Saturday, March 9, 2013

Dien Bien Phu & the Last Empire

Dien Bien Phu & the Last Empire

by J.M. Hamilton (Originally Published 12-25-11)

“Colonial policy is the daughter of industrial policy.” – French P.M. Jules Ferry

Lost in the fog of war and the mists of time is a long forgotten battle. A battle fought on the other side of the world, between the French and a proud and indigenous people, who wanted nothing more than their freedom from colonial rule. The U.S., at that time, pumped what would be considered an exceptional amount of money into the French military. Fought in the decade following WWII, and with the Korean War very much on the minds of U.S. policy makers, surely the French could defeat this revolutionary tribe. But it was not meant to be, the French decided to roll the dice within Indochina’s isolated hill country, near the enemy’s Laotian supply line. The French opposition knew the importance of this battle, as international negotiations were underway in Geneva over the regions future. The French, who had brought with them into battle mobile bordellos, were caught off guard when they found themselves surrounded by captured artillery pieces and anti-aircraft guns, strategically placed on higher ground. The subsequent battle of Dien Bien Phu ended French colonial rule in Southeast Asia, and became a rallying cry globally for nationalist movements seeking independence from occupying western powers. The country was subsequently divided in two at Geneva, and Ho Chi Minh was given a foothold in North Vietnam and international legitimacy, with which to launch a civil war that would eventually end in American defeat two decades later.

The New York Times reported on 5-9-54 the following: “The fall of Dien Bien Phu marks the end of an era. The ultimate military, political and psychological reactions may either make or break the anti-Communist front in the Far East and France as a great power… A lost battle has tipped the scales of history in the past; Dien Bien Phu may prove, in future accountings, to be the balance point in contemporary history.” - After Dien Bien Phu, What?

Could the Iraq war be America’s Dien Bien Phu?

Before answering that question, let’s take a look at the similarities and differences between America’s wars in Iraq and Indochina. And then let’s examine the cost allocation of war.

History repeats. Both wars, Vietnam and Iraq, were started at a time when the American public was hyper vigilant about a perceived and real menace in the world: Communism and Radical Islam. In both wars, political authorization for U.S. involvement was obtained under dubious and questionable circumstances: In Vietnam it was the Gulf of Tonkin incident that provided a catalyst, and in Iraq it was concern over weapons of mass destruction. In both wars the political goals and objectives were nebulous over time, and finally denigrated into “nation building;” and in both wars, America was either forced to leave the battlefield or requested to leave… no longer wanted, and leaving under less than auspicious circumstances. Time would also show that the twin threats of Communism and Arab Radicalism would dissolve considerably with the collapse of the Soviet Union and the rise of the Arab Spring/pro-democracy movements.

And as Vietnam proved, and as pointed out by Alan Abelson in last weeks Barron’s, Americans will not know the true cost of the Iraq war for many decades. The Iraq war will more than likely exceed a trillion is net cost, but that doesn’t begin to account for the tremendous forgone opportunity costs incurred by the nation, when we consider that Iraq war debt could have been allocated to helping Americans achieve a higher education, or if said funds were allocated to paying down the national debt, or not expanding same. Even by today’s standards, a trillion dollars is still real money. Nor does this begin to factor in the additional economic burden placed upon ordinary Americans, and returning soldiers, post war, when monetary policy inevitably swings towards war debt monetization – resulting in inflation and lower living standards.

That the real political achievement of the Iraq war was the permanent removal of Saddam Hussein calls into question the efficacy of Executive Order 12333, which supposedly forbids the assassination of foreign heads of state. The reality is there are plenty of exemptions to Executive Order 12333, and so if we compare the cost of the Iraq war to say, the cost of the mission to eliminate Osama bin Laden, well there really is no comparison. What’s the nominal cost of a bullet or a drone, versus the extraordinary cost of Iraq War…. all to remove one man? To push the point a step further, compare the cost, in blood and treasure, to remove Col. Gaddafi versus Saddam Hussein?

Separately, “nation building” (code for we no longer know what the freak we are doing here, so we have turned this mission into a philanthropic enterprise) was a failure in Vietnam, and only time will tell if it will prove successful in Iraq. Recent actions by the Iraqi prime minister, like issuing an arrest warrant for the Iraqi Vice President and further consolidating his hold on power, already call into question whether or not a nascent Iraqi democracy will flower and grow. What nation building really has come to symbolize is a run up of conflict costs and expenditures, and a financial “pig-out” by private contractors and commercial interests within a war zone, all at U.S. tax payer expense.

Despite many similarities, a key difference between both wars was the utilization of conscription by U.S. forces fighting in Vietnam, versus an all volunteer military fighting force in the Iraq War, and the resulting passive objection to the Iraq war by U.S. society, versus the near public rebellion over the Vietnam war. Some how it makes it more acceptable to some Americans if the poor and the down trodden are voluntarily sacrificed upon the altar of war, instead of the sons and daughters of the wealthy and the middle class, via the draft. And the military industrial complex (MIC) knows this. Former Defense Secretary Robert Gates warned of a separation in society between an elite warrior class and ordinary Americans.

Also of critical importance, we can see a tremendous disconnect in the way the costs of war are passed onto society as whole, in lieu of armed conflict’s true beneficiaries. J.M.H. argues that because of this, wars have a tendency to drag on indefinitely. In other words if the true costs of the war were allocated correctly, than wars would become more efficient, cost effective, produce swifter results with less loss of human life, and pull out and withdrawal would become more rapid. More thought might also be given to entering into war in the first place.

So who or what truly benefited then from the removal of Saddam Hussein, aside from the Shia majority inside Iraq? Well as clearly alluded to by French Prime Minister Jules Ferry, commercial interests clearly benefit from war without end, colonization, and/or nation building. Big Oil was clearly chomping at the bit to return to Iraq. And of course the U.S. military industrial complex expanded and grew, significantly, over the last decade, more than doubling in budgetary outlays. Not surprisingly banks benefit with the issuance of martial debt and financing. The fact that the U.S. government spends more on defense than the G-20 combined says it all.

As with all wars, there are often unintended consequences. An unintended beneficiary of Mr. Hussein’s removal was Iran; and Iran has been working to obtain a foothold inside Iraq, with success, ever since the U.S. lead invasion.

America has to figure out a way to be less subservient to what President Eisenhower referred to in his farewell address to the nation as the military industrial complex; failure to do so may mean that Iraq could become America’s Dien Bien Phu. How then might America control the costs of war, and prevent taxpayer money, sometimes with good intentions, from being wasted on nation building? If the cost of Iraq war was amortized over the costs of the products and services produced by the MIC, and passed onto foreign consumers (America being the largest arms dealer on the planet), the price of a prolonged and protracted war would become too great for the MIC to endure and would make MIC products and services considerably less competitive. Likewise, if the price of the Iraq war were presented as a cost of doing business to Big Oil or mining interests, they would balk at the cost; and maybe the Iraq war truly would have ended when Mr. George Bush landed on the deck of the aircraft carrier, USS Abraham Lincoln, with the now infamous sign, “Mission Accomplished.” Thanks to the manner in which American wars are presently billed, there is no financial incentive to rein in the cost, since the U.S. has been living on a credit card economy for decades, and the MIC, via its all volunteer military, has all but eliminated serious protest.

Ultimately, if America is unsuccessful in reining in MIC costs, it could result in a threat to national security, the loss of international prestige, as well as, possibly cause unmitigated hardship here at home, as defense spending takes away government services from the 99% and ultimately leads to an increase in taxation upon all Americans, the 100%. (By way of example, take a look at the financial situation of the so-called PIIGS in Europe… and ask yourself, are these nations in any kind of financial condition to fight a war on terror or handle any other sovereign threat?  The PIIG’s fiscal policy, and deficit spending, is a threat to their very own national security.)  Equally tragic, back in America, nation building exercises may leave the MIC winded and the public less likely to support the use of force in the future, when the U.S. may actually have very good reasons for going to war.

“Of all the enemies to public liberty war is, perhaps, the most to be 
dreaded because it comprises and develops the germ of every other. War is the parent of armies; from these proceed debts and taxes … known instruments for bringing the many under the domination of the few.… No nation could preserve its freedom in the midst of continual warfare.”
— James Madison, Fourth President of the U.S.

There is some reason for optimism however. Not everyone who enters the White House is an opportunist or a poor war strategist. Look at George H.W. Bush and his management of the first Gulf War; this was a war that was fought with great precision, finite goals and objectives, and clearly big oil and the House of Saud were among the beneficiaries of that war, not to mention the Government of Kuwait. Arguably, the U.S. should have submitted a substantive portion of the bill for that war to the various governments in the Middle East and to commercial oil concerns operating in the region.

Better yet, observe President Obama and his deft and expert management of the overthrow of the Libyan dictator, Colonel Gaddafi. These are excellent examples of where the U.S. military was utilized for its intended use, as opposed to an unending nation building exercise that only served to enrich the private contractors of war, and the commercial interests that sweep in post-war – all at the expense of the American people and the men and women who serve. Are we naive enough to believe that these same commercial interests, in our present form of democracy, do not have a considerable say in how and when America goes to war? Do foreign governments and the MIC lobby the congress? Assuredly and big time!

To be sure, there are many reasons to go to war, and American leaders may in fact have the best of intentions and the highest of ideals ( humanitarian, the spread of democracy, and otherwise), but our leaders nor the American people should never lose sight of the fact that there are tremendous profits to be made in war, as well as, many interested parties and unintended consequences and expense.  

J.M.H. is a fan of President Obama’s foreign policy, and the world owes him a debt for his substantial contribution towards the Libyan dictators removal; and America owes the President another debt for finally extricating our service men and women from the Iraq war.

That said, it appears that we plan on colonizing Afghanistan for years to come, in yet another nation building exercise. Witness last Wednesday’s NY Times story, which quotes a U.S. general as stating that America may be in Afghanistan beyond 2014. How ironic that Afghanistan, under Americas watch, has been and remains the worlds foremost opium purveyor. Americans, fiscal conservatives, and liberals, who find endless war objectionable, or too damn corrupt and expensive, may find that Republican Presidential Candidate Ron Paul provides sharp and welcome contrast to mainstream political pandering to the MIC. Perhaps Mr. Paul can help drag the mainstream towards his line of thinking?

J.M.H. is grateful for the men and women who serve their country. And Americans, as responsible participants in our democracy, owe it to our armed forces to make sure that when our elected officials send these men and women into harms way – it truly is for the advancement and protection of the national interest, and not just another nation building exercise. These men and women would also be better served if the true costs of U.S. involvement in armed conflict were allocated to commercial entities and foreign governments, with vested economic and political interests, when and where possible.

After all, blood and nation building are a huge expense.

P.S. 
“The most powerful weapon on earth is the human soul on fire.” -Ferdinand Foch

Americans should not confuse a quick willingness to go to war with patriotism, or subservience to the MIC as a rational political agenda.  Ronald Reagan, who never started a hot war in his two terms in office, is model for current political leadership to emmulate, in this regard.

A very happy holidays!

Copyright JM Hamilton Publishing 2013

PLAYBOOK




READ THE BOOK… PLAYBOOK by J.M. HAMILTON



Drones Swarming U.S. Skies

March 8, 2013/NYTIMES

Visions of Drones Swarming U.S. Skies Hit Bipartisan Nerve

WASHINGTON — The debate goes to the heart of a deeply rooted American suspicion about the government, the military and the surveillance state: the specter of drones streaking through the skies above American cities and towns, controlled by faceless bureaucrats and equipped to spy or kill.
That Big Brother imagery — conjured up by Senator Rand Paul of Kentucky during a more than 12-hour filibuster this week — has animated a surprisingly diverse swath of political interests that includes mainstream civil liberties groups, Republican and Democratic lawmakers, conservative research groups, liberal activists and right-wing conspiracy theorists.

They agree on little else. But Mr. Paul’s soliloquy has tapped into a common anxiety on the left and the right about the dangers of unchecked government. And it has exposed fears about ultra-advanced technologies that are fueled by the increasingly fine line between science fiction and real life.

Drones have become the subject of urgent policy debates in Washington as lawmakers from both parties wrangle with President Obama over their use to prosecute the fight against terrorism from the skies above countries like Pakistan and Yemen.

 

Sunday, March 3, 2013

Did You Ever See a Dream Walking?

Did You Ever See a Dream Walking?



"There he goes.  One of God's own prototypes.  Some kind of high powered mutant never even considered for mass production.  Too weird to live and too rare to die."  -  H.S.T.



"Even if one takes every reefer madness allegation of the prohibitionists at face value, marijuana prohibition has done far more harm to far more people than marijuana ever could."  - W.F.B.

By J.M. Hamilton  (3-3-13)

Well yes Mr. Crosby, I did see a dream walking... but this lady dons grey.  And not only do I adore the lady, but when I stand before my maker to answer for my countless sins, the one most likely to land me into the greatest amount of trouble is my near pagan idolatry of our individual freedoms and in particular, our first amendment right.  I don't know, somewhere I may have run afoul of the commandment which posits we shall place no other gods before Her?  I pray not.  That said, J.M.H. believes it is the democratic duty of all Americans to remain educated, and speak out, on the problems this nation faces, and over the last three years, this blog has done that and more.  Speaking out does not mean you dislike your country; but rather, quite the opposite, it can mean that through one's scribbling, you hope to make her a better place.  Besides career politicians hate it when their constituents awaken from their somnolence, so get involved and stay involved.

The first amendment is, by far, the freedom that makes this country great; even if it is often abused by politicians, lawyers, indeed SCOTUS, to further such aims as the buying of U.S. elections by the plutocracy, under a Citizens United decision, et al.

This right, however, should never be taken for granted, and it is under assault daily, whether it's China's communist regime blocking Google, or our own government's lack of transparency, and the influence the Orwellian named Patriot Act has on America's thoughts, dialogue, and writing.  If only the same passion and vigor the NRA and its membership places on the second amendment were transferred into protecting the first amendment, J.M.H. believes this nation would be a much better place.

Chief among those who have influenced my thinking in this regard, are two gentlemen who are no longer with us.  The anniversary of their respective passing was just last month, February.  Both men have influenced me in so many ways, perhaps as much as my own father; both men were iconic writers, with singular styles; both men were iconoclasts, individualists, and libertarian to varying extent; and both men were at complete opposite ends of the political spectrum, albeit meeting full circle with a love of country, freedom, and a deep distrust of the establishment (that is before both became - to differing degrees - apart of the establishment).  At the very end, both men were united by a disdain for the Iraq war, and the perpetrators of that war.

I am writing of course of Messrs. William F. Buckley and Hunter S. Thompson, a more polarizing duo never walked the face of the earth.  Their respective writing influenced generations (and my guess is many more to come); and in the case of Mr. Buckley, his writing spawned a political movement that governed this nation for the better part of three decades.  Like President Reagan's words, Mr. Buckley's movement was arguably twisted to a very bad end, and some believe, he came to recognize this near his end.  Like God taking away Beethoven's hearing, Mr. Thompson was ultimately rendered mute, to a sizable degree, by the personal excesses he described in his writing.  Both men -fighting the social and political conventional wisdom of their day - were right about so much, and had the daring, the will, and courage to lay it out in writing.



Neither of them could have done this without the first amendment.



And for both of them, no matter one's political leanings, we can all be thankful.  Not just for their words and their ideas, but for their meritorious acts of defiance.  How quintessentially American.

I find the magnetic draw from both these individuals to this very day tugging at my mind, body and soul, just as I am attracted to the living authors, Mlles. Dowd and Noonan.

And the Lady in Grey who habituates my dreams?  Well that would be the New York Times, the greatest newspaper ever produced.  And to think, I used to believe she was just another communist rag.  Today, I believe she's on the verge of documenting and ushering in a new age.

P.S.   I've been down on the GOP for sometime, but they should be applauded for holding the Dems accountable to the sequester they originated and agreed upon.  Lets hope the GOP does not fold.  If the stalemate rests with the GOP opposed to additional taxes, and the Dems opposed to spending cuts.... well then that leaves cutting billions in waste and fraud, to fund each party's respective pet projects.  Have at it, and what's more, give the President a line item veto and/or the power to impound funds.

 Copyright JM Hamilton Publishing 2013

Saturday, February 23, 2013

Addiction of Duplicities


Addiction of Duplicities

By J.M. Hamilton 2-24-13 

Why does the stock market soar? 

To hear many a CEO or banker tell it, the economy, although improving, is still struggling.  Economic headwinds from across the pond are not good.  The uncertainty produced by a highly dysfunctional federal government has shuttered CAPEX and R&D, and so many corporations are sitting on mountains of cash.  The consumer is still mired in debt, upside down on their mortgages, or reluctant to spend, as the baby boom generation begins to retire, those with the means that is.  Job creation is still too few in number to bring down intransigent unemployment and underemployment.  And, as reported by Bloomberg this week, bank lending is at a five year low.  Wall Street banks have turned into giant hedge funds, speculating while borrowing at the Feds window.  The malaise feeds on itself.

Dems are fretting over what the sequester will do to the economy.  This is what happens when too many eggs are placed in too few economic baskets… that is, the U.S. has grown dependent upon too few industries (the financial sector, defense spending, government spending, agri-business, big oil and healthcare), and now pines for the return of manufacturing. When one of these sectors sneeze, or the government desires to spend less, the economy catches a cold; and of course, home building although showing some green shoots, remains in the cellar.

So if the fundamentals are lousy, the question gets asked again, why does the stock market soar?

The short answer is the Federal Reserve or Fed.  The Fed has been printing some eighty odd billion a month to purchase T-bills and MBS, and the reasons for this are as multivariate as a rose.  Among them: Fed purchases and balance sheet expansion keeps interest rates suppressed and allows the Wall Street banks and shadow banking to jack up the stock market to new heights (or what this blog has referred to as trickle down monetary policy); it keeps the interest on the national debt low, so that Washington can continue to live beyond its means; it keeps all those adjustable rate mortgages the banks like to sell Americans from being foreclosed upon; it allows the U.S. to export the few products it manufactures overseas at a discount (in the classic “beggar thy neighbor” approach); and of course, there are all those hundreds of billions (notional value) in credit default swaps that are betting on continued Fed interest rate suppression.

Many economist will tell you that the Fed plays a not insignificant role in the boom and bust cycles this country goes through, with greater rapidity and frequency.  The stock market is now so addicted to easy money and short-term speculation, instead of long term investment and sound business fundamentals, that when the Fed talks of pulling away from its purchases or yanking the punch bowl, the Street begins to jones.

Meanwhile, M&A activity and private equity deals appear to be heating up, which tells me that we are on the cusp of yet another bubble (observe the LBO of Heinz).  M&A is great for the banks and the financial elite, but presents a problem for employment prospects, as it invariably leads to synergy and pink slips to help pay for all that debt.

So little has changed since the last crisis, which one can argue we are still in the midst of; Dodd Frank has yet to be finalized, and derivatives and swaps regulation has still not been enacted.  And Basel III has been punted down the road.  The herd is now buying back into the stock market, while the heavy hitters are taking their money off the table.

In short, look for the Fed with no good options to keep its foot firmly mashed on the printing press accelerator, and lookout for the possibility of what PIMCO’s Bill Gross recently called a financial supernova.

 Copyright JM Hamilton Publishing 2013

Monday, February 18, 2013

Chinese Gov tied to Hacking

Chinese Government tied to Hacking... NY Times

http://www.nytimes.com/2013/02/19/technology/chinas-army-is-seen-as-tied-to-hacking-against-us.html?emc=na


Sunday, February 17, 2013

Next Stop, Greece

Barron's Cover

 | SATURDAY, FEBRUARY 16, 2013

Next Stop, Greece

Special Report--Debt Crisis: If we fail to rein in spending and increase taxes -- starting now -- the U.S. in 22 years could be in worse shape than Greece is today.

In his State of the Union speech last Tuesday, President Obama concluded that "the State of our Union is stronger." The big question is: stronger than what?

Federal debt is a record $12.2 trillion, or 76% of the nation's annual output of goods and services. While that's still well below Greece's 153%, we're headed steadily in the wrong direction.
According to estimates by the Congressional Budget Office, adjusted by Barron's to account for recent tax increases and other factors, if the U.S. doesn't raise taxes further and cut spending dramatically, the national debt could easily reach 153% of economic output by 2035.

These are not just numbers. If the U.S. national debt continues ballooning, we can be sure of a deep, long-lasting recession -- very likely a depression -- sometime in the next two to three decades. The unemployment rate could easily surge to 20%.

 

Analysis: Euro strugglers eye Ireland

Analysis: Euro strugglers eye Ireland for crisis lessons

Photo
Tue, Feb 12 2013

By Alan Wheatley, Global Economics Correspondent

LONDON (Reuters) - To the relief of its creditors, Ireland is showing the rest of the struggling euro zone periphery that fiscal and wage discipline will eventually be rewarded by the bond markets, if not appreciated by the man in the street.

A less heartening lesson is that throwing away the crutch of IMF and EU support, as Dublin is likely to be able to do later this year, is no ticket back to pre-crisis prosperity: nations on the euro zone's rim have dug a debt hole so deep that they face years more of morale-sapping austerity and sub-par growth.

"In all of these countries, it's going to take the rest of the decade to bring debt down to more comfortable levels," said Douglas Renwick with Fitch Ratings in London.

Take Ireland itself. The country is held up as a model pupil for the way it has complied with a loans-for-reforms rescue program agreed with the ‘troika' of the International Monetary Fund, the European Union and the European Central Bank after a banking crisis toppled its economy in 2008.

"Ireland is not in any sense in good shape," Kirkegaard said. "There are lessons to be learned for the rest of the euro area from Ireland. But the idea that you can get through a crisis of the magnitude that Ireland has had in just a few years is not one of them."

 

Thinking the Unthinkable

-->
Thinking the Unthinkable  


By J.M. Hamilton  (Originally Published 7-5-2010)

As stocks continue their downward decent (the S&P 500 is down 8.3% for the year), and unemployment remains recalcitrant (Shadow Government puts the U.S. unemployment/under-employment figure in excess of 20%), Keynesians, lead by Mr. Krugman, and Fiscal Conservatives, presently embodied by Mr. Paulson, are at war with one another.

Mr. Krugman is a Nobel Laureate, and a Princeton economist, and a long time advocate of the poor and the down trodden.  His primary pulpit is the N.Y. Times editorial pages.

Mr.Paulson’s notoriety derives through that “market maker” institution – Goldman Sachs; Mr. Paulson, allegedly, hand-picked the deck in a CDO issuance, and walked away with extraordinary profits.  A civil complaint has been filed against Goldman Sachs by the SEC, over this very same transaction.   No similar filing, by the SEC, has been made against Mr. Paulson or his hedge fund.

The Keynesian Argument

Mr. Krugman is hammering for greater government spending to spur economic activity and to get Americans through the great recession.  Mr. Krugman argues that we are not out this recession by a long shot; and only government spending can make up for, in terms of job creation and economic activity, the contraction in private sector spending and growth.

Keynesians argue that in the short run deficit’s don’t matter (as opposed to former Vice President Dick Cheney, who – when it’s politically convenient – is said to argue that deficits do not matter at all), and that deficit spending is a valid policy response to a down turn in the economy.  They further argue that when times are good, government should rein in spending, and put money away for the next, inevitable, downturn.

Generally, many Americans would side with Mr. Krugman, were it not for the monstrous national debt visited upon this nation, by every administration from Reagan forward (the sole exception would be President Clinton, who actually ran budget surpluses).  In fairness to President Obama, he inherited this fiscal nightmare, and gets a pass on deficit creation, at least in the short run.

Bottom line: There are two problems with the Keynesian argument:  One, the second half of the Keynesian thesis simply falls apart in reality; that is to say, seemingly, no politician on earth, or all too few, has the self control to rein in government spending during the good times, and create budget surpluses.  If the alleged keepers of the faith of fiscal conservatism, the Republicans, cannot rein in federal spending during prosperous times (e.g. witness Bush – Cheney, who actually expanded Big Government, with Entitlement D of Medicare), then how can U.S. citizens expect well meaning liberals to act accordingly?  And two, the U.S. debt to GDP ratio is hovering around 90%… the servicing of such debt, and magnification of that debt, presents a huge fiscal drag on the U.S. economy, and other sovereign nations facing similar circumstances (witness the PIIGS in the E.U., and the fiscally “healthy” sovereigns propping up same).

Additional budget deficits at this point, although well meaning, may actually have a reverse effect, as businesses spend their time on alternative non-core pursuits, such as hoarding cash (to pay for inevitable higher taxes and worse economic times yet to come), hedging currencies, and loading up on gold.   

Moreover, governments with sky high debt cannot continue to borrow forever to finance the Keynesian model, just ask Greece?

If the debt to GDP ratio wasn’t in the stratosphere, with the CBO and the OMB predicting trillion dollar deficits – seemingly in perpetuity, Mr. Krugman’s policy prescriptions would seem to make sense, in the short run.

The Fiscal Conservative Argument, or Let Them Eat Cake!
If one absolutely did not give a damn about the unemployed in this country, nearly 1/5 of all Americans, Mr. Paulson’s argument would be the way to go: simply rein in government spending, and cut social services – in order to get our fiscal act together .  If one had a huge financial stake in perpetuation of the status quo – unemployed be damned – then Mr. Paulson’s “Pollyanna/rose colored glasses approach” would make perfect sense.

Who said Herbert Hoover is dead, why his spirit is alive and well in Mr. Paulson!

Mr. Paulson seems to be thinking (while not speaking it), if I may paraphrase and cut to the chase, ‘Heh, the economy is growing.  The government largess, joy, and love showered upon the nation’s banking sector, seems to be a rising tide for me and my  hedge fund, so why rock the freaking boat???’ 

The problem is the “voodoo economic theory” (read: laissez faire) that has been passed down for over a generation now, appears a bit tired and worn.  Main Street is not profiting from the unprecedented bailout of Wall Street.  And in fact the only parties that appear to be profiting from government intervention into the market place (TARP, TLGP, Fed Funds rate at Zero, Et Al.) are, ironically, the Wall Street banks, and their close associates.

The rising tide is not lifting all ships, thank you Mr. Paulson, nor can the 1/5 of American’s presently unemployed wait for crumbs to come trickling down.  Mr. Paulson seems to have forgotten, conveniently enough, that the manner in which he’s made his extraordinary fortune, via an unregulated derivatives market and Goldman Sachs (now being pursued by the SEC),  in short laissez faire capitalism run amok, are both primary contributors to the mayhem visited upon both the U.S. and world economies.  Separately, one cannot recall Mr. Paulson calling for fiscal discipline during the peak of economic cycle, say around 2006 and early 2007.  Why?

Mr. Paulson’s position, if allowed to play out, could lead to problems with the social fabric.  For some reason, Americans have come to believe in the semi-egalitarian social construct of a middle class.

Monetary Policy

Another approach to our economic Hiroshima is through monetary policy, which posits that massive inflows of liquidity into the economy should stimulate growth and prosperity.

Note to readers, I am on my roof, nightly, feverishly scanning the horizon for Ben Bernanke and his helicopter to come to the rescue, and dump that load of cash right into my waiting arms.   But alas, no Ben  - only pigeons dumping an entirely different load.

Here again, a liberal monetary policy would work quite well if the nation had healthy banks and some semblance of a normal fiscal policy, but this perfect storm of a financial nightmare appears to have left monetary policy face down in the water.

That is to say, while Mr. Bernanke is busily printing money at the Fed, he appears to be “pushing on a rope,” in terms of stimulating the economy.  Try as the Fed might, M3 is actually contracting at an alarming pace.   The banks aren’t lending, at least not to small or mid-sized businesses, or individual consumers – the life blood of U.S. job creation and the engine of economic growth.

Instead, the Wall Street banks appear to have entered into a symbiotic relationship with the federal government, whereby the government provides them with free liquidity through the Fed Funds window, and severely watered down bank reform legislation, and in return the banks finance ever growing government debt.

Many banks balance sheets are still a wreck.   And globally banks are so leveraged up with government debt  that – going forward – when we talk about governments bailing out “the banks,” we really are talking about bailing out the international order or world governments, themselves.   Governments and banks are more interconnected than ever, but I digress.

Thinking the Unthinkable:  A Global Restructuring of Debt

So if all the economic answers (Keynesian, Fiscal Conservatism, and Monetary policy) are shot, dulled, or worse yet, may actually aggravate the situation, what then?  What is left?

Here’s a hint: South and Central American countries have been known to do it from time to time, and some have done quite well, economically, after the fact.

Centrals bankers meet some weekend, ask the creditor nations to take a “haircut,” and abracadabra a new currency is born, Monday morning.

Of course, this could upset the international order of things.  On the “con” side:  Creditor nations might demand that in exchange for “haircuts” on debt, that the western democracies surrender the ability to print fiat currencies?   Fiscal order might be pushed by creditor nations, and profligate government spending might be banished (e.g. the end of politicians making spending promises that have to be financed), but is that really a bad thing?  After seeing the chaos within the E.U. and the lack of centralized political power over the euro, a real world bank might be created to control, monitor, and oversee a new world currency.  The monetization of debt might no longer be available to many sovereign nations.  The truly American value of living within one’s means, thrift and frugality, might be imposed, where our politicians have failed us.

On the “pro” side:  The crushing debt with which western democracies are presently faced with might be wiped out, or eliminated to a large degree.   The government deficits, and debt, that are such a drag on the world economy, could be eliminated.   Governments, no longer faced with catastrophic debt, would no longer have to deploy contractionary fiscal policies during the ongoing economic crisis, such as tax increases and reductions in public spending and social services, so that debt loads could be serviced.   The social order could be preserved.   Governments – no longer dependent upon banks to buy their debt – could, in turn, install mark to market accounting and let the chips fall where they may among banks.   

In short, no more propping up banks so that they can finance sovereign debt, the mess that we are presently in.  Banks that survive mark to market accounting would be free to lend to the private sector, again, instead of being tied up financing government debt.   With bad banks washed away, and healthy banks free to lend, a floor could be established in the real estate market, a huge driver of economic activity, job creation, and wealth creation.  As real estate makes a comeback, government, the Fed, Freddie/Fannies, and the banks may actually make a buck off of what is presently referred to as toxic assets.

Protectionist forces might be held at bay.

Basically, we are talking about clearing the decks for global economic activity The global economy may enjoy a renaissance, and economic growth could be explosive!  Today’s creditor nations, post restructuring, could be primary beneficiaries of rapid worldwide economic growth, especially the export lead Pacific Rim (i.e. China).  Multi-national business would flourish, having to worry less about hedging currencies and escalating taxes.  Global banking could be significantly simplified.  Business could expand globally, as they would no longer have to worry about market instability and problematic currencies.

Main Street could return to a preeminent position of economic activity, and Wall Street could return to its secondary position of supporting Main Street.  The “pros” of a global restructuring, at the end of the day, could overwhelmingly outweigh the “cons.”


Reactionary Forces

To be sure, there would enormous political pressure not to engage in such an enterprise, much of the pressure deriving from the banking sector, hedge funds, politicians, and some sovereign nations (admittedly, a fierce crowd).  The old international order of nation states might come under fire, to some degree, as they surrender some economic power to a global bank; but many nations/states have already surrendered banking authority to some centralized power, such as:  all 50 states that make up the United States, or members of the E.U.

The need for many disparate powerful private banking enterprises, and the incumbent global systematic risk and moral hazard, might also come to an end – or be mitigated; and with it, the tremendous sway the banks hold over the political and economic processes, particularly within democracies.

There would be many intended and unintended consequences from such a proposal, but if we are truly honest with ourselves, isn’t this what the world is headed towards anyway, a global financial restructuring?   The only question is will it happen sooner rather than later, after considerable economic suffering and hardship.   Is it more advantageous for the U.S. to engage in restructuring negotiations now, while the dollar is still strong, or to wait until such time as there is a global run on the dollar?

Apparently, the only reason the dollar is strong is due to the collapse of the euro – the catalyst for the euro down fall occurred when Goldman Sachs sold Greece derivative products, all the better to obscure Greek financials for E.U. admittance.  Up until the fall of the euro, presumably more than one hedge fund and more than one Wall Street bank (and perhaps some U.S. politicians) were gambling that the dollar was in the decline, and in the long run, they, unfortunately, are correct.

The point at which nations can no longer finance their debt load is near for many countries around the world.  And how will each country handle their respective crisis(?),  by printing paper!  Either that, or wealthier nations will have to come to the table to bailout nations with problematic financials, but in doing so, the financially stronger nations will only weaken themselves (German citizens appear well aware of what is happening in the E.U. and many are perfectly prepared to walk away from the Euro). And we wonder why corporations are hoarding cash!

And the alternative to a global restructuring?   Well, read the press, take a walk in your local mall, look at the stock market, stagnation and decay are appearing everywhere, as is substandard economic growth, except in the golden halls where Mr. Paulson operates.

The Fourth of July is all about Freedoms: Economic, Political and Spiritual.  A global restructuring may serve to better preserve those freedoms, as well as greater economic opportunity, for the many rather than a few!  The real question is will politicians surrender power, the ability to monetize debt, and global economic hardship, so that the world economy can take off again?  World-wide economic recovery is being held hostage by crushing sovereign debt and an exceptionally nasty private sector debt hangover, in the incarnation of banks and the real estate bubble.  A world economy deserves a global banking system.

Copyright JM Hamilton Publishing 2013