States to grow and thrive for over sixty years.  Thus, short term pain led to long term dominance including a dominating presence in the Second World War.

Simple math, GDP= G+C+I+(e-i).  The letters e and i represent imports and exports, and the difference of the two is defined as net exports.  If exports exceed imports an economy gets a boost from international trade, if imports exceed exports the number is negative thus creating a drag on the country's GDP.  Since positive GDP is desirable, one would surmise that countries prefer to have positive net trade.  While sarcasm is not my style, I find it literally implausible that any person who resides in a country with a net import could argue that trade on such terms is a positive for them (if they are capable of self sustenance, i.e. not lacking sufficient resources to maintain life). It's a drag the country's GDP and a threat to its national security.  After all, some of the worst threats to the economy of the United States has been the result of dependence on the import of foreign oil.

Now, I understand that a small number of elite finance, corporate multinationals and ultra wealthy would like to proliferate a belief that the United States should not protect itself in any manner when it comes to international trade. These arguments are based in self interest and selfishness.  They are not healthy arguments, and clearly not sound judgment for a country that aspires to be the world's super power.  That said, these voices are strong because they own the media sources, banks, and a number of our elected officials.  Regardless of their amplification, they are wrong.

Succinctly and logically put, saving per our purchases from cheap foreign labor is not worth having a country where middle class workers have no means to make a life for themselves.  

Now many argue unions are to blame for the lack of competitiveness in the American worker, and while there is much merit to this argument, it is collateral to the point.  I'm talking about keeping American dollars in America.  Currently, Asian and Middle Eastern Countries use our dollars to manipulate the values of their currencies so that they can continue to be net exporters to the United States.  With little to no importance on the global scale as consumers, the citizens of these countries suffer with their undervalued currency while their governments use the captured dollars for investment in stocks, bonds and commodities.  That's right, the countries themselves use our currency to corner markets, drive up commodity prices and control corporations.  

Americans thus suffer a self-inflicted punishment.  We need two incomes to raise a family and we lose the ability for upward mobility as globalization destroys our need for our own human capital.  It starts with manufacturing and soon it is service work, finance and engineering.  

The proper question is why suffer?  The elitist with no regard for our Nation say it "makes us stronger," but that's nonsense.  The reality is that we live in a country loaded with natural resources, the benefits of capital, and the massive infrastructure that reflects our wonderful experiment of capitalism.  We have it all.  

Unlike the Chinese, Japanese, Russians, Germans, Mexicans and Indians we don't need them to purchase our goods to survive.  We are the consumer and they are without recourse should we insist on fair terms of trade.  Any great leader knows that he or she has at their disposal the power and ability to dictate whatever terms they have the power to uphold and impose.  One for one (export for import), as Warren Buffet would declare, is within our reach by a simple declaration by the US that such a standard is the now necessary.  The United States has the strongest military and the power to enforce its will with little or no recourse.  Why allow the weak to become strong by eating our innards?  Why destroy our way of life while those of ambition and tactical advantage attempt to unseat us with our own weapons. 

 We need to wake up, and stop the leak.  We must remember a multinational corporation is not country, the United States is our Nation.  Further we must act now, while we still can enforce our will.  This disturbing trend could unseat our ability to dictate terms.  With every mutter of changing the dollar as the international currency, every balk at trade reform by net exporters, and every month of negative net exports we move closer to becoming irrelevant.

For a more in depth discussion on this topic please see: http://commoncentsdg.blogspot.com/2009/01/national-security-and-balancing-current.html

It's Over When "They" Say It's Over

The current depression is over as soon as the financial institutions decide it's over.  In a credit based economy where banks decide how many employees a business has, how much our homes are worth, how much inventory a business can stock, whether one can buy a car, attend college, open a business, create IPOs, complete mergers and acquisitions, the current misery is over when those lending institutions say it is.

If a bank owns 8% of the homes on a street, holds the mortgage on another 12% of the mortgages, maintains the deposits of 15% of those homeowners and is one of the few options that an interested purchaser has to buy a home currently for sale on that street, what decision are the citizens really making?  If that bank is willing to loan $300k to the prospective buyer to purchase a home, than the value of their bank owned homes are $300k and the "home-owners" with mortgages with that bank may be offered an equity line on that home if they owe less than $300k.  If one of those "home owners" owed $150k, they could take a loan against their home for $150k and start a business, invest in stocks or purchase goods, services or additional assets.

Until the stumbling incoherence financial institutions consider to be reliable computer based risk models are scrapped for the favor of common sense and rational human judgement, these banks will continue to wound themselves and have the citizens as a whole suffer.  If any intelligent person owned a home and was in the business of loaning money, that person would loan as much as a willing and credit worthy buyer could reasonably afford to pay.  Loan to value would be without regard, as payment to income would be the "trump card."  This would certainly be the case if that same person had more homes for sale and currently had balances owed to them against homes purchased from them as the values of those assets would appreciate.  In essence, a home's value is substantiated by the incomes of the people who wish to purchase them.   

 

Sound simple?  Well it's not for massively inefficient corporations, or as I like to call them governments of shareholders. Common sense and rational judgement are just the types of intangible variables that will get a person fired.  Follow the model is the cry of executives, upper middle management, middle management, branch managers and credit analysts (glorified bank tellers) alike.  After all, the model is quantifiable and predictable.  Follow the model or find new employment.  Never mind that the model rewards loaning as values appreciate creating inflated valuations that will invariably correct in a massive fashion every one to two decades when lending institutions decide that they no longer wish to outrun losses. Never mind that the model shall exacerbate the correction by magnifying price declines as the model reduces loan to value requirements in a race against price declines creating a fury of crashing prices.  Never mind that this article is exactly on point and almost all loan officers and credit analysts could not refute it with candor.  

Follow the model, follow the model- least we be without the ability to make a decision or decide on what criteria to lend.   Thank goodness that when these banking models fail again, and they will, we will have the only organization less efficient than large corporations, the Federal Government, to rebuild them and remind them through massive tax payer waste and societal loss of wealth that they are the sole solution to their self created problem.  

The Conversation We Need to Have

Wage disparity, the slimming of the American middle class, the strengthening of the multinational corporation and the record breaking bonuses of CEOs are all occurring simultaneously in the United States. The threat of wealth redistribution and government intervention are topics that have become common place. Divergence in the media where Americans can choose their slant by switching the channel, but never get a straight answer is all that is available. Finally, a growing majority of America's youth who believe they shall not be able to achieve the socioeconomic status of their parents is significant.

How did this Country who banned together to win: two world wars, a four decade cold war for global supremacy, and the race to the moon become so demoralized? Where did the tough- nosed honest gumption of this population go? It wasn't long ago when an experiment comprised of an enmeshment of immigrants found a common purpose in the burgeoning of an industrial revolution and understood that together they could conquer any challenge. It was against this backdrop Henry Ford declared he "paid his workers well so they could afford to buy one of his cars." Every neighborhood was adorned by a corner market where a family could make a living serving their block as a local grocer. These were the days when doctors would make a house call, and one paid the bill with what he or she had in his or her wallet. Americans left their doors unlocked and finding work was attainable for those who were willing to work.

In these golden days, buying local and buying American was the standard, and foreign labor and outsiders were viewed with skepticism. These Americans believed in honesty, family and Country. This was the era where the boy with a work ethic and a dream could move from the mail room of a company to becoming the CEO. People believed that hard work would lead to upward mobility in society. In these days, bankers let borrowers meet with them face to face, a worker knew the owner, and neighborhoods policed themselves.

America today is in transition. The ghosts of Marx and Schumpeter look over us with parsed lips and a wry smile in a gesture of "told you so." Prices and wages diverged throughout the 2000s culminating in a freezing of the credit markets. In the simplest description, trust between the classes seized in a long coming day of reckoning. If one acknowledges that credit is a bridge extended to someone in need of more money by someone, or some entity, that possesses it, than it becomes obvious why the credit markets seized. Those "without" no longer could afford their current course of consumption. Credit was extended to supplement this shortage, but soon, those "without" could no longer afford to service the necessary debt. Frankly speaking, the wages had fallen far too short of the prices of society. The culmination was $4.50/gallon gasoline and median home prices of $300,000 on an average household income with two working parents of under $45,000/year.

Now it is commonly acknowledged as fact that globalization caused the wage deflation, or at a minimum wage stagnation, in the United States (Thomas Friedman, The World is Flat, Alan Greenspan, The Age of Turbulence, Common Cents, The Current Account Deficit and National Security). American companies became part of the "multinational" corporate model where labor was sought in an environment where a competitive advantage existed regardless of nationality. United States labor laws, environmental regulations, labor unions, and high corporate taxation cemented this outsourcing of labor. In addition, failure to enforce Anti-Trust laws allowed Corporations to reach a size that eliminated competition. An example is Walmart, who breaches contract law with suppliers, drives down wages by forcing competitors to close and subsidizes its low costs by paying wages so low that the workers are encouraged to accept Federal and State welfare for health care instead of the Company's group policy. Most intelligent business people refuse to supply, build or service companies of this size because such Goliaths slow pay and renegotiate contracts as a business practice and ultimately drive their business partners into insolvency.

So after all of the above, what conversation needs to take place? A one on one conversation, nationally televised without commercial, commentary or spin between an American CEO and an American worker. No government, no labor union, no chamber of commerce and no company delegates permitted. Like the doctor on a house call when it was time to settle the bill, business leader and worker need to see one another from a perspective of humanity. Just two brothers of Country, who have avoided one another, speaking only through third parties, for a significant period of time and act with malice despite forgetting how their relationship became so strained. The American worker needs to know what they can do to earn the trust of the American upper class. The American upper class needs to understand that regardless of why they have betrayed the trust of their Country when they chose to export the dignity of work overseas, they will be stronger once such a trend is reversed.

In having this conversation their should be no third party interference, as just in a sibling rivalry, such interference shall cause resentment and defensiveness on the party who feels outnumbered. The wealthy need to soften in resolve with the real needs of the worker and the worker needs to understand and respect the pressure facing the business. Picture it. Two people, who have grown to dislike one another and have refused to directly communicate for decades, locked in a room until they come to a mutually agreeable solution. A solution to bring the United States back into alignment. No longer should the youth be conditioned with a fear of being outsourced by fellow countrymen. No longer should the wealthy feel that those without are spoiled and not willing to work and earn their way to a point of financial security.

My suggestion is metaphorical, symbolic and allegorical; but, drives at the core of our current crisis of credit, unemployment, confidence and patriotism. There has been far too much taking in our culture and entirely too little giving. Giving of employment, giving of opportunity, giving of self and giving of dignity. Government cannot solve our situation without the agreement of those who are able to give these things. The cry of the wealthy that "if the government is to redistribute wealth they shall denounce their Country and take their capital and toys elsewhere" is understandable. Forcing a party to act never ends amicably. The cry of the working class of unfairness is counterproductive, for we need no further sleuthing for problems. We need a solution. A dialogue of how these parties can best participate together.

After all, their existence within the borders of this Country is symbiotic. The worker needs the wealthy for wages, the middle class needs the worker for advancement and the wealthy needs the middle class for sustenance of their situation.

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.