MONEY 68 - WORLD ECONOMY

THIS IS MY 68^th BLOG ON UNDERSTANDING MONEY TOOLS

My blogs are to be directed mainly at understanding money so I thought we should take a look at the national and international scenes as so much is happening.  I am writing this as a consolidation of various economic reports, from the positive to the negative, and trying to form my own opinion of reality.

Let’s start with our own country, and try to be very objective. We’ll start with the big economic picture, long term.  First, let’s look at assets versus debt. We, as a country, have total assets of approximately $100 trillion dollars. On the debt and liability side of the balance sheet we have current debt and future obligations of somewhere between $85 and $200 trillion. Why the great range? It depends on what is figured into the equation. So much or our reporting has not included “off balance sheet” items. What is the term? An example being the Iraq and Afghanistan wars. When the government saw all the wounded war casualties and medical treatment as long term they decided to not include that in the war expense but re-appropriate it to some other budget. Long term debt projected forward does include Social Security, Medicare, Medicaid, government pensions and other obligations.

To take a look at shorter term, let’s look at our current economic situation. We have about $18 trillion in current debt with a gross domestic product of about $16 trillion. This ratio is very popular as a comparison to other countries. In terms of this it is well known that Japan is one of the worst at 200% or more debt to GDP. In October, 2014, Japan started their own quantitative easing program lowering interest rates and weakening the Yen, their currency.

Wow, how did we get in such a mess here? We had a balanced budget in 1999 and even a surplus of money coming in.   We had a debt of about $5.5 trillion, and that amount was being reduced.  September 11, 2001, and the terrorist attacks on the NYC Twin Towers created a lot of decisions to be made. We attacked Afghanistan and then Iraq. War is expensive and can break a country financially. Reading books on Napoleon Bonaparte I always remember one comment he made; the best way to unify a country is a war, the best way to destroy a country and the support of the people is a long war. I wish our leaders took advise from history.

Are you familiar with the word “hegemony”? The word concisely means the power or dominance of one country over another militarily, politically or financially. We have seen empires go under because of this, expansionism and loss of control; the Greek Empire, the Roman Empire, the English Empire, the French Empire, the Spanish Empire, and now over the past 85 years America is following suit.

US interventions like Viet Nam, Southeast Asia, and throughout the Middle East cause extreme expenditures with little return. We have done this in the name of democracy and for financial reasons around the world. After WW
II we had a lot of war debt to pay off, US savings bonds. Instead of watching finances we backed the French in Viet Nam as early as 1947 and kept financing war efforts there for 25 years with the approval of Presidents Truman, Eisenhower, Kennedy, Johnson and Nixon. In retrospect we didn’t belong there.

Besides wars greatly contributing to our national debt and financial problems what else adds to this?  Import and export imbalance is another. We have been importing manufactured goods, especially from China, for years adding to huge trade deficits. This means our US dollars are leaving the country.  We have become a service country, this includes financial services especially Wall Street in NYC. No country can grow on this. Our greatest export now has become cardboard being shipped back to Asia to be recycled and filled with more products returning to the USA.

The US debt now has reached a point where a free market place no longer can exist. We have tried to monetize our debt printing an extra $4.5 trillion in money and lowering our interest paid on debt to about zero, all governmentally controlled. This still hasn’t helped us prosper economically. Other countries are stuck with deflation and no growth and are willing to copy our standard, Japan and the European Union being two places.

We have discussed the reduction of the middle class in America over and over. Here is a statistic that I came across the week of April 27, 2015.  In the last 35 years middle class wages, adjusted for inflation, have only risen 6% where top management wages have risen 125%. Again, no country can be successful without a strong and varied middle class population. Small businesses were the backbone of this country, and we need that again. Unfortunately, the “golden rule” is prevalent, “he who has the gold rules”. This accounts for the controls of big business, as well as our top wealthiest controlling politicians. Many Senators are millionaires helped into office by the wealthy. They don’t forget favors and aren’t going to vote for bills that would increase taxes or endanger their wellbeing. Again, over 50% of our country’s assets are controlled by the top 1%, and about 85-90% of all the stock owned in the exchanges is held by the wealthiest.

Let’s take a moment to look at what comprises a successful country:

-       Unification and focus. An example, even though it is war, was

          World War II.  Nationalism.

-       Common culture.

-       Manufacturing economy versus a service economy.

-       Common religions or respect for each other’s beliefs; Israel with Judaism.

-       In many Scandinavian countries socialism with medical paid, good education, and low unemployment resulting in happy, low stressed life.

-       Population size. The larger the population the harder for conformity, and lack of focus on solving national issues.

-       Similar culture of the population.

-       Sensible banking regulations favoring business both small and large.

Now, let’s point out some obvious problems that face us now and will become more apparent and burdensome in the future:

-       Our population is aging, older people unfortunately are expensive.

-       Immigration from all fronts coming in without money to support themselves or jobs; e.g. housing, medical.  Some countries do not permit this as with New Zealand and British Columbia.

-       Low birth rate. The average family birthrate to sustain the US was always considered 2.2 children per family. Now it is below 1 child. Millenials are not having children, holding off on marriage or not marrying at all, and this will disrupt society.

-       Our educational system needs revamping. Our student debt in the US is now about $1 trillion. Everyone is going to college and has degrees with no place to enter the workplace with good paying jobs. Students are graduating with great debt loads and not being able to pay down the debt. This is one reason they are not likely to marry and add to their financial burden. Like Germany we need to encourage more students to enter skilled trades and starting at the high school level. The future is in robot factories and skilled computerized work. We need to train directly for this, and provide well paying jobs.

-       Business has gone to the big companies. We had Anti-trust at one time and that has disappeared. America was built on small diversified business and that needs to come back. Today, we have Walmart and Target for retailers. We have consolidated investment banking on Wall Street and those companies have merged with commercial banks so that a handful of companies control the money. Again, the “the golden rule”.

-       Too tight a reign on money and too regulated. We went from loose money for the private sector to almost no way to borrow money unless you don’t need money and are wealthy, or a big company. This suffocates business in America.

From here let’s talk briefly internationally. There isn’t a lot of good news out there. Greece may or may not stay in the European Union. With little industry except for tourism, olives and Ouzo they don’t have much. They can’t make debt payments.

Central banks and the International Monetary Fund (IMF) have been lending emerging countries money in the form of US dollars and expecting to be paid back in US dollars. With the strength of the dollar these countries can’t pay back the debt and thus become subservient to the debt. Control of the powerful over the weak, hegemony.

There are many countries in the world trying to circumvent the power of the United States and the US dollar. As I believe we’ve discussed in prior blogs, another entity entering the world to compete with the International Monetary Fund and World Bank is the Asian Infrastructure Investment Bank (AIIB). It has members outside Asia that include Britain, France, India, Italy, and now Iran has been accepted. China is the strongest member. At first they will finance in US dollars, however eventually switching to a basket of currencies or another currency.

With our first quarter 2015 gross domestic product numbers coming out at a tepid .1% we are looking at no growth. This has recently weakened the dollar, and should have positive effects on our exportation of goods. The expected escalation in interest rates by the Federal Reserve come September is looking weaker all the time. Even this .1% growth is mainly coming from the public sector spending, not private sector.

That is about it for this blog.