Posted by: Dr Pano Kroko | January 11, 2014

What does the fall of Fallujah have to do with America’s debt decline and how Economic Sentiment and reality not Theory is what holds our Society together…

Just as the bird has to find the courage to let go of the branch in order to fly, so we also must let go of the branches we are perched on, if we are to test our capacity to fly — let alone if we want to know the exhilaration of soaring to the highest potential of our life.

And that means to be able to let go of old ideas. To be able to change course. To accept the need for change. To move from our equilibrium soon…

Long time ago, decided to devote my energies in building businesses globally in the emerging markets — and therefore was faced with the good and bad economic challenges internationally, where I felt the economic problems and potential for growth were both more acute and the social issues in need of greater attention. It was a good call for the time and proved both profitable and successful, and a great journey, in magnificent ways. The fact that most of my years in academia, business, and applied economics, were lived under the assumption that the United States, with its great wealth, depth of learning, advanced technologies, and democratic institutions, would reliably find its way to social betterment and advancement in both health-wealth and power — gave me a sense of security and certainty. And that has certainly been proven true for the century  since the First World War and solidly so for the Baby Boomer generation. January 8th 2014 was the exact century mark since the start of WWI and am thankful for the intervening decades of progress and peace that followed the second major conflict of WWII. As am truly grateful for having survived the day before yesterday this bloody anniversary of a hundred year war, in Peace.

By all accounts we are in a good place, yet the rate of change eroding our position away from this positive territory of peace building and economic growth and growing middle class — has awakened me to the realities we face due to the ill effects of the Great Recession. The great recession that has been weakening our Democracy and pre-empting our empire. The great recession that we are still coursing through. Truth be told, this isn’t the first time we talk here about this but the economic crisis of recent years reflects a deep, threatening, and ongoing deterioration of our national identity, of our dreams and aspirations, of our Democracy, and even of our Empire  standing as the pre-eminent power in the globe, assuring safety and stability for all nations near and far.

Even our politics, economics, and culture of power, reflect that decline sharply. The lost war of Iraq with Fallujah falling back in the hands of the terrorist imams and their zealous fighters who preach to Ayatollahs and the dark despotic rulers of old, and who deny basic human rights, simple liberties, all science, progress, and innovation, unless it fits their need for suppression of their society, and their want of weapons of mass destruction — is rather uncomfortable.  Uncomfortable because people who establish Sharia and use blood baths and revenge against children as a form of justice — have taken over Fallujah and the hopes for a free democratic nation in Iraq are fast diminishing. Our about face in Iraq and the plight of the millennials back home who are simply shit out of luck — concerns me as they are issues intimately related.

Therefore am now seriously interested in reshaping the prospects of growth in our Democracy for a more inclusive brand of Economic theory that is science based and Innovative.  Because our Republic needs to be strengthened to be sure and this has to happen through the cooperative sustainable economics I call Carbonomics.

Great Gifts come in strange packages. Am saying this because we now wake up suddenly to the need to reconcile the idea of a Great Democracy and a Good Society with Technological Innovation, Economic Thinking,  and Bleeding Edge Science, within the early years of the 21st century — just to be ready for whatever might come down the pike. We are in need of jobs, to take care of our people in this New Millennium, but we are also in need of major smart upgrades to retool our Republic. We need a fresh dynamic equilibrium, within our Social Contract, just in order to find a creative path towards our ideal economy and thus fend off all challenges. Most importantly, we need to be ready to pay the price of civilization, through multiple acts of good citizenship and emerging Institutions of governance, keeping the extremes of our society in check, by helping people bearing a fair share of taxes, through all strata of society and educating ourselves deeply about society’s needs — all the while maintaining a vigilant eye, and talon, outside to all corners of the Earth where challenges abound.

And this brings special responsibility to those of us well endowed with charismatic nature. Somehow the best of us need to be acting as vigilant stewards for future generations, by remembering that the health of our environment is the true measure of wealth in our country. By remembering that compassionate social services represent the glue that holds society together, and that the wellbeing of our people is ultimately the only real benchmark of success in this great country. And of course we have to take care of home economics first.  Clean up our house and pay our bills. We ought to address the economic inefficiencies, same as we need to stem the mounting deficits, and reduce the export gap while rebuilding all of our infrastructure and capabilities.

But let us start first by examining the reasons for the quagmire we are in, for the runaway debt, and for our seeming inability in addressing the proper solutions with care and diligence over time. We all know that no quick cures will work now, but better cures shall definitely work in due time. And let’s remember to not make the Great the enemy of the good, because as we embark in this quest, we need to educate ourselves, calmly and  without passion or ideology, about where we went wrong — and how we can steer back to the right. Let us learn conclusively the lessons from our failures so as not to repeat them ever again.  And let’s start from the current malaise. The Deficit. The Debt that doesn’t let us be free. The national handicap…

So here are some causes of the deficit and the resulting “fiscal cliff” if you will. No need to play the blame game but best we play the crying game to reveal what’s what. It doesn’t really matter who is most responsible for the Fiscal Cliff of rising public debt. Yet it’s good to freshen the economic theories and signpost the correct governmental policies in order to bring down the debt sustainably and to not repeat the same mistakes we’ve made in the recent past. It’s been a long time since Lehman’s collapse. And true to American ingenuity, gumption and hard work – we’ve come a long way baby… Because we also appear to have come a rather long way intellectually since the day our daft Vice President Dick Cheney, famously said “deficits don’t matter” We’ve come a long way because we now care to at least address these deficits. We do this today, because we are frightened by the crippling and roiling debt crises of Greece, Italy, Spain, and the long lasting effects of debt in Japan & UK, etc. It is now high time that Americans fret about the floods of red ink that reached more than a trillion dollars a year under George W. Bush, and that have gone down only slightly under President Barack Obama.

Wasn’t it just a little while ago that we were paying down the debt, under Bill Clinton?  We were paying down the debt so rapidly that Alan Greenspan [FED chair] even worried that the US treasury might cease issuing bonds, forcing down interest rates to dangerous levels? Remember those happy days with girls all over wearing the Lewinsky blue spotted dress? For the US, even now, with interest rates at an all-time low, the actual cost of borrowing money is very small. We are fortunate that is so. Yet luck, same as the lull in our economic headwinds is not expected to last for ever. Sure – our fundamentals are far better than Europe’s, for the time being.  Nevertheless, everyone — Democrats and Republicans alike — admit that fixing the deficit has become urgent and something needs to be done soon on a massive scale. So to be rady for facing adverse change, I say growth is what we need, and that is what we are starting to get…

Now if the Republicans and the Democrats cannot end the gridlock with a compromise, and all Bush era Tax Cuts automatically expire, triggering a sudden return to tax rates we saw during the Clinton era, this might prove to be a blessing in disguise. Not a bad thing in and of itself… Yet many people fret about this too. Why? Is that prospect so bad? Weren’t those good times? The resulting treasury take — calculated at 600 billion dollars per annum — would more than cut the current deficit in half.  And all we have to do is — nothing.  Just let the Bush era tax cuts expire. Alas, having barely veered out of a genuine Depression and into deep recession, and now into recession lite — this is no time to reduce the velocity of money by hitting the spending power of the Middle Class. Some up-ratchets are needed, not hammering the middle class.

According to statistics, the average American has finally paid down most of the excess private debt that he or she built up during the Bush years. This de-leveraging process has been hard and painful, especially during a depression-recession.  But Personal debt levels are now down to Clinton Era ratios. Combine that with rapidly rising consumer confidence, plus gradually improving employment, plus very fat company cash reserves, and you have a recipe for good to great things in the year of the horse, 2014. Horse being an auspicious symbol of speedy growth or runaway effects – you choose your pill… Obama and the White House economic team rightfully deserve all the credit along with Ben Bernanke and the FED’s expansionary policy through the QE money supply dripping juice all over Wall Street and the Emerging Markets worldwide… Quantitative Easing or not – in truth – we all participated in digging ourselves out of this mess and because of that we all deserve some credit. Not tax hikes.

So, if citizens and the private sector can climb out of their deep debt hole — what will it take to de-leverage the biggest debtor of all?  The U.S. Federal government? First, we must (at last) calmly list the reasons why the U.S. went from Clintonian  surpluses to devastating hemorrhages in just a few years. Second, where possible, we must assign blame for the things that got us in this mess.  And if our list proves that one economic theory or ideology was more responsible for the mess we got ourselves into — then it’s our duty to give that party ideology and their economic theories, their due deserts. Namely less credibility. Less attention. And certainly far less opportunity to repeat the same mistakes that caused the damage in the first place.

So let’s go after the reasons for the deficit, in approximate order of importance. Economic Recession 101. Number one on our list is the tanked economy. An economy that plummeted suddenly and steeply, and thus reducing tax revenues and sharply increasing the number of Americans needing help to get across lean times. There’s a lot of blame hurled around for this… But a few top culprits for the collapse stand out. And the first of these was a faulty ideology that was bipartisan in nature: An asset bubble was allowed to grow through exuberant optimism and then it popped in our face, tipping the already wavering economy into the drink. That asset bubble was largely tied to an overheated housing market, the mortgage industry, and Wall Street speculators, who overheated both while creating a swamp of toxic derivatives to poison capital markets. Couple this with a couple of rather expensive and largely pointless wars and you get enough of a party drinking to get us all together crashing in the car of state, and ending up in the ditch.

Yet for reasons of expediency, we’ll set aside the crimes of Wall Street and the CEO cast, and the War mongering profiteers for the next batch of culprits.  But the housing/mortgage bubble was the work of both parties. Over-building and lax rules allowed millions of unqualified buyers to leverage themselves beyond their ability to pay. It is the same thing that shredded the otherwise healthy Spanish economy and to some extent the ill Greek one. Democrats were fully culpable in this topmost sin, because they saw it as a social program to get poor people into homes. And Republicans claimed to have the same generous motive. The core moment was George W. Bush’s “Ownership Society” speech that then led to passage in the Republican-controlled House and Senate — but with plenty of Democratic votes — of bills loosening mortgage rules, for example letting Fannie Mae, Freddie Mac, and Countrywide, run wild. The good news?  That failure mode is over. The bubble burst.  Citizens — even many who had sunk beneath underwater mortgages — have by now largely dug their way out and housing is recovering toward its approximate real value. The bad news? This was a harsh blow and both parties took part. What made the bursting of the housing bubble especially gruesome, however, was the second whammy. Criminal fraud and culpable failure of regulatory supervision over banking, Wall Street, hedge and wealth funds, allowing them all to use other people’s’ money in a casino of fevered gambling that became un-tethered from reality. The central example was conversion of dubious mortgages and other questionable bets into “securities” that became grotesquely toxic, amounting to trillions in losses. It was enough to transform a bad asset bubble into what could fairly be called the Second Depression.

Top culprit: the removal of restraint from Wall Street and Banking gambling with depositors’ funds by allowing merger of deposit and investment banking. Plus the crippling of regulatory agencies charged with checking and curtailing fraud, plus the scandalous conflict of interest built into the bond rating agencies. And the redefining of securities to include phantoms made of hot air. As for blame? Some of the first deregulatory steps were taken by the Republican Congress during Bill Clinton’s term as president, and Clinton went along, in trade for things he wanted — a reluctant acceptance that he now says he regrets. But the full dismantling of regulatory oversight of Wall Street took place when the GOP controlled all three branches of government.   Even now, the GOP’s top agenda item, other than “making sure Obama fails” is to prevent the Consumer Financial Protection Bureau from becoming fully functional. The first and second ideological follies and regulatory laxity, dumped us into this Great Recession. That Recession/depression (since moderated into a deep-long Recession) devastated the economy and the resulting plummeting of tax revenues became the biggest contributor to the deficit. Tax “largesse” gifts to the aristocracy, are another nail in the coffin of reason in governmental income. With tax rates  – especially on the rich – already near a 70 year low, the radical wing of the GOP took advantage of Bill Clinton’s departure, to pass the Bush tax cuts.

In fairness, Clinton had been paying down the debt, but he had not been doing the responsible thing all by himself.  A consortium of moderates from both parties had negotiated budget plans with Clinton that emphasized paying down debt during “fat years” so that we might be in good shape when, or if, lean years returned.  Radicals of the left and of the right railed against this, but the middle class, according to many polls, favoured debt pay-down over grabbing the surplus as a temporary bonus… You see the Wall Street “Wolf” mentality hadn’t set in the populace as ideology yet. This came later with devastating consequences. But still this sensible, house keeping prudence did not outlive the election of 2000, when the radical right controlled all three branches of government. They soon — even amid crisis and war — doubled down on the voodoo economic theory called “supply side” economics, a mythology proclaiming that money flowing into the pockets of the rich will immediately be invested in entrepreneurial new enterprises, into research and development and into the capital equipment needed by old businesses to deliver new products and services, resulting in skyrocketing business activity and a burst of prosperity that will then be taxable at the lower rates, erasing the loss to the treasury. Like most voodoo-cult theory incantations, there is not a grain of truth in this economic theory largely designed for pot smoking, alcoholic, and drug abusing rich kids, who sometimes their daddy puts them in the White House.

For one thing, the high marginal tax rates under FDR and Ike Eisenhower blatantly did not repress economic growth.  Indeed, the 1940s, 1950s, and 1960s, featured the most rapid rise of the middle class and new business startups and proportionate increase in prosperity in the history of our species, alongside the lowest disparities between owners of the means of production and workers in U.S. memory. All of this at a time with very high marginal tax rates. In other words there was no tradeoff, there was synergy and cooperative Economic sentiment across all segments of society, and this built the Great Society. JFK did reduce top tax rates from 90% to 70% and that was probably called for.

Yet when Reagan’s initial supply side experiment, plunged us into red ink – we didn’t continue it.  As a response upon this rising debt, Reagan did something responsible. Something that would get him drummed out of today’s Republican party and label him an economic leftie. Pay attention here please: Reagan raised taxes six times. In quick succession. He raised taxes in order to adjust, bracket, and fine-tune, his tax policy, as any pragmatic person would do, when predictions don’t jive with reality. In fact, there has never been proof that supply side cuts ever correlated causally with bursts in economic activity. Trickle down economics is a biblical effigy hoping that the crumbs from a rich table will feed the poor and also start investment engines to propel the economy into growth. A simple nonsense and a revenge of skin flints who don’t pay taxes, against the very society that affords them to be rich.   Yet in practice this is proven to not work, because most rich people do not take sudden cash infusions and invest them significantly in entrepreneurial new enterprises, or risky R&D, or the capital equipment needed by old businesses to deliver new products and services. Nor do they rush out to spend the money on purchases, thus adding high velocity transactions to the economy. Not at the spending ratios of a middle class family. Ever since Adam Smith’s time, we have known what most members of any aristocracy do with such largesse. They spend it in low velocity ways, on passive securities and land (feeding asset bubbles), on what Smith called “rent-seeking,” on gambling speculations, and on being richer.

All of which explains why the third tsunami that swamped our economy — the giant Bush tax cuts for the wealthy, enacted as soon as Bill Clinton was out of the way, did not erase their own cost to the treasury, as predicted, and instead, opened up a huge deficit hole that contributed to the asset bubble collapse. The astonishing thing is that now, amid a near depression, the GOP is doubling down upon their Voo-Doo economics mantra. Their elliptical thinking goes something like this: Obviously the Bush tax cuts did not improve things from the Clinton Era… So what do we want to do? We do more tax cuts. For the rich. It’ll work this time for sure… Nasty bit of Reason right there. A bird flew out of the cuckoo’s nest or something, and came up with this brilliant trickery labeled as economic theory. Bring it on…

And while we are at it, why don’t you add a couple of multi-Trillion dollar quagmire wars of “nation building? It’s a party after all for all of our friends. Pouring hundreds and hundreds of billions into far-off deserts where we were hated, are hated and will be hated for generations to come — seemed like the brilliant idea Cheney’s bush had. Yet today reasonable Republicans have long admitted that our reasons for going to Iraq were at best mistaken, at worst concocted lies. So those reasons got replaced with idealistic ones. Nation building and spreading democracy — in the rockiest, worst soil that anyone ever tried to plant democratic seeds. In retrospect, we have to ask, “why didn’t anybody warn us that this was repeating the calamity of Vietnam? Well, in fact, the generals and admirals did exactly that. They complained like hell! Many were fired by Bush, Cheney, and Rumsfeld for daring to foresee us getting stuck in far off Asian quagmires, bringing our boys back in cardboard boxes, and blowing the U.S. Treasury out of the water.   Yet dismal as the experience has proven someone won out of all this… See who benefited from this mess: Well, for starters, the vaunted Military Industrial Complex, Ike warned about, with Halliburton of Cheney at the helm.  Funny, that. Who else benefited?  Guess who…? The Ayatollahs. The Imams and not surprisingly even the Saudis and the petite emirs of the dirty oil Gulf states along with Russia and Mr Putin and his merry bunch of oligarchs.

All of Iraq and half of Afghanistan were doomed from the start to become satrapies of Iran. No other outcome was ever possible. All other fantasies were delusional. Was that worth the loss of lives and treasure in both of America’s longest wars? Oh, and the war cost was never put on the books. It was waved away… for years, until honest accountants took over. And now we must pay the piper. The scorecard so far: Those are the four big reasons for our malaise: Can we assign blame yet?

The number one cause of the deficit — an asset (housing) bubble that plopped us into recession — was bipartisan, though the biggest steps took place when the GOP held all the reins of power in all three branches of government. Cause number 2, which turned a recession into a borderline depression, was almost entirely ideologically Republican economic theory and practice in action. Same as were the other two main causes of runaway debt no 3 and 4. Faulty supply side trickle down economic theory, GOP-instigated, Republican stage-managed and led from the beginning, and also caused by the same right wing nut tools, top to bottom. But our list is not finished.

So far, we’ve covered only the worst budget-busting calamities.  But not all of them, by a long shot. Medicare Part D, a wholly GOP-devised program, was never funded through hard choices, but simply slapped into general obligation as a new and unfinanced entitlement. By contrast, Obamacare is funded by hard-nailed tradeoffs. We’ll see if they work, but the CBO says they at least look sincere. A vast expansion of the government’s obligation to pay for prescription drugs, which was heavily backed by the Pharmaceuticals industry. Abandoning any pretense of negotiating over prices, Medicare Part D was denounced by the libertarian wing of the GOP as both socialism and a blatantly pandering voter bribe.  In fact, this part of Medicare could be considered a largesse. It was a budget buster because no attempt was ever made to shift funds or otherwise pay for it.  Not even a fig leaf. It passed when all three branches of government were completely controlled by the Republican Party.

Fortunately, Obamacare will reinstate some bargaining against the pharmaceutical industry in this unfairly stacked system…

Yours,

Pano

PS:

Failure of Leadership is the biggest cause of collapse in my book. Because across the last 70 years, of Pax Americana, the world has seen a boom in prosperity unlike any other, with 50%+ of the planet’s population arguably in some kind of middle class, moving into homes that have electricity and hot water and kids in school.  The biggest driver of economic development has been the American consumer, buying trillions of dollars worth of crap we never needed. This trade pattern was established deliberately by George Marshall, by Acheson, Truman and Eisenhower.  It has been the world’s hope… though ecologically dangerous, unless we innovate ways for seven billion middle class lives to impact the world far less, use fewer resources, and decarbonize our Energy sector.

Remember that word, innovation.

Closer to the point, how have we Americans been able to afford the endless trade deficits that propelled world development? Simple. Innovation, Science and technology.  Each decade since the 1940s saw new, U.S.-led advances that engendered enough wealth to let us pay for all the stuff pouring out of Asian factories, giving poor workers jobs.  Jet planes, rockets, satellites, electronics & transistors & lasers, telecom, pharmaceuticals… and the Internet. The first decade of the 21st Century — the Naughties — was the first since the 1940s, that saw no such technological advancement  tsunami, making America rich enough to buy from the world.  As the internet boom petered out, we could have made sustainable energy our Next Big Thing. It was proposed, and the rate that China and Germany are getting rich off solar and wind is most impressive. By coincidence, that was also the decade when the Fox-News War on Science ideology hit full stride. When science became the Republican Right ideology’s enemy number one.

If not for that, and Cheney’s bush cuts on R&D and all the rest idiotic attack on Innovation, Science, and Technology, we would have had another renaissance and tech-driven boom by now in full swing with surpluses instead of deficits. It is no accident that this failure of the expected decade of innovation wave happened in the wake of an epochal and telling anti-science event. When the GOP banished from Capitol Hill all of the advisory panels on science and technology that had helped Congresses to legislate wisely for the last One Hundred [100] years — Innovation died off.

Sure we still have some great companies to thank for what is at least still going on in the Innovation arena, but Google and Apple and a slew of other corporations are in no way able to be bringing home the bacon for the American Treasury, let alone enough jobs for the taxpayer.

Canada and the Stephen Harper government are busy now closing science libraries and firing off all of the scientists. See where this will get them in three to five year’s time. We’ve seen the film and the cowboy doesn’t marry the cowgirl in the end because He goes bankrupt. Wait and see how fast Canada is going to end up in the ditch.

And people wise up, because today, American scientists are voting overwhelmingly with their feet. Less than 5% of the United States Scientists still call themselves Republican. And keep in mind that this ratio used to be above 50% in the years preceding Cheney’s bush. The verdict is clear. We now know who has torpedoed the one thing that kept us rich. We know who killed our Innovation mojo. Let’s innovate now by keeping them out of office for a very long time to come or until they refashion their faulty ideology and non existant economic theory.

And those enemies we funded and benefited accidentally in Iraq and Afghanistan are having a field day now at our expense.

Now the iconic city of fighting Fallujah has fallen back in the hands of Islamic terrorists; and we need to get to grips with this wholly expected reversal of fortune. We seem to be feeling the pinch and yet the realization of our folly is still far behind. Nothing good came out of this war and the ideology that fueled it is all wrong. It’s a sad day for all of Middle East and the Western World and if war comes again we’ll be the ones to blame.

There is of course always a silver lining. It’s at least a good omen if it helps awaken us to realities we need to face — otherwise all this blood and treasure, with the lives of hundreds of young men who died for this city to be liberated in the first place, are lost for nought…

PPS:

Disraeli is rolling in his grave laughing at those upstarts who dismantle their Great Empire all on their own. Cheney’s bush and their minions going at it full tilt — unassisted by reason.

Let’s wake up and start sandbagging. Let’s wake up and mend the damage in the fabric of society to get the sentiment back up high and the hopes and dreams re-energized. Let’s wake up and start preparing for whatever history dishes out to us, by building up our Economy. Let’s bring our Society again to it’s previous glory. …  Because that’s really our best defense.

A proud nation with a strong mindful Middle Class prepared to face whatever odds are stacked against it. It’s simple Political Math. The more people have an integral stake in our Economy and society — the stronger our Liberty and Democracy are. So when the next World War comes, as it will surely come, and it shall be particularly nasty, brutish, and really Big, as these conflicts tend to be  – we might be best ready. JP-MARINE-1-superJumboFallujah Islamic Fighters control city 44km west of Baghdad


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