The True Axis of Evil (Part I)

The True Axis of Evil (Part I)

 “… the Reagan administration has failed to promote free trade. Ronald Reagan by his actions has become the most protectionist president since Herbert Hoover, the heavyweight champion of protectionists.”

 - The Reagan Record on Trade, Rhetoric versus Reality, by Sheldon L. Richman – Published by the Cato Institute.

By J.M. Hamilton (Originally Published 10-10-10)

George Bush first used “axis of evil” on January 29, 2002, during a State of the Union address, to describe the primary threats to U.S. and world stability: Iraq, Iran, and North Korea.   We now know that Iraq was not a threat (nobody is looking for WMDs, anymore).  And North Korea’s Kim Jong-Il, dictator of death’s twilight kingdom, when he’s feeling fine, only pokes his head up long enough to extort aid and financial assistance from the West.  For the moment, Iran’s nuclear ambitions are being sidetracked by a computer virus named Esther (who needs standing armies, the U.S., probably, has computer geeks writing malware code).   So much for the threat to the West poised by President Bush’s axis, instead we have two very serious threats to U.S. national security and world stability, and J.M.H. aims to take them both on.

The threats identified in this two part piece are, possibly, far more frightening than Islamic fundamentalist bent of global jihad, or rogue petrol states seeking nukes…. For the threats offered up cut to the core of the American economy, and have already begun to carry out the American dream.

A Slam Dunk for Bipartisan Support

Of the two threats, by the far the easiest one to target, politically, is China.  For Democrats, attacking this job draining succubus appeals directly to its core constituency, unions and labor.   By pegging the Yuan to the U.S. dollar and exploiting a limitless labor pool of impoverished Chinese, China literally exports its demographic problems and political unrest right onto America’s shores; and it holds with an iron fist the U.S. dollars, utilized to purchase China’s products.  Otherwise, the Yuan, if allowed to float, would naturally rise in value, making American products more affordable in the global market.   Therefore, the pegged Yuan, and the vast stores of U.S. dollars retained, gives China an unfair trade advantage over U.S. products.

For Republicans, taking on the People’s Republic of China harkens back to the days when the G.O.P. nearly ruled the known U.S. political universe.  For inspiration, think of the glorious commie bashing days of Eisenhower, Nixon, and Reagan!  What could invigorate the Republican base more than resurrecting the arch-nemesis of God, country, mom and apple pie?  Who said Reagan’s evil empire was defeated?  Why it’s alive and well, and kicking our economic ass; but not because of any superiority over American labor or American ingenuity, but rather, because of unfair trade practices and a U.S. government that has allowed this to happen.

Together, Democrats and Republicans can unite to defeat an economic foe, for entirely different political and ideological reasons.

Trade-o-lanche

In making our case, the U.S. Bureau of Economic Analysis provides us with some cold hard facts:

Period		Balance
	Total	Goods	Services
Annual
1992	-39,212	-96,897	57,685
1993	-70,311	-132,451	62,141
1994	-98,493	-165,831	67,338
1995	-96,384	-174,170	77,786
1996	-104,065	-191,000	86,935
1997	-108,273	-198,428	90,155
1998	-166,140	-248,221	82,081
1999	-264,239	-336,310	72,072
2000	-378,780	-446,233	67,453
2001	-364,393	-421,980	57,586
2002	-420,524	-475,345	54,821
2003	-494,183	-541,544	47,361
2004	-609,345	-665,631	56,286
2005	-714,176	-783,801	69,625
2006	-759,240	-839,456	80,216
2007	-702,099	-823,192	121,093
2008	-698,802	-834,652	135,850
2009	-374,908	-506,944	132,036

From the table: U.S. International Trade in Goods and Services: Exports, Imports and Balances

We can project from this table that the advocates of “free trade” have provided America with trade deficits that, if left unchecked, could ramp up to a trillion dollars, annually, very soon.

One sees from the BEA’s figures that a whole lot of jobs are being exported outside the United States.

We now know there is nothing free about “free trade,” when it costs Americans jobs, erodes the U.S. tax base, and leads to tremendous drain on our government, in the form of social payments and unemployment insurance.  “Free trade” also directly feeds our national debt – by cutting America’s taxable income base and increasing the aforementioned social service expenditures; and “free trade” further feeds the U.S. jones for easy debt financing, both private and public, as net Exporter countries send some U.S. dollars back to America in the form of debt financing.  

And the single largest contributing nation to the U.S. trade deficit (?), well this very same Bureau of Economics will tell you that would be China.

Slave Trade

To fight this true force of evil, the U.S. should leverage its preeminence as a world market to assist China in bringing about necessary societal reforms, so that China can become a global market that aids America in driving the world economy.  As it stands now, an elite cadre of communist party leadership, and a handful of crony capitalists, surfs a massive wave of Chinese humanity that is exploited daily as inexpensive labor; moreover, this leadership employs all, or nearly all, of the tools designed to curtail U.S. exports to China: from tariffs and taxes to insisting that American business, wishing to operate on China’s shores, partner with Chinese business.

In the worker’s paradise, Chinese labor does not enjoy the basic social services or safety net that Western democracies provide for its citizens; instead, the average Chinese worker, operating in an economic gulag, is paid a fraction of his American counterpart, and must save to provide for catastrophic medical care, and retirement.  So that by allowing China to carry on like this, we not only do America and American labor a tremendous disservice, but we allow Chinese leadership to continue to exploit nearly 20% of world’s population for communist elite enrichment.

If the Chinese government had any sense of morality at all, it would take some of its profits, and foreign reserves, and invest them in setting up a social safety net that would allow Chinese workers some semblance of dignity and discretionary income.  The result: a Chinese consumer society, and a self sustaining market for China’s massive productive capacity, and a rising middle class; of equal importance, it would take the monkey off America’s back to be the engine of global economic consumption, help prevent global currency and trade wars, and give the world’s exporters a new market with exceptional potential.

The Fear Card

China’s Red Leadership is no hurry to adopt these reforms, for they like things the way they are – with an elite fraction of society on top, reaping incredible profits, and more than a billion citizens beneath them, operating at a near sustenance level.  Setting up a safety net for China’s population will, undoubtedly, prove expensive in the short to intermediate run, as the cost of China’s labor rises; but in the long run profits should soar, as China transforms into a consumer society, and, ultimately, a preeminent world market.

To be sure some Western multi-nationals, of a manufacturing focus, may not like such an economic and social transformation, as the rising cost of labor increases the costs of goods sold, or erodes fat and rich profit margins on consumer electronics and other products.  Not to pick on Apple, whose products we all know and love, but does this company really need to enjoy a greater than 50% profit margin on iPhone, courtesy of suicidal Chinese labor and the predatory Chinese company, Foxconn?

No, unfortunately, in order to assist China’s Red Aristocracy to move forward, America is going to have to pull out every stop in the economic and political play book to leverage China into doing the right thing.  Trade sanctions and taxes on Chinese imports are a great beginning.  Labeling China a currency manipulator is another step.  Or worst case, by simply freezing China’s imports out of the U.S. market, we tap into the communist party leadership’s greatest fear: political and societal unrest. 

If you think the fat cats in Beijing and Hong Kong are tough, just think what hundreds of millions of angry and hungry Chinese workers looks like moving en-masse.

And will China actually dump its massive stockpiles of U.S. currency reserves, the scenario U.S. leadership fears most?  Not likely, for such an act will only serve to devalue China’s own holdings, remove their leverage card, and make American goods and services that much more competitive, globally.

The Long March!

A myth has sprung over the last couple of decades that China and the Chinese government are this warm cuddly capitalist bear, who means the world no harm.   Mr. Alan Abelson, of Barron’s, a financial weekly, over the course of many Saturdays, has eviscerated this fantasy that China is some sort of free market Disneyland, when nothing could be further from the truth.  Mr. Abelson’s weekly editorial, Up & Down Wall Street, gives us a clearer picture (e.g. IPOs and stock market to the contrary, the majority of China’s largest businesses remain under the control and watchful eye of the state; the economic planning of this command economy, and the infusion of funds into these large Chinese companies, is directed by technocrats within the big red machine; and the captains of Chinese industry who run these large companies work side by side with communist party cadres).

Chairmen Mao wrote in 1935:  "The Long March is a manifesto. It has proclaimed to the world that the Red Army is an army of heroes, while the imperialists and their running dogs, Chiang Kai-shek and his like, are impotent. It has proclaimed their utter failure to encircle, pursue, obstruct and intercept us. The Long March is also a propaganda force. It has announced to some 200 million people in eleven provinces that the road of the Red Army is their only road to liberation.”

Chinese leadership today, under threat from few if any countries, seems to have chosen a different path to “liberation,” one of crony capitalism and command economy; but the world should make no mistake that China’s leadership remains on that long march, even if it means a short run detour into faux capitalism.  American leadership has nothing to fear from an exploited and humble Chinese people, but should be highly weary of the goals, ambitions and designs of China’s communist party leadership, who appear bent on economic and political hegemony.  Perhaps a less sinister, but ultimately naïve read of the situation is: This same leadership is just trying to stay one step ahead of 20% of the world’s population?

This blog’s greatest concern is that China has, for the last couple of decades, lulled America into a sense of economic calm and a consumer opiate haze, as U.S. jobs have been shipped overseas, and America  and the American government has become addicted to cheap debt financing.  Meanwhile, Federal deficits spiral out of control, from over consumption, lack of national savings, and a shrinking tax base, and the need for ever increasing unemployment benefits.   And to what end (?):  A weakened, declining and debilitated United State of America.

Who also benefits by a diminished manufacturing base within America?   Why that would be U.S. banks and the shadow banking industry, who have become one of the larger employers in America, and who can in turn leverage this fact against our own government to pay for Wall Street’s financial disasters.

“You will never find a more wretched hive of scum and villainy. We must be cautious.”

Without firing a shot, China, and in this country a band of free market zealots (like some fifth column working its evil from within), has done more to harm and damage America, economically, than the Red Army ever could have done.   Why merely check out this nation's unemployment and underemployment rate of 20% or greater.   Look no further than Federal and State budgets and a government debt that is spiraling out of control; and glance at the last gasps of Federal Reserve policy, with yet another round of bank bailouts under the auspices of QE2, wearing the mask of monetary stimulus.

To be sure righting the balance of trade is not the answer to all of America’s economic ills, but it’s a good start; and to be sure, China is not the only nation who has exploited America’s “free trade” dogma for their economic betterment.  

But what is absolutely sickening are the elites at the Chicago school of economics who still tout this faded catechism as some absolute, when they are surrounded by the decay “free trade” has wrought, in Cleveland, Pittsburgh and Detroit.  There is no such thing as utopian “free trade,” only wealthy industrialist and manufacturers seeking out labor, tax and regulatory arbitrage, in order to maximize profits (and governments who in turn profit, or lose, but nearly always – at the expense of its people).

America’s share of the world economy has shrunk over time, but approximately 24% of global GDP still resides within U.S. borders, and we must leverage this fact in establishing U.S. trade policy.  We owe it to ourselves, and ultimately for the betterment of the citizens of the world, to insist upon fair trade and U.S. trade policies that mitigate the advantages of labor, regulatory and tax arbitrage.  It’s good for America and it forces some developing countries to catch up with the American economy, by creating their own, internal, markets to rely upon.  Once these self sustaining markets are established globally, in the so-called BRIC nations, and when the differences in tax codes, regulation and the cost of labor are mitigated, then fair trade and the global economy can take off as never before.

But until then, the U.S. should insist upon fair and equitable trade from its global partners, all the better to protect against predatory trade policies.

The True Axis of Evil, Part II, coming soon.

 Copyright JM Hamilton Publishing 2013

The Third Man

The Third Man

By J.M. Hamilton ( 2-3-13)


"Don't be so gloomy.  After all, it's not that awful.  What the fellow said... In Italy for thirty years under the Borges, they had warfare, terror, murder, bloodshed, but they produced Michelangelo, Leonardo da Vinci, and the Renaissance.  In Switzerland, they had brotherly love.  They had five hundred years of democracy and peace.  And what did that produce?  The cuckoo clock."

-  Orson Welles (aka Harry Lime), in The Third Man


Americans and American Business prize loyalty and fidelity in their friends with great passion and vigor, often above all other traits and attributes.  And with very good reason - after all what's the sense in having a champion hunting dog as your loyal companion, if he's going to turn and bite his friend and owner?  I have often wondered what is the breaking point of any relationship, or personal and professional bond, and I have concluded that it often comes down to feelings of betrayal.

The Third Man is a movie classic that addresses this very issue.  This film noir was shot in 1949 in black and white by Robert Krasker, and takes place in post-war Vienna.  The Third Man stars Joseph Cotten, Orson Welles, and Trevor Howard, as Holly Martins, Harry Lime, and Major Calloway, respectively.  The love interest in the movie is played by the brooding and dark, Alida Valli (aka Anna Schmidt), who is the girlfriend of Harry Lime.  The story starts with American Holly Martin's arrival in Vienna to visit his childhood friend Harry Lime, only to find that Harry had died under mysterious circumstances.  Even more enigmatic are a series of characters, who show up to tell Holly slightly different accounts of his best friend's untimely demise.  Holly is warned to leave Vienna by Major Calloway, but Holly, loyal to his friend - Harry, wants to know what happened.  Moreover, he appears to be smitten by Anna, who provides yet another reason to stay.

To cut to the chase and without giving away too much of the story, Holly finds out that Harry, in fact, has staged his accident, and is both alive and well, albeit doing his best to evade the military authorities.  It seems that there is a raging black market in post-war Vienna, and Harry/Orson is deeply involved in trading diluted penicillin for serious cash.  Holly can't believe it, and refuses to turn his resurrected friend in to Major Calloway; but on his way out of town, the Major brings Holly by a children's hospital, where the affects of Harry's nefarious trade can be seen in crippled young lives, not to mention considerable suffering.  Holly has now reached his breaking point, and at the thought of the betrayal of all those young lives, he joins forces with the Major to help bring Harry in (or was Holly thinking about Harry's girlfriend, Anna?).

American manufactures - indeed, some would argue the American economy and citizenry - are also beginning to feel a little betrayed, presently, by Big Oil.  For decades American business has walked in lockstep unison against government mandates, regulation, and taxation.  And business was willing to overlook the peccadilloes of its private sector brethren, even if some of their activities operated at cross purposes with their own bottom line.  Of course, J.M.H. has often written and spoken out against the predations of monopolies and cartels; and the significant drag these cartels bring to the economy, and their detrimental impact to the business community at large, as they charge unregulated, and what amounts to be monopolistic profits.

In a still struggling economy, a cartel can tax the consumer to such an extent, through monopolistic profit taking (particularly in inelastic markets, such as gas, energy, and LPG), that it can send the economy into a tailspin.  Economist have made the case that every recession from the 1970's forward, was either precipitated by or accompanied by an oil price shock, such is the awesome economic power of the domestic oil cartel.

That's why it is absolutely breathtaking that American manufacturers are finally standing up to Big Oil, and the American Petroleum Institute, and stating that they have had enough.  At issue, now that America has achieved energy independence, via fracking and natural gas, Big Oil - which also conveniently owns Big Natural Gas (witness Exxon's takeover of XTO Energy, Inc.) - wants to ship America's natural gas offshore to more lucrative markets.  By shipping America's energy independence and natural resources offshore, this will in turn keep fuel prices higher here in the U.S., and thwart a nascent economic recovery and a renaissance in American manufacturing.  Arguably, higher fuel prices, and with American resources exported offshore, Big Oil's position will also serve to keep America tangled up in Middle-East affairs, and fighting to protect the interests of the Saudi regime and other oil rich despots.

All Americans should be proud that some American manufactures are fighting Big Oils efforts to ship America's energy independence to Japan and China; but they are facing a formidable foe, and very powerful interests.  Just this week, Senate Republicans attempted to push through legislation that allows Big Oil to ship LNG offshore, with the "Expedited LNG for American Allies Act" - such is the awesome political power of the domestic oil cartel.  The supporting Senators offered the familiar refrain that whatever Big Oil wants is inherently good for the American economy.

Seems as though some members of the business community bravely beg to differ.

Meanwhile, Exxon reported near record profits of $44 billion for 2012, a profit figure that was only exceeded in 2008 - when oil price shocks helped to drive the American economy into the ground.

Feeling betrayed yet?

P.S.  Make no mistake about it, J.M.H. is pro-oil and pro-energy, but is anti-cartel. 


 Copyright JM Hamilton Publishing 2013

The Most Fiscally Conservative President...

The Exceptionally Nasty Politics of Unemployment… And the Most Fiscally Conservative President in the Last Thirty Years

By J.M. Hamilton  (Originally Published July 17, 2010)

Here’s a hint, it sure wasn’t Reagan…

This week President Obama named a new budget director to replace Peter Orszag.  The President was quoted as saying: "If there was a hall of fame for budget directors, then Jack Lew surely would have earned a place for his service in that role under President Clinton when he helped balance the federal budget after years of deficits," and "Jack is the only budget director in history to preside over a budget surplus for three consecutive years."

It’s been awhile, what does a budget surplus look like, and for that matter, how does an unemployment rate of less than 5% appear?   Both, the budget surpluses, Mr. Obama wistfully commented on, and an unemployment rate of less than 5% occurred under President Clinton’s watch.  These highly enviable economic results didn’t come easy to President Clinton, and they occurred during a personally painful time for the President, his second term. 

The nation’s unemployment rate during the ‘90s:

1992	7.49		Bush H.W.
1993	6.91		Clinton
1994	6.10
1995	5.59
1996	5.41
1997	4.94
1998	4.50
1999	4.22
2000	3.97

Source:  http://www.miseryindex.us/urbyyear.asp

Hind sight is 20/20, and we now know that Clinton was not a favorite in the business community and of many ultra wealthy investors, in either of his terms in office.  The nation’s top income tax rate was 39% under Clinton, up from 28 and 31% under H.W. Bush (interestingly enough, this same tax bracket was 50% for much of Reagan’s two terms in office).   So here’s Clinton jacking up the tax rate on the rich, the wealthy, the investor class (stealing the punch bowl at the great capitalist party), and he’s an absolute pariah among Republicans; in short, Clinton was viewed very much in the same manner President Obama is viewed by the rich, today, for threatening to snatch away the Bush (W) tax cuts (who lowered Clinton’s top tax rate to 35%).

Boy, talk about your economic buzz kill!  All manner of conservative economist, republican politicians, and many CEO’s, will tell you that a tax increase in the middle of a recession is a sure way to derail the economy, and will make matters worse.  But after Clinton was reelected exactly the opposite happened, the economy jumped and hard:  U.S. GDP grew from approximately  7.5 trillion in ’93,  to nearly 10.0 trillion in 2000, almost 2.0 trillion of that growth, the lion’s share, came during Clinton’s second term.

So what happened?  Well, I don’t have a crystal ball, and it’s beyond my skill set to be able to peer into the hearts and minds of the business/corporate elite, but here’s my hypothesis:  the plutocracy, possibly, held up on their investment plans in the hopes that Clinton was a one term wonder.   Maybe, just maybe, corporate American and the banks slowed up on hiring and loans, so as to run the Arkansas wunderkind out of office?   After all, CEO’s are people too, and we know that the many of them are Republican.  Gee, wouldn’t it be human nature to make things tough on the political opposition and take a wait and see mentality (particularly if you are wealthy), slow down on the spending/investments a little?  Meanwhile the economy is tough; the public – who’s also experiencing the financial pain of an early ‘90s recession, albeit more painfully – could conceivably empathize with the business community, if investment and jobs weren’t exactly forthcoming.

Back at the White House, Clinton hooked up with a campaign advisor, Dick Morris (former advisor to the most right wing Senator to enter the halls of U.S. Senate, in the modern era – Jesse Helms); and Clinton turned right of center before his second term, at least in terms of taking on a more “pro-business” stance.    In ’96, Clinton, with some help from Perot, ran over Bob Dole, smoking him by nearly 10 million votes.  Clinton, who had also signed NAFTA and presided over a considerable amount of banking  deregulation, was not just watching the revenue side of the ledger with his tax increase, but like any good accountants, Jack Lew and the President were also watching the spending side.   Clinton, keeping an eye on government expenditures, signed:  the Personal Responsibility and Work Opportunity Act, or simply put welfare reform.

Following through on my hypothesis then, the business community, seeing that their efforts to unseat the President had come to naught, may have decided that sitting on the sidelines for the balance of the ‘90s was not fun and costing them money; and hence, cranked up the show.  The banking and business elites learned to live with the Clinton tax increase, and a Democrat in the White House.   The economy, the Street, and profits roared to life - reaching the pinnacle for that era with the Dot.com boom and the Dow’s 10,000 benchmark. 

Messrs. Clinton and Lew went on to hand the Texas usurper three years of budget surpluses, which he promptly wasted on two wars, irresponsible tax cuts, and profligate government spending and deficits (but that’s a story that is still firmly burned in the nation’s collective memory).

Are we, as a nation, revisiting circa ’94-’95 all over?   Again, we have a Democrat in the White House, who’s had to take – through no fault of his own – some tough stances with the business community and is about to enact very modest bank regulatory reform.   We know many corporations are flush with cash, holding on to that cash very tightly, and not investing said cash in CAPEX or new hires; we know that some very large banks, having received the mother of all bailouts, are also flush with liquidity, enjoying a Fed Funds rate at or near zero percent.   

Key question:  Could some members of the business elite be waiting or biding their time?  Waiting out this administration, in the hopes that Obama is a one trick pony?    Maybe.  Perhaps?   Afterall, if the economy continues to perform poorly, and unemployment remains high enough, Americans just might vote the President and his party out of office, or so the reasoning goes.

To be sure, there are exogenous and endogenous economic variables today that make the early 90’s recession not entirely analogous, like the financial Armageddon unleashed on an unsuspecting citizenry by firms such as Goldman Sachs, Countrywide S&L, and AIG.   The inherited debt to GDP ratio is definitely higher for this sitting President.   And unlike Clinton, Obama did see some semblance of “healthcare reform” signed into law.

That said, the shrill cries that Clinton faced are not dissimilar to the anger faced by Obama…. Complaints that Obama is a socialist and anti business, by the Chamber of Commerce set, were also faced by Mr. Clinton in the ‘90s.  Could it be that some part of our nation’s present economic misery is by calculated political design then, from some elites keeping too tight a grasp on the purse strings, and what would cause them to spend, or loan, again?  If these same elites (banking and business) are indeed, biding their time, then we can only hope that a good showing by the Democrats in November 2010 will quite possibly hasten their desire to accept both bank reform and the possible end of the Bush era tax cuts, and partake of the great capitalist party once again.

Who knows?  With increased business expansion and a resulting increase in government receipts might President Obama and Mr. Lew be incited to enact some Clintonian cuts in federal spending?

If the Clinton years are indeed analogous to the Obama years, let’s hope that the midterm elections in 2010, and Obama’s reelection in 2012, sets off an economic renaissance.

 Copyright JM Hamilton Publishing 2013

Malum in se: Goodby Mr. Geithner!

Malum in se

“He is calm in the face of a storm, and he sees the world as it is, not how we’d like it to be.”
-Treasury Secretary Geithner, as quoted in Bloomberg 7-2-12

“Some men see things as they are and say, ‘Why?’  I dream things that never were and say, ‘Why not?’” 
- Robert Fitzgerald Kennedy, U.S. Attorney General; U.S. Senator

By J.M. Hamilton 7-14-12

This essay may, for some, get a little crude this week, so for those with virgin eyes, you may not want to read further. 

Who am I kidding?  It’s going to be crude! 

You can almost taste it.  One can certainly feel it, and read about it.  It’s invasive.  And it has metastasized throughout the body politic.  It’s called cynicism, or by any other words:  “an attitude of scornful, jaded, negativity.”

I remember the first time I encountered it.  It was 1990.  We were still basking in the warm Republican glow of Reaganomics.  In Texas, the Republican Party had put forth a businessman named “Claytie” Williams, to run against then State Treasurer, Ann Richards.

democrat!  

And, Mr. Williams was about to politically stomp Ms. Richards, big time.  He had a twenty-point lead. 

Republicans were feeling real good. 

Mr. Williams was about to become the second Republican governor in the State of Texas, since the Civil War’s Reconstruction.  Yup.  A carpetbagger was about to enter the governor’s mansion, but at least he was one of ours. 

And then something happened like a bolt out of the blue… revelations!  Turned out Claytie’s tongue would be his undoing; turned out Mr. Williams had a fondness for cynical, dark humor.  Poof, his lead went up in smoke.  He was quoted as saying amongst the “boys,” the following joke:

“Rape is just like the weather…  it’s inevitable, just relax and enjoy it.”

Ms. Richards never looked back and won the governorship.  Republicans shrieked and howled and chewed on their own body parts.  Damn, I was sore.

Now, you have to remember Mr. Williams comment was Pre-Hillary and Pre- P.C. (politically correct), but it displayed – even if in jest – the dark side of American politics and of human nature.   Many of us have watched political cynicism grow and grow ever since, if not at the state level then certainly at the national level. 

Today, the author of our economic recovery, and our economic messiah, if you believe his P.R., Mr. Geithner, was recently quoted in Bloomberg as praising Mr. Draghi, E.U. Central Bank President, and Goldman Sachs Alum, with the aforementioned quote.

Mr. Draghi gets it, per Mr. Geithner, not how the world ought to be, but how it is.  

According to Mr. Geithner, one might infer, how the world should and will be is with Bank Presidents running the planet, impervious to their own malign actions, backed by the full faith and credit on the American taxpayer, and never, ever sanctioned or held accountable for their outrageous behavior; that is to say, no matter how economically debilitating banker fraud to the global economy; the amount of debt the bank bailouts piled upon the taxpayer; and no matter how many bank created hardships face the ever growing ranks of the unemployed.

Per Mr. Geithner, that’s just the way it is:
·      Libor scandals, impacting hundreds of trillions in banking instruments and investments;
·      Derivative and swaps scandals in London, a la Mr. Dimon and “the London Whale;”
·      Alleged Energy market manipulation in California by J.P. Morgan;
·      Accounting shenanigans and off balance sheet transactions;
·      Money laundering;
·      Offshore accounts;
·      Taxpayer funded Banks gambling in Private Equity;
·      Another Futures Dealer vanishes with hundreds of million in client money gone missing (and the banks and the regulators are unaware?);
·      Tax evasion; and
·      Accounts for drug dealers.

What have I missed?  These are just the Headlines for the last thirty days.  This list doesn’t begin to account for the 2008 Banking Armageddon, even though many of these events are redundant.  

Recidivism is the hallmark of this crisis.

And the proceeding list is a direct result of the 2008 actions of the Gang of Four:  Messrs. Bush, Paulson, Bernanke, and Geithner!  This nation should have led the way for the world, and never bailed out the banks, or certainly not without nationalization, penalty and a change in management.

Lost Japanese decades, stagnation, and malaise… this is what Mr. Geithner, the Bank Presidents, and SCOTUS have delivered. 

Somebody should explain to Mr. Geithner that cynicism is not what government is about.  

What Government is about is doing the impossible.  As Mr. Kennedy so eloquently said above, it’s about dreaming things that never were, and saying why not.  It’s about:

Another Texan, President L.B.J., signing Civil Rights legislation;

It’s about President John F. Kennedy setting the nation’s sites on the moon;

President Roosevelt’s efforts and success in defeating National Socialism in Europe;

It’s about President Truman establishing the policy of Communist containment, which allowed President Reagan to ultimately defeat the Soviets;

It’s about President Lincoln signing the emancipation proclamation, and

President Obama demonstrating vision and attempting to steer this country away from the Bankocracy that rules us all, despite the “ball and chain” that is Mr. Geithner.

That’s what government can be about.  It should not be about a personal bailout fund for the Cartel.

By the way, notice how the dreamers and doers above are all Democrats?  Okay, Lincoln would be a Democrat by today’s standards, as the underwriter of the first Federal income tax. Even Reagan was a Democrat before joining the Republican Party.

In the last four years, the U.S. and Europe have suffered a withering shit storm of deception and greed perpetrated upon us all by the banks, and public officials in the banker’s pockets.  

As Mr. Geithner cynically alludes to, the more things change the more they stay the same.  

But Americans and Europeans, by now, know the difference between Malum in se, and Malum prohibitum.  And just because banking atrocities have not been made illegal, because politicians conveniently abdicate responsibility, or feckless regulators refuse to act, doesn’t mean what the bankers are doing to humanity isn’t inherently evil, or enjoys public consent.

Until what the Economist refers to as “banksters” are held accountable, lost careers and prison time, this storm will continue.

At the end of the day, Americans refuse to take Mr. Clayton Williams advice.   We will not sit back and enjoy the rape perpetrated upon us all by the international banking cartel.

P.S.

Mr. Geithner, how much longer do you think the banking dictatorship, and your world and “the way it is” will last???

“Every dictatorship has ultimately strangled in a web of repression it wove for its people, making mistakes that could not be corrected because criticism was prohibited.”

– Robert Fitzgerald Kennedy, U.S. Attorney General; U.S. Senator


 Copyright JM Hamilton Publishing 2013

Tax Arbitrage

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Tax Arbitrage

There are some who legitimately believe businesses should pay no taxes whatsoever…

By J.M. Hamilton  (1-6-13)

Arbitrage is not a force majeure...   and for any CEO or COO worth their salt, arbitrage is like breathing air.  Quite simply arbitrage is finding discrepancies in tax rates, the cost of labor, regulatory law, and exchange rates between sovereigns, and taking advantage of those discrepancies - all other variables being equal - to enhance the corporate bottom line.  Put another way and more specifically, tax arbitrage is like water - always flowing down hill, continuously seeking out the most advantageous (read the lowest) tax rate.  An entire cottage industry of lobbyist, accountants, and lawyers has sprung up seeking out the most advantageous tax rates for their clients.

In order for tax arbitrage to take place it must have a willing partner; and in a democracy that partner is our elected officials, who grant tax concession to free enterprise.  By way of example, the NY Times recently wrote about Texas (in a piece entitled, Lines Blur as Texas Gives Industries a Bonanza, by Louise Story).

Per the Times, Texas offers tax concessions worth $19 billion dollars, per annum, in an effort to create a more business friendly environment and spur job creation; but there's a downside - the state's citizens suffer for want of funds for public education, and a regressive tax code.  Moreover, despite the state's generosity, some question whether or not these tax breaks actually generate benefits to the state and her citizens.  The Times goes on to note, Texas is number three in the nation for the proportion of jobs at or below minimum wage; Texas has the 11th highest poverty rate; Texas balances corporate tax incentives with reductions in public education spending- easily placing Texas in the bottom quartile of per student funding; much of these government giveaways require no reciprocal stipulations, covenants or hiring requirements on the part of corporations receiving the gift from the state. Texas is number 45 in education ranking and consistently produces some of the lowest SAT scores in the nation; Texas also has a very large percentage of the population that is uninsured for medical care.

What's in it for Texas politicians?  Well campaign contributions of course, with many lobbyist ponying up serious cake in return for tax breaks.  This presents Texan pols with a substantial conflict of interest, with significant repercussions, not just for the citizens of the lone star state, but for Americans nationwide, who reside in states competing for businesses and jobs taken up via Texas sized tax breaks.

Per the same Times piece, state and local governments give $80 billion in corporate incentives per annum; of that figure Texas would appear to be giving away 25% of it.

Many would argue Texas politicians are only harming its own citizens, neighboring states, and any states that want to provide quality public education and services for its citizens, by siphoning off business, in some instances jobs, and the resulting tax base.

This would appear to be a road to perdition, whereby wealthy and powerful economic and political interests continuously play one state off upon another; and the parties - who can afford to pay taxes - successfully dodge societal obligations, in exchange for lobbyist fees and campaign contributions.  Or put another way, this is simply tax arbitrage.

It's not just happening at the state level, even the Federal government is in on the action, as noted in this week's WSJ piece - Crony Capitalist Blowout.  Among some of the passages of this article, the following:

"There’s plenty to lament about the capital and income tax hikes, but the bill’s seedier underside is the $40 billion or so in tax payoffs to every crony capitalist and special pleader with a lobbyist worth his million-dollar salary. Congress and the White House want everyone to ignore this corporate-welfare blowout, so allow us to shine a light on the merriment."

And.... "The great joke here is that Washington pretends to want to pass 'comprehensive tax reform,' even as each year it adds more tax giveaways that distort the tax code and keep tax rates higher than they have to be. Even as he praised the bill full of this stuff, Mr. Obama called Tuesday night for 'further reforms to our tax code so that the wealthiest corporations and individuals can’t take advantage of loopholes and deductions that aren’t available to most Americans.'

The costs of all this are far greater than the estimates conjured by the Joint Tax Committee. They include slower economic growth from misallocated capital, lower revenues for the Treasury and thus more pressure to raise rates on everyone, and greater public cynicism that government mainly serves the powerful.

Republicans who are looking for a new populist message have one waiting here, and they could start by repudiating the corporate welfare in this New Year disgrace."

Tax arbitrage is not isolated to the Unites States, it's global.... Great Britain recently noted that its corporate revenues were down substantially at a time of tremendous corporate profitability - with many corporations sitting upon record amounts of cash.

To be fair, not all corporations are looking for tax breaks.  Some corporations and their management teams recognize that paying taxes is important for the long term health and viability of their labor pool, employee morale and welfare, as well as, their markets.  And some CEOs are forced into arbitrage knowing full well that if they don't play the arbitrage game - their competitor will.  Apple has recently indicated that it will bring some manufacturing back to the United States, which is to be applauded; and Apple, one can argue, with their cash reserves, and product demand and mark-up, is well positioned to return manufacturing to the U.S.  For many manufactures, however, the arbitrage choice is less simple.

And it is in this area that government, rather than being a part of the problem, could and can be a positive force for both the business community and society.  States and the Federal government need to work together, that is to say, collude to maximize tax revenue and services for its citizens, while maintaining a business friendly environment.

State and federal governments should naturally seek uniformity in the tax code nationally, so that free enterprise is operating in regions and states for legitimate business reasons.... Not because states are paying them to operate in their state.   Ideally, if a nation, say the United States were to achieve equilibrium/uniformity in taxes, regulation, and living wages across all fifty United States-  business will naturally locate to states and regions closet to their respective markets to save on storage, transportation, and logistical costs.  In short, if the states all agreed on tax policy, there would be no such thing as tax arbitrage within the United States; there would be no race to a revenue bottom lead by pols at the expense of government services; there would be less temptation for politicians to hand out tax breaks, since the paradigm would be turned upside down.

If a single state decided not to voluntarily abide by a uniform tax code/regime, say Texas, pressure could be brought to bear upon that state and the businesses operating in that state, by the contiguous/competing states, or even the Federal government, increasing the sales tax on any Texas produced - or originated- goods and services sold.  Federal funds allocated to the state of Texas could also be withheld, until Texas politicians climbed on board with a homogenous national tax code.

There are some who legitimately believe businesses should pay no taxes whatsoever, or pay lower rates, as long as business or enterprise hires that respective country's citizens; indeed some "socialist" northern European countries have adopted such corporate tax policies (i.e. minimize or lower corporate taxation, while taxing individuals at significantly higher rates).  And that is legitimate discussion that should be held in a public forum with our elected U.S. officials, as opposed to our elected officials making corporate concessions on a one off basis - to say, lure California businesses to the state of Texas; what should not happen - and the very dynamic that is failing this country - are pols making these tax decisions in smoke filled closed door sessions in exchange for campaign contributions, with no caveats or conditions or guarantees that such tax breaks will produce jobs and opportunities in a given state or even within the United States.

Once again, our elected officials are wreaking havoc on state and federal budgets at a time of economic hardship.  And these same pols continue to eviscerate the tax code with local, state and federal budgets running in the red.  Clearly our elected officials need to be reined in - a national tax code for all states would establish a new normal and highlight any politician, who was attempting to game the system for personal gain.  While politicians' coffers grow fat with campaign contributions, the constituency, labor, and markets wither for want of education and services.  Indeed, at the same time pols hand out government largesse to corporations, many of these same pols are seeking substantial cut backs in state services for their constituents.

A balanced and uniform state tax code, identical across all fifty states, is inherently most advantageous for citizens; such a universal code would help prevent the politician led downward spiral of tax cuts for the wealthy, followed by lost revenue and the resulting reductions in government funded education and services.

As mentioned, arbitrage is not limited to U.S. borders... Ultimately if nation states don't want to be played off against one another - they should work towards adopting uniform/global tax, accounting, and regulatory regimes as well, along with similar labor and wage policies over the course of time.

P.S.

Mission accomplished... The NRA can come out of its foxhole now.  With politicians incessantly arguing about the fiscal cliff, and now, the debt ceiling limit - the political news cycle has already pulled away from the travesty and tragedy in Connecticut.  It remains to be seen whether or not congressional leadership will actually govern in 2013, or will congress and the country continue to be hijacked by the Tea Party movement... A movement in rapid decline.

 Copyright JM Hamilton Publishing 2013

A Rusting City

A Rusting City

“I’ve spoken of the shining city all my political life, but I don’t know if I ever quite communicated what I saw when I said it.  But in my mind it was a tall, proud city built on rocks stronger than oceans, windswept, God-blessed, and teeming with people of all kinds living in harmony and peace; a city with free ports that hummed with commerce and creativity.  And if there had to be city walls, the walls had doors and the doors were open to anyone with the will and the heart to get here.  That’s how I saw it, and see it still.  And how stands the city on this winter night?  More prosperous, more secure and happier than it was eight years ago…. And she’s still a beacon, still a magnet for all who must have freedom…”   —  Farewell Address to the Nation, January 11, 1989

By J.M. Hamilton 6-30-12

It was a dark and stormy night.   No, let’s start over.

Once upon a time, a very eloquent leader came to be elected to run a tarnished and rusting city.  The city had fallen into disrepair and faced double-digit unemployment, inflation, and interest rates (mostly because the city had been taken off the gold standard by a prior administrator, and the printing presses had been maxed out to gain a mayoral second term).  An index was even created to measure just how bad things had become for the citizens, a “misery index.”   Times were indeed difficult.  The leader was a gifted orator and roused his tribe/Party against government; he talked down government programs, oppressive taxation, and government regulation; and he spoke proudly of the private sector, capitalism, and privatization.

But the wise ruler also was smart enough to remember the great depression, and at one time had actually been a democrat. Oh my!

A Democrat in Wolf’s Clothing?

And yet, there seemed to be a wide divergence between the mayor’s rhetoric and his actual policies.  For despite his strong anti-government language, the leader didn’t have the heart to cut government programs for the elderly.  In fact government spending and entitlements expanded and grew, as did deficit spending; he also protected the city’s workers and jobs from the free trade policy he advocated, with tariffs and barriers to trade; and the renown mayor of the city raised taxes no less than eleven times during his two terms, and yet, the deficits – government spending versus tax revenue – grew and grew.  The top tax rate for the largest wage earners was 50% for much of the great communicator’s terms in office.

Despite the mayor’s policies, the city – possibly by shear force of his charm and persuasion – prospered.   While others saw through the leader’s verbal skills and recognized that he had merely adopted liberal economic policy – held widely in disrepute within the mayor’s Party, commonly known as Keynesian Economics; the leader claimed that the free market, tax cuts, and deregulation had brought the city back and made her shiny again, while failing to acknowledge government’s role (both fiscal and monetary policy) in his and the city’s success.  After eight long years, the mayor retired for well-earned rest and relaxation.  Indeed, he seemingly had done very well.

Except the mayor’s words appeared to have cast an enchanted spell.

The leader was remembered very fondly, and over time his political Party/tribe built a cult of personality around him and his ideology.  The Party remembered with great relish the great communicator’s words, all the while ignoring or wishing away his actions and deeds.  Or attributing the continuing problems of the city — rampant fiscal profligacy and deficit spending — to a failure to cut revenue/taxes.  The Party, which prided itself on its tremendous business acumen, seemingly believed that while no business could spend indefinitely without raising revenue/increasing sales, apparently believed that government was magical and that it could continue to grow and spend indefinitely without raising revenue/taxes.  By sorcery, the Laffer Curve, and supply side economics, the Party of the great leader wished away the government’s deficits but did nothing to stop its “borrow and spend policies.”

What Big Teeth You Have…Grandma

What’s worse the Party ignored their leaders practice – and track record – to avoid foreign entanglements and wars.  Instead, the Party began to fight in foreign lands seemingly endless wars, or battles to protect oil rich cities, all to the great benefit of: trade routes, “managed” energy production, commercial and sovereign interests, and two of the Party’s greatest benefactors, the military industrial complex and Big Oil.  However, these wars cost the city greatly in terms of blood and treasure, and while they caused a short-term boom in her economy, they often left the shiny city winded financially, morally, and martially (for taxes had been not raised to pay for city’s foreign adventures — indeed, they had been cut).  Denizens of the world often wondered why the shiny city, often fought in resource rich lands, protecting the interest’s of dictators and despots, while contrary to the City’s ideal, she often ignored human rights atrocities committed by dictators in lands that were not resource rich or had minimal links to the city’s economy or business interests.  Worse still, when the city was at the apogee of her power, she failed to spread democracy and stability globally; but rather, continued to support military and authoritarian regimes, an opportunity squandered.

And I’ll Huff and I’ll Puff and I’ll Blow Your House Down…

But worst of all, the great communicator’s Party – having completely abandoned the financial rules and regulations put in place after the great depression, such as Glass-Steagall – allowed the city’s banks to gamble and engage in idle speculation, at the expense of the city’s economy and the banks traditional role of lending to the fair city’s citizens and businesses.  A tremendous bubble ensued, and the city’s real estate market came crashing down, and with it a lifetime of accumulated wealth, and the livelihood of a great many of the city’s businesses and inhabitants.  Worse still, it turned out that the city’s banks had bet against the city and her people, and some of the banks very own products, and the banks reaped significant financial reward for their wickedness in the city lead bailout.

Separately the tax code had been turned to Swiss cheese; the Party having been lobbied to create loopholes for the rich and the powerful – and having accepted large political campaign contributions – acquiesced to many demands.  The city’s budget was now ruinous, and she could no longer provide basic services for her people or make good on her financial commitments.  The city’s central banker took to printing money to pay for the city’s massive debts and tax cuts for the rich, the Party had so favored.

In the end, the Party’s and the leader’s free enterprise and anti-government language had become such a cornerstone of their beliefs that businesses and entire sectors of the city’s economy were given free reign and allowed to merge and denigrate into mere monopoly.  The cartels often worked directly at cross-purposes with the city’s consumers, the city’s labor force, her financial health, and the city’s once great markets.  Contrary to the great leader’s policies and actions that helped and aided the city’s workers and her markets, trade barriers were taken down, “free trade” agreements ratified, and many of the city’s jobs were sent offshore – which only made the city’s fiscal crisis worse, so diminished now was the city’s tax base.

Yes, inexpensive products were exported back to the shiny city and her once great markets, but who could afford them, with such high unemployment rates, depressed wage levels, and monopolies preying upon the citizenry for limited discretionary income?

The shiny city and the Party listened to the great communicators words, and ignored his actions at their own peril, and the city fell into disrepair, was over extended fiscally, and the need to print money to pay her bills, and for additional bank bailouts, grew greater.  Over the span of time, and contrary to the Party’s and the leader’s speeches, the shiny city had adopted the liberal economist Keynes’ policies almost to the letter.  Moreover, redistributed wealth was not shared equally for a just and fair society; but rather, it went to the wealthy, often in the form of tax cuts, bailouts, special regulations, inflationary monetary policy, and accounting magic and subsidies.

The city soon grew rusty again, along with her infrastructure, and she was ill prepared for the next calamity to come, because she had squandered her treasure and credit line.

In a final irony, the great leader, along with his city, counted among their many successes their signature achievement – the dismantling of a withering crony empire.  Ultimately, in many ways the shiny city was rapidly becoming the very thing she and her citizens had fought a great cold war against, an empire that was overextended economically, militarily, financially and intellectually.

After a thirty-year reign, the Party and many of the leader’s words became little more than a fairy tale.

For while the free market and capitalism are great producers of wealth, the free market works best when partnered with a strong and healthy government to ameliorate private enterprises worst attributes: that of monopoly, concentration of wealth and power, cronyism, and government and regulatory capture.

The great communicator knew this, and his actions revealed as much, but his rhetoric, almost spell like, had been twisted to a very bad end, indeed.

And the moral of the story:  Watch both the words and actions of actors turned politician.  For while actions speak louder than words, sometimes a leader’s words, unintentionally, may have damaging consequences for future generations.

P.S.

And the mayor’s lasting legacy? The mayor showed us that when the debt to GDP ratio is low, anyone – even a public relations man from General Electric – can kick start an economy by adopting Keynesian fiscal and monetary policy; what takes discipline, foresight and good stewardship is raising taxes during prosperous times.

Ultimately, the mayor’s lasting legacy was his dark words against government turned a generation off on public service, so that the city – all too often – became led by easily manipulated second-string hacks, extremist, and political opportunist.  Subsequently, malaise and lost decades ensued.

The End.

 Copyright JM Hamilton Publishing 2013