You canÕt create a
twenty-first century society based upon an educational system promoting the
myth that you can be all you can be — by just showing up; enforced by an
mediocre bureaucracy ‑– which essentially just shows up; built on a
twentieth century industrial model to create workers for factories — that
no longer exist; and enforced by a geopolitical financial establishment —
totally hedged against any risk.
— Jerry Bannon, The Wonder Springs Chronicle, 25 January 2012, Publisher and angry American citizen
By
attempting to pick up where we left off last week and close out this brief
series, this article runs significantly longer than I normally like, but I
think the context helps provide a cogent framework to build toward a positive
future economic path. Borrowing the outline, and placing it in a totally
different context from what was presented in a Monday evening presentation I
attended, the conclusion is: Make wine, not argument, and definitely not war.
When
your first job after graduating from college is in military intelligence, the
one universal law is to: Never believe anything you are told without verifying
it from at least two other independent sources. Through experience, even in the
more communications side of the spy craft, like the National Security Agency,
contrasted with the real spooky dudes, you quickly learn that the real world
does not operate as it is generally hyped and anything approaching the real
truth is hard to come by.
This
of course can quickly make you cynical, if not tempered with the most powerful
force in the world — which is truth. Truth always comes with a cost and
most of the time untruth grows not so much from its power, but from the na•ve
perception we do not possess the resources to dismantle the presuppositions of
these lies.
One
such untruth fostered through the media, especially at this time, is that we
live in a global capitalist system of markets. This whole myth supports
inductive extreme views that in order to move toward the shining city on the
hill, we need either to restrain capitalism or unleash capitalism and markets
will work their magic.
Neither
view is able to grasp the reality that the industrial consumer age we
experienced during much of the twentieth century is unsustainable, because all
the productivity gains we have been able to achieve, especially in the last
thirty years, have been offset with decreasing efficiencies and centralization.
One
of the first principles of business and engineering is that of the economies of
scale. The problem is that there are limits to these economies and unless those
limits are taken into account we will have to eventually pay the price.
Mathematics, especially the complex mathematics used in economics and
engineering do not recognize these limits because they are built upon the faulty
assumption that the past is the ÒonlyÓ predictor of the future.
Last week
we assigned and discussed some homework that included a video of almost an hour
in length from Moyers & Company on
crony capitalism. This week there was another installment that featured John
Reed, now president of MIT and former Senator Byron Dorgan, related to
financial deregulation. We also watched the first episode of this series on
Òwinner take all politics.Ó The episodes come in both video talking heads and
just talking podcasts. All three seem to qualify as what historically was
called journalism; now mostly extinct in the United States, except for a few
isolated microclimates.
We
closed last week with a brief introduction of the now forgotten reality in
which most of the economic growth of the twentieth century came about during
times of high marginal tax rates, the highest being over 90 percent and was at
70 percent before the first Reagan tax cut. These high marginal rates, all over
the world, created a vast pool of flight money for startups, limited partnerships
and investment scams.
When
you cut right to the truth of the matter, this was truly capitalism saying that
it is a more efficient use of capital to Òinvest in these risky endeavors than
to give it to inefficient government(s).Ó
Art
LafferÕs curve changed that by reducing the marginal tax rates to the point
where the government burden became a smaller share of available capital and
investments moved to established ÒpubliclyÓ traded firms. What was lost however
was any emphasis on funding the innovations (capitalismÕs creative destruction)
required to provide continuing economic renewal through entrepreneurialism and
enterprise startups.
As
we also pointed out last week, the Laffer curve only simplistically deals with
increasing tax revenues to the federal government, the total antithesis of what
I understand to be the fundamental principal of the Reagan Revolution. The Tax
Reform Act of 1986, closed many tax loopholes and the fallacy that ÒIÕm from
the government and I am here to help, was briefly codified into law. The voodoo economics was not so much in
the fact that supply side economics didnÕt work, it was that the trickle down
didnÕt, because there were no incentives for the Revolution to foster true
innovation, which is the basis for the strength of the ÒfreeÓ market system.
In
other words the market was no longer free, but eschewed towards what could be
called the financial services cartel; defined as groups of brokers, dealers,
bankers, economists, consultants, lobbyists and politicians that benefit from
the transaction, without any skin or investment in the product. They get paid
for providing no value added, they are too special to get dirty, they get paid
for just showing up. Sadly just as our current education model, the cartel
emphasizes this is all they need to be, because all they know how to do —
is just show up and take their fees.
This
was essentially what created AmericaÕs income discrepancy, the one percent that
the president, the occupy protestors and even the tea party vilify, while many
establishment conservatives simplistically consider our only hope for the
future.
In
retail enterprises there was what traditionally was called the keystone markup
and the ten percent rule. The keystone markup basically doubles the productsÕ price
from the wholesale purchase price within the retail establishment. The ten
percent rule generally adds about ten percent to the price from the
manufacturer through each of any number of distribution channels before it gets
to the retail store.
The
changes in consumer retailing in the last generation has come by elimination of
most of the ten percent rule by big box stores and membership organizations,
such as Costco and SamÕs Club, which has also allowed them to reduce their
markups to well below the keystone.
With
the elimination of the Glass-Steagall Act in 1999 by Congress and the Clinton
Administration, instead of providing greater marketing efficiencies we have
seen in retailing, what has really happened is that we have developed a global
financial oligarchy and that oligarchy has essentially used the ten percent
rule to overcome any financial regulation at all. The Dodd-Frank Financial
Reforms just added further inefficiencies to financial markets and consumer
affairs.
My
real problem with American federalism has little to do with politics, but much
more to do with the way it has been practiced throughout our progression from
the Great Depression until the present, slowly becoming more unproductive,
inefficient and centralized. The whole centralized paradigm requires the
American people and corporations to send their tax monies to the great
government in Washington DC and those highly enlightened servants of the people
send a small portion back to do essentially everything we desire our governments
to perform.
What
we need is really an amended ten percent rule for all taxes in this country.
Local governments get ten percent, states get ten percent and the federal
government gets fifteen percent. The federal government percentage is ten
percent for government programs and five percent for things not performed by
state and local governments, such as defense, some infrastructure, social
security and a few other limited safety net provisions.
Total American government
spending for 2012 is estimated to be about 41+ percent of GDP, federal
spending 25 - (minus) percent, state spending 9+ percent and local spending
11+. In Washington state much of local spending is collected and distributed by
the state; nationally the combined state and local spending comes out to be my
10+10=20 percent rule, to two significant figures. The problem is with the
feds.
When
you figure that in 2012 the projected federal deficit is $1.1 trillion, (added
on to $1.3 trillion in 2011), you see that for 2012, 30 ‑ percent is
deficit spending. So say, the do nothing federal government could, without a
drop in current GDP, presto-change-o eliminate the deficit spending, the
current 25 - percent drops to 17+ percent, close to the historic averages;
bringing the deficit into the range of our fifteen percent federal threshold.
I
suppose this is the basis for Newt GingrichÕs 15 percent flat tax rate, but I
havenÕt checked. Even if that were true, there he would include no provisions
to reduce the national debt, recently surpassing 100 percent of national GDP.
Saying that will be made up by just economic growth requires something not
shown in smoke,
mirrors and manure homework.
So
letÕs see if we can wrap up a century of enlightened development in a brief
summary. Notice the absence of the terms ÒprogressiveÓ as a political term, because
along with the historic-modern definition of Òliberal,Ó they both serve no
useful purpose.
For
most of that time, high progressive federal income tax rates led to an
unproductive, inefficient and centralized enterprise ecosystem, but at least those
inefficiencies allowed for the creation of startup and entrepreneurial
activities through what we could call Òflight moneyÓ.
When
these market inefficiencies began to become a drag on the economy, rather than
seriously looking and deductively analyzing what we were doing, we just
believed that the future was always going to be more rosy, wonderful, and
prosperous than the past. In that enlightenment we believed in and attempted to
fund concurrently the civil rights movement and the Great Society, while we
were fighting the nasty communists in Vietnam.
This
forced us to move from the hard money of Bretton Woods after World War II, to
real but still tangible money after Nixon closed the gold window in 1971. As we
entered a new century, through similar faux reality dreams, we changed from
real money to true faux debt money under Alan Greenspan at the Fed.
The
Reagan Revolution cut those marginal tax rates, improved utilization of
financial assets, somewhat decentralized what we would call Òfederal discretionary
spendingÓ in favor of the military industrial complex, fostered classical
investments and in the process eliminated flight money, much of which was then
collected in government taxes associated with the Laffer Curve.
During
the 1990Õs we realized that Òthe era of big government is over,Ó and we
repealed Glass- Steagall and other restrictive regulations on classic
commercial and investment banking, thereby putting the United States in the
position to be the financial center of the universe. In other words, these
laissez faire practices, accompanied by faux money, changed the economic
landscape when we entered the twenty-first century.
As
we entered the new millennia, we elected a new president with a Mediocre But
Arrogant degree (MBA) from Harvard. Because of 9-11 and other factors, the
wheels were beginning to come off economic growth, so we decided to add a new
level of stimulus to the faux money paradigm, which was essentially
unlimited-unregulated financial leverage created by the wild frontier of faith
in globalismÕs utopian potential.
Those
within the financial cartel determined the best way to grow that leverage was
to alter the American Dream from owning your own business and building your own
wealth, to owning your own home, and giving you a huge mortgage, which could be
bundled, insured, and hedged to the point that everyone involved in the
financial services cartel could get their fees and bonuses and pass the risk to
the patsies in other areas of the world. That way you could tell them you were
giving them American cake while keeping the money within the well secured
financial cartel country club.
That
all changed when the housing bubble burst. For all intents and purposes the
American entrepreneur, the historic source of economic innovative renewal is
extinct — and has been for a generation. But since I am writing these
words along with an increasingly loud chorus of others, that spirit and those
dry bones are again coming to life.
How
is this going to take place?
The
diagnosis of the occupy protestors and even president Obama is right. The
problem is with the one percent of the richest Americans. However the occupiers
and Obama think the solution is totally early twentieth century. Their solution
says bust down the fence around the country club, redistribute the wealth, make
them pay — and become one of us. This is really a problem with inductive
reasoning, which all forms of social justice attempted to achieve through
centralization and failed so miserably during the last century. Spinning that bottle again, gets us
nowhere.
Furthermore
the prime cause of the housing bubble was the Ayn Rand alternative to these
collective elitist centralization fantasies; unrestricted libertarian laissez
faire scoundrels money aspirations, enabled by FED chairman Greenspan, by which
they were able to build the country club and erect the fence.
Sadly
much of the Republican Party still seems to believe that someway the wealth
will ebb through the fence to those less fortunate. The real problem however is
when you really think about it with an opened mind, all the one percent country
club has is a mountain of highly leveraged faux money and really very limited
true transcendent wealth.
Changing
the analogy slightly, the world is full of highly leveraged faux monetary debt
and the developed nations are adrift and unanchored on this ocean. The emerging
countries and less affluent are even in a worse predicament. Furthermore in
real reality there is no sovereign government in the world that is successfully
handling this problem. The first country that we will soon see reenter the real
world is Greece, but even the mighty Germany is in trouble when their high
ticket exports no longer have a market.
If
centralized ÒsovereignÓ governments canÕt make globalism work, what are we to
do?
What
people have done since the beginning of people. That is simply build
productive, efficient, decentralized yet interconnected (now emerging) global
communities. This possibility didnÕt exist in 2000; it really didnÕt even exist
in 2010. In early 2012 all we have is some vague mental construct where we are
not going to be able to go back to what we thought worked before.
When
the Reagan Revolution moved classic investments to the status of the only
allowed wealth creation player in the game, it set in motion a progression,
which thoughtlessly created the lost decade of the early twenty-first century.
Probably for the first time in the history of human economic forecasting, most
of the computer models say that this second decade is going to be more of the
muddled same, before —?
From
a natural ecology perspective, grasslands, or savannahs, are the most
productive, efficient and decentralized ecosystems. If the creative destruction
of a wild fire comes through every so often, the next spring, or rainy season,
productivity is back at it, with vigor, while it will take a forest a decade to
become reestablished, a century to be a forest of trees, and centuries until
that climax forest reaches its former glory. For the grassland that climax
continuum can take a decade.
What
we, the 99 percent need to do, is begin to plant that grassland with seeds, not
of money, but human potential and true wealth creation. A presentation I went
to Monday evening closed with a wine story. We all know that the one percent
really enjoys a high quality wine, and will spend a lot of money to get a
bottle from a great vineyard of an unusually good vintage year.
Over
the last half of the twentieth century the valleys of the west coast of the
United States has become not only one of the worldÕs most proficient wine
producing areas, but also one of the best in terms of quality. California
produces by far most of that wine, followed by Washington and Oregon. However
small specific areas with certain soils and microclimates in both Washington in
Oregon produce some amazing vintage selections.
These
great wines in Oregon are produced in the poor sandy soils that were deposited
in and around the Willamette Valley by the catastrophic Lake Missoula floods at
the end of the ice age. These poor soils along with just enough natural rain
create enough vegetative growth stress in the grape plants to eventually
produce great wine.
In
Washington, for the most part the great wines are grown on the fertile loess
soils that were not washed away into the Pacific Ocean by the Lake Missoula
floods, but the grape quality here is enhanced through restricting the
vegetative growth by limiting irrigation water, therefore producing outstanding
wine grapes.
So
as radio commentator Paul Harvey used to say, ÒThe rest of the story,Ó is if we
want to get the one percent of the rich people to leave their fenced country
club, surrounded by a moat of money, money everywhere and none of it fit to
drink, we need to give them the opportunity to invest in a vineyard that
produces the fine wine of economic opportunity, purpose, wealth and diverse
security; and just like the field of dreams, they will come.
And
with the profits from these new vintage enterprises, we can build or buy a real
vineyard and winery, or whatever else floats your boat (even on a faux money
ocean).
©
2012: All rights reserved.
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