CHAPTER 4

GLOBAL FINANCE

Global Finance PRISMS1. Are the benefits of

Keynesian national financial deficits greater than the costs?

2. Should FDI be used for political purposes?

3. Who should benefit from a nation’s currency policy?

4. Is it fair for nations to manipulate the trading value of their currencies?

5.Should governments have the right to regulate currency inflows & outflows across their borders?

Trade balance (Total imports –

exports) Trade surplus or

deficit

Is Bill Gates checking account an accurate

measure of his wealth?

(No, because it doesn’tinclude his non-cash,

capital wealth)

TWO WAYS TO MEASURE TRADEBETWEEN NATIONS:

1. Current Account: Annual exports of goods & services – Annual imports of G&S

2. America borrowed $2 billion every day in 2003 for imports, producing a record current account deficit of $500 billion (5% of GDP). 2004 estimated deficit = $600B (6% of GDP).

3. America imports twice as much merchandise as it exports

1. America’s annual current account has been mostly negative in recent decades (a trade deficit) because Americans consume more than they produce—we import more than we export.

2. The trade deficit has doubled over the past 20 years, from 3.1% of the overall economy to 6.5%

3.So how is it still possible for the U.S. economy to be so strong and dominant in the world?

4.Capital Account: Current account + annual exported Foreign Direct Investment – annual imported FDI (money invested in your nation by foreign companies & investors)

5. America’s capital account has always been positive in recent decades because American companies & investors invest more money in other nations (by buying stocks & bonds & building factories, etc.) than the rest of the world invests in the American economy. Thus America makes up for importing more than we export (the negative current account) by investing so much capital around the world.

6. Because economics and politics are opposite sides of the same coin, the size of a nation’s capital account has great bearing on its foreign influence. Nations that own lots of assets in other nations (land, real estate, technology, manufacturing facilities, stocks and bonds, etc.) have a greater capacity to control their own destiny.

CURRENT ACCOUNT DEFICITS:

1. Compromise a nation’s financial freedom

2. Eliminate skilled labor BC jobs

3. Weaken currency control

4. Boost the economies of rival exporting nations

5. Weaken the trade deficit nation’s foreign policy power

6. Boost national consumption > production

FEDERAL GOVT DEFICITS:1. Increase a nation’s

international indebtedness

2. Empower creditor nations

3. Jeopardize the debtor nation’s standard of living

4. Weaken the nation’s capital account

FDI is the pie

1. Foreign direct investment is the global economy’s blood circulation system. Circulating capital, technology, & knowledge nourishes the growth of nations, corporations, and stockholders.

2. Nations that invest in one another have a stake in one another which prompts cooperation. You don’t “bite the hand that feeds you.”

3. To use another analogy, FDI is the invisible root system of the global economy. As is true of trees, these roots nourish economic growth and provide stability.

Without FDI, America’s goose is

cooked

FDI is the invisible root system of global economic

stability. Just ask Bin Laden.

1. Bin Laden’s main objective for attacking America was to destabilize the world economy through destabilizing the American economy (by scaring consumers into seeking security by saving more & spending less, thus causing an economic recession)

2. Bin Laden understood that the U.S. is the main driver of the world economy because of how much Americans import and export. Thus, cripple the American economy, cripple the global economy.

3. Bin Laden realized that he could increase America’s already heavy debt burden by pulling the U.S. into a Middle Eastern war that would have to be financed largely by foreign creditors.

4. He also realized that by invading Iraq, America would be heavily pressured to push Israel to grant more concessions to the Palestinians (such as the resulting Gaza pull-out) as a way to show the world that America did not intend to colonize more of the Middle East beyond Iraq.

1. The EU has invested the most in other nations (55% of the world’s total); the U.S. is second highest with 25%.

2. China now receives the most incoming FDI in the world annually ($54B in 2003); France receives the most of any industrialized nation ($47B in 2003); the U.S. received $30B in 2003 (a large decline compared to 2000).

3. China currently has the largest cache of foreign currency reserves in the world--$833B. This stems from their huge trade surplus (taking in more foreign currency via exporting than China yields to the rest of the world of its currency via importing). Japan has the second highest foreign currency reserves ($830B). Asia as a region has 2/3 of the entire world economy’s FCRs--$2.5T.

OTHER WAYS NATIONS INVEST IN EACH OTHER

1. Technology sharing2. Job creation through trade3. Immigrant labor4. Supply chains: global

sourcing of raw materials for manufactured products

5. Corporate joint ventures

1. A new FDI trend in America has foreign companies buying or leasing American highways & bridges.

2. An Austrian-Spanish corporate partnership paid $3.8B for a long-term lease on the Indiana Toll Road.

3. An Australian company obtained a 99-year lease on the profits of Virginia’s Pocahontas Parkway, while its subsidiary leased the tolls on the U.S. side of the tunnel between Windsor, Canada & Detroit.

U.S. HIGHWAYS FOR SALE

4. Spain’s Cintra & a San Antonio construction firm paid $1.3B for the right to collect tolls for 50 years on a 4-mile toll road from Austin to Seguin the partnership will build.

5. Texas plans to build other tolls roads, potentially financed by foreign deals, along the Gulf Coast, to Shreveport & Texarkana, & from the Oklahoma border to Mexico.

6. Many American government officials are gung ho about such road deals, because both the U.S. federal government & many state governments lack the budgeting to expand the nation’s road infrastructure that has fallen way behind highway usage. Between 1980-2004, Americans drove 94% more highway miles than the previous decade.

FOREIGN OWNERSHIP OF AMERICAN CORPORATIONS

Anheuser-Busch: BelgiumMiller and Coors beer: South

Africa7-11: JapanFrench's mustard: BritianCitgo gas: Venezuelan

governmentFrigidaire: SwedenHoliday Inn: BritainShell gas: Netherlands

Chrysler building in New York: Abu Dhabi

Church’s Chicken: BahrainCrown Plaza hotel, New York: Saudi

ArabiaTrader Joe: GermanyDial soap: GermanyT-Mobile: GermanyToll House cookies: Swiss (Nestle)Many toll roads: joint ventures with

construction companies in Spain, Australia, Canada

% Of American Industries Owned By Foreign Investors

Sound recording: 97%Brokers for commodities: 79%

Motion picture industry: 64%

Wineries & distilleries: 64%

Book publishers: 63%

Rubber products: 53%Glass products: 48%Coal mining: 48%Sugar & confectionary products: 48%

Advertising: 41%Pharmaceuticals: 40%Securities brokerage: 38%

CORPORATE CONCENTRATION & CONTROL IN GLOBAL & AMERICAN

INDUSTRIES 10 bio-tech companies account for ¾

of all industry revenues in America.10 pharmaceuticals control 55% of

the global drug market.4 corporations control 60% of the

American grain industry.The largest 4 meatpackers control

70+ of the American meat market.The 4 largest grocery chains control

70-88% of the American grocery industry.

Cargill controls 25% of all American grain imports & 22% of meat. Cargill's $120B in annual revenue is larger than 2/3 of the world’s national economies.

5 of the 10 largest companies in the world are oil companies.

2 or 3 corporations control almost all of the weaponry manufactured in America.

The “Big Four” accounting firms perform virtually all private company audits in the world.

6 companies control 90 %+ of all media outlets in America.

USA EXPORTING FACTS

1. The annual growth of exporting by the US has been growing steadily since the 1940s.

2. One third of exports are in services, including large amounts of business-related services: consulting, accounting, research, computer services.

3. US is 3rd largest exporter behind Germany & China.

4. US excels in invention/innovation exports.

THE 3 CHALLENGES OF DOING BUSINESS WITH FOREIGN CUSTOMERS

1. Currency risk2. Collecting customer accounts quickly

3. Collecting bad debts

Hedging: Using a broker to lock in the future price of

a currency today

This increases currency exchange stability & facilitates advance

business deals

Cash is the main factor in factoring

For a fee, the factoring company pays you right away what the customer owes & then collects from the

customer at a later time.

INTERNATIONAL

INDEBTEDNESS

PER CAPITA EXTERNAL DEBTIreland: $448,000UK: $151,000Netherlands: $137,000France: $68,000Germany: $54,000Spain: $50,000USA: $42,000Russia: $2599Brazil: $1234China: $271India:$130

U.S. DEBT AS % OF ANNUAL GDP2001: 33%2002: 34%2003: 35%2004: 37%2005: 37.5%2006: 37%2007: 37%2008: 41%2009: 60%2010 est.: 67% 2011 est: 69%

2004 GOVT. DEFICIT AS % OF TOTAL NATIONAL BUDGET

USA: 26% Japan: 25%Germany: 8%UK: 7%France: 7%Italy: 7%China: 10%Canada: 4% surplus

% FOREIGN OWNERS OWN OF U.S. TREASURY SECURITIES

China: 23% Japan: 21%UK: 6%Oil exporters: 5.5%Caribbean banks: 5.6%Brazil: 4%Russia: 3%Hong Kong: 3%

Currencies are tradable

commodities(assets)

Currencies can be bought & sold by

anyone in currency exchangesaround the world.

Which currency is stronger: the American dollar or the European

euro?

Currencies can be valued only in relation to other currencies.

Did the dollar just get stronger or weaker vs.

the Euro (in comparison with the previous slide)?

FACTORS THAT INCREASE DEMAND FOR A NATION’S CURRENCY

1. The nation is prominent in global business

2. Institutional stability3. Low national debt4. Healthy economy5. Investors do not feel the nation

is politically or economically risky (inflation, unemployment, recession, war, etc.)

1. Global currencies are influenced by natural market forces of supply & demand, but only to a certain extent. The price of a nation’s currency naturally “floats” in the global market place according to how much nations & companies want to use this currency for trading purposes & by how much of the currency is available in banks. However, nations can manipulate (“dirty” the natural float process of supply & demand) both the supply & demand of their own currency by buying & selling it in quantities large enough to alter its supply in the global financial community.

2. Homeostasis regulates the body’s temperature at around 98.6 to keep the body operating peak efficiency and stability. Nations regulate the trading range of their currency (via “dirty float” currency intervention) for the same reason—to promote economic stability and growth.

3. Gyrating currency prices hurt the flow of foreign direct investment into a nation, dampen investor optimism, and make business deals hard to execute. Stable currencies bring a smile to everyone's face!

4. When a government wants to prop up the value of its currency, it uses it inventory of foreign currency to buy back its own currency in global exchanges (thus lowering supply) and secures it in the nations vaults.

5. Selling off currency will cause its value to decline (due to an increase in its supply).

Currency is overvalued when it sells above supply/demand price (due to

dirty float intervention). It’s undervalued when it sells for less

than it should in the global marketplace.

CURRENCY STRATEGY FOR

EXPORTING & IMPORTING1. Importers (consumers) want their

nation’s currency to be overvalued (because it buys more imports)

2. Exporters prefer undervalued currency, which makes their exports cheaper for foreigners to buy

3. A nation should devalue (lower) its currency when it wants to stimulate its economy (since exporters will now be able to sell more)

Currency propping can lead to a fall

1. Propping up (over-valuing) a currency for an extended period of time takes lots & lots of foreign reserves, which are needed to buy back the nation’s own currency in currency markets around the world.

2. These foreign currencies come into the nation when it sells exports around the world. Thus the more a nation exports, the more it is able to over-value (prop up) the value of its currency.

3. Weak exporting nations have a tough time controlling the value of their currency.

(Don’t run out of)Foreign Currency Reserves

1. A nation has to DEVALUE its currency (drop its trading value) when it runs out of foreign currency reserves to use for dirty float

2. The main reason nations run out of foreign currency reserves is due to a negative trade balance—importing more than exporting.

3. A currency devaluation is also warranted if a nation wants to reassure the global financial community that its lowered currency price was a planned policy decision, not the result of a crisis.

4. When a nation wants to stimulate its economy via greater exporting (facilitated by a lowered currency), currency devaluation can help.

THE DRIFTING AMERICAN

DOLLAR

Trade DEFICIT causes:

Currency supply causes:

Currency value

Why does a nation’s currency supply revolve around its trade

balance?

America’s dollar began drifting in a downward direction throughout 2007, particularly against the EU Euro & the British pound. The Federal Reserve Board blames problems associated with bad mortgages in the American housing market, lessening demand for dollars as the currency of choice in overseas markets, & America’s heavy dependence on Middle Eastern oil. “Global money managers have been consistently negative about the dollar’s prospects for the past five years. Many economist welcome a weaker dollar which stimulates exports & reduces trade deficits.”

WHY THE DOLLAR HAS DECLINED1. Asian investors worry about U.S.

indebtedness & the economic repercussions of the investment banking mortgage scandal

2. Foreign investors are highly concerned about the debt-financed war in Iraq.

3. There is a continuing decline in the extent to which Saudi Arabia is willing to transact oil sales in U.S. dollars vs. the Euro.

4. The ever-escalating American trade deficit pumps more & more dollars into foreign hands & these creditors are slowly divesting their dollar holdings to purchase other currencies.

5. “As a society, the U.S. is so reliant on other countries that Americans have no choice but to pay the extra costs that come as a result of the weaker dollar.”

6. “China has literally hundreds of billions in U.S. dollars & debt. What would happen if China decided to sell large sums of their U.S. currency over a short time period just for spite? This is a sword dangling over the head of America.”

7. “The root cause of the dollar problem can be summed up in one word: debt. Overspending is an American lifestyle, both among consumers & the government. Ever-increasing amounts of this debt is foreign financed.”

“As international investors wake up to the weakening of America’s economic power, they are questioning why they hold the bulk of their wealth in American dollars. The dollar’s decline amounts to the biggest default in history, having wiped out far more of the value of financial assets held by foreigners than any other global economic problem in the past.” (Economist magazine)

“Hot money” spills out across national borders (the

“contagion effect”)

1. Investors electronically transfer their investments over night from one developing nation to another at the slightest sign of economic or political risk. Other investors may panic & also sell off their currency as quickly as possible, triggering a rapid drop (meltdown) in currency value.

2. Numerous investors suddenly cash in the unwanted currency & its supply skyrockets causing the price to nosedive.

3. This can push a developing nation into bankruptcy, because it’s low currency won’t pay off the nation’s foreign debt or allow it to buy imports, which are now much more expensive.

4. This currency “meltdown” can then cascade within the region to other nations that trade extensively with the nation experiencing meltdown. The meltdown nation imports less and less from its regional partners, whose economies are then also hurt. Once again investors panic and pull out their money out of these regional partner nations overnight, triggering currency meltdowns throughout the whole region.

FREE TRADE CAPITALISM CAN FUEL CURRENCY MELTDOWNS

1. Advocates of free market capitalism oppose governmental interference into FDI flows such as restricting cross-border movement of capital.

2. Since most global-government organizations (IMF, World Bank, WTO, G-7, etc.) are rooted in free trade ideology, cross-border capital flows have been highly efficient in recent times, and thus a precursor of currency meltdowns.

CURRENCY DOLLARIZATION1. A growing number of economists are advocating the currency strategy of “dollarization“ (or Euro-ization), where only a small number of currencies are “in play” in the global marketplace. They contend that the present use of 200+ currencies is economically inefficient & a drag on global currency stability.

2. Dollarization would have smaller nations peg their currencies to that of a powerful global or regional trading partner, thus reducing the number of currencies in play.

3. Dollarization proponents contend that fewer currencies lower inflation and interest rates.

INTERNATIONAL FINANCE LESSONS

LEARNED FROM THE 2010 DEBT

CRISIS OF GREECE

1. Most nations are in financial trouble when their national debt exceeds their annual economic output.

2. Global recessions reveal the true financial health & stability of nations.

3. National standard-of-living cuts (government spending cuts + hiked taxes) are the only remedy for over-leveraged nations, & these remedies are politically-unfeasible.

4. Currency depreciation , higher interest rates, higher employment, & lifestyle cuts are inevitable for most debt-plagued nations.

AMERICA’S 21st

CENTURY ECONOMIC

CHALLENGES

Challenge #1 DEALING WITH THE DAMAGE

OF REAGANOMICS

The American & global economic meltdown in the last quarter of 2008 unceremoniously brought an end to the 25-year era dubbed “Reaganomics” after the “trickle-down” economic programs of Ronald Reagan. Reagan’s emphasis on economic stimulus via tax-cutting, government & consumer debt, & deregulation was a “caustic financial cocktail” that left a nasty global economic hangover. Too much of the money invested by the wealthy never did trickle down to the middle class because so many corporations simply held onto the money (never putting it to work in capital assets) by reinvesting for the short-run in exotic new quick buck securities such as speculative “derivatives” (debt-based investments such as the notorious subprime mortgages).

“Americans & the world didn’t fully grasp how damaging the Reagan cocktail of debt, deregulation & laissez faire government would be. The world economy was much more intertwined than people realized. Global financial instruments that were so complex that most CEOs didn’t really understand how they worked—especially on the downside. The global financial crisis started in America with the toxic subprime rate housing mortgages, the crippling legacy of Reagan deregulation. When a crisis starts in Mexico or Thailand, we can protect ourselves, but when it starts in America, no one can.”

SLOW STARVATION OF THE FEDERAL REGULATORY AGENCIES

“One result of Reaganomics was tripling the national debt so budgets for needed public programs & agencies had to remain at drastically reduced levels throughout the 1990s while the federal debt was paid down.” As a result, over the past decade, government agencies have found it difficult to fulfill their missions & there have been an unprecedented number of regulatory failures, such as response of FEMA to hurricanes Katrina & Ike; recalled toys, contaminated food, etc.

EXAMPLES OF FEDERAL AGENCY BUDGET CUTSFederal meat inspection: 7.5% budget drop

over the past 20 yearsCoal mine safety: 45% budget drop since

1979Consumer product Safety Commission: cut

40% since the 1970sOccupational Safety Admin: Budget has

been cut so much that half as many safety inspections are now conducted compared with 20 years ago

FDA: Budget constraints mean samples of less than 1% of retailed food can be taken

National Highway Admin: 30% lower budget since 1980 & only 15 investigators employed nationwide

The hollowing out of government social services brought on by 25 years of budget cutting culminated in 2007-2008 with the breakdown of government emergency rescue efforts for Hurricane's Katrina & Ike; the collapse of Iraqi troop rehabilitation at Walter Reed military; & the mass importing of unsafe Chinese toys & other consumer products. It undoubtedly contributed to the all time low public ratings of Congress & the presidency in most of the 2000s.

Challenge #2

THE DEREGULATIO

N CRISIS

Since 1980, a number of major American industries have been deregulated, including most of the banking industry and much of energy, transportation, & financial services industries. Letting the “invisible hand” of the marketplace, instead of the government’s “visible hand,” influence American business produced a number of financial gains and advantages, especially for large corporations. But it also greatly increased the dependence of Americans and the American way of life on corporate ethics and sense of community.

In quick order in the 1980s, deregulation wiped out the entire savings and loan industry; then enabled the Enron-public accounting scandals of the early 2000s; and then the subprime mortgages scandal that exploded in 2008, threatening to become a global financial meltdown. These unprecedented breaches of corporate ethics and community responsibility reminded Americans and the world why capitalism has to be regulated: capitalism is no better than the capitalists, who, like all people, must be disciplined by laws and regulations.

Analyst Ed Cutlip notes 7 ways in which deregulation unleashed a 30-year epoch of irresponsible capitalism in the American & around the world:

1. Off-balance sheet accounting enabled banks and corporations like Enron to hide their liabilities from the general public.

2. On at last 2 occasions, the federal government blocked regulation of financial derivatives (in which financial risks such as those associated with mortgages are pooled and passed on to frequently naïve investors).

3. Deregulation allowed capital banks to set their own capital reserve requirements (what % of deposits they can lend out), which spurred risky financial speculation on subprime mortgages.

4. Govt. regulatory agencies and the Federal Reserve Board, under pressure to prolong the subprime mortgage binge, did nothing to curb predatory lending practices & backed laws that denied aggrieved home mortgage borrowers the right to sue loan companies or banks.

5. The 2 giant fed-govt mortgage providers, “Fannie Mae” and “Freddie Mac,” lost hundreds of billions of taxpayer dollars by gambling heavily in the subprime market.

6. “The abandonment of antitrust and related regulatory principles enabled the creation of too-big-to-fail megabanks, which engaged in much riskier practices than smaller banks.”

7. “Beset by conflicts of interest, private credit rating companies incorrectly assessed the quality of mortgage-backed securities,” so global purchasers of subprime mortgage derivatives received inadequate information and warning about the risks they were taking in purchasing mortgages marketed via often fraudulent predatory , & unregulated marketing practices.

“The job of regulators is that when the party's in full swing, make sure the partygoers drink responsibly. Instead, they let everyone drink as much as they wanted and then handed them the car keys.”

Challenge #3

THE AMERICAN

DEBT CRISIS

Imagine that parents borrowed $300,000 to give their children lots of luxuries, and instead of paying off the debt, they passed it along to their children, who ran up the debt to a half million and then passed it along to their children, who ran up the debt to a million and…(you get the picture)

1. The 8 years of the Reagan administration + the first 4 years of the George W. Bush administration quadrupled the national debt from $1T to $4T. In 2005, Congress authorized raising the debt ceiling to $8T.

2. The U. S. Comptroller General warns that “America is on course to go broke in a generation unless budgets can be balanced.”

A 2006 study of the Government Accountability Office estimated that unless drastic changes occur in how the U.S. government deals with past deficits, America’s national debt could grow from the current $11T to $46T over the next three decades. For every year the US government fails to reduce the debt total, international debt payments will grow by $2-$3T annually. The three budget-busting entitlement programs of the Bush era (Social Security, Medicaid and Medicare) are on pace to run up a $20T deficit by 2030. “The US government is essentially going to have to renegotiate some of the promises it has recently made to Americans probably by some combination of tax increases and benefits cuts.”

RECORD CONSUMER DEBT HIKES THE U.S. DEFICIT

1. Total American indebtedness (consumer + government) has more than doubled over the past decade to $8 trillion ($1.98 trillion in non-mortgage debt—($18,700 per household)

2. Americans now spend 20% of their total incomes ($1 of every $5) on debt.

3. The national debt is now increasing by $1.65B every day—11% of all the government takes in annually.

4. In 2005, Americans spent 57% more than it earned in world markets.

5. Credit card debt makes up $735 billion of this total; $12,000 per household; $1,700 in annual interest. American households currently hold average of 8 different credit cards.

6. 40% of Americans pay only the minimum balance on their cards each month

7. American household debt now = 18% of disposable income. This amounts to $1 in interest payments for every $5 of disposable income.

8. Americans now save only 1% of their income ($1 for every $100 earned), by far the lowest in history and the lowest of any industrialized nation in the world.

9. Over the past decade, Americans have tripled their amount of credit card debt.

10. In 2004, the federal government took in the same amount of money as in 1999, but spent 34% more.

11. More than 40% of U.S. government debt is owed to foreign nations, including $500B to China & $720B to Japan.

12. The average college student owes $15,500 upon graduation ($19,400 for grads from private schools)

13. In 2005, the average personal savings rate was below zero (deficit incomes) for the first time in U.S. history.

Since taxes were not raised for the Iraqi war, the U.S. financed it mainly through bond sales to Asian investors, which has annual interest payments between $264B--$308B ($18,000 per American household just for Iraqi war debt). If further American debt is to be avoided, $200B in new taxes will have to be assessed for every additional year the U.S. remains in Iraq beyond 2006.

THE U.S. DEBT INDUSTRY1. America’s finance sector (banks,

consumer finance companies, brokers, etc.) accounts for a much larger share of annual corporate profits (44%) than all of manufacturing (10% profit share).

2. The stock market is currenlty worth $15T; total credit-market debt is $40B; & total global derivatives (often risky investments linked to changing financial market trends) are estimated at $270T.

3. A large portion of the finance industry's profits comes from financing corporate & consumer debt. Debt is one of America’s largest industries.

4. American consumer debt more than doubled between 1989-1990. “Indebtedness flourished on many fronts; as government sleight-of-hand, corporate growth tactic, an investment firm underwriting bonanza, and for many ordinary citizens, a household indulgence or sheer economic necessity.”

5. “For many Americans, the commitment to consumerism introduced a new precariousness to material life. By 2001, despite high incomes, over half of all Americans had almost no savings and a third lived paycheck to paycheck. In some cases this situation reflected continued real poverty, but in others it followed from a sense that so many goods and trips had become absolutely essential.”

6. Every year, American consumers buy 20% of the world entire GDP.

STALKING THE BANKRUPTA 2007 study revealed that credit

card companies aggressively target recently-bankrupted Americans with twice the number of new credit card offers than received by the average American. “The findings show how the credit industry seeks to profit from financial distress. Credit card companies count on high interest, late fees, and missed payment penalties for a major source of their revenue.”

The financial services market (commercial banks, investment banks, consumer finance, insurance, & mortgages) has emerged as America’s largest single market in the 21st century. The enormous profits which have pored into the industry in recent history are based to a significant extent on debt, especially credit cards & subprime home mortgages. America’s financial future currently appears less stable & robust due to a 30 year stagnation in middle class incomes, the declining dollar, & the onset of economic recession caused by unregulated economic speculation.

1. The International Monetary Fund recently warned America that its “unprecedented” domestic debt (consumer + government) threatens to reduce global output by 2.5% & U.S. output by 2% due to forcing up global interest rates (in an effort to slow down America’s debt appetite). “The rest of the world is affected seriously by the U.S. fiscal deficit.” (IMF chief economist)

2. Tax cuts, large social spending, & the Iraqi war produced America’s largest domestic debt ever by 2005 ($8T total, increasing at the rate of $1.66B daily!) & $300B annual interest.

3. If historical trends continue, America’s total domestic indebtedness will soon equal 40% of annual GDP (higher than after World War II).

“The money made from manufacturing is a pittance compared to the amount of money made from shuffling money around. Forty-four percent of all corporate profits in the U.S. come from the financial sector compared with only 10% manufacturing. Corporate profits, household incomes, asset prices, & national economic performance are acutely dependent on debt-based speculation.”

THE RISKY INSTRUMENTS OF CORPORATE FINANCIAL SPECULATION

Mortgage-backed securities, collateralized mortgage obligations, credit default swaps, portfolio swaps, equity index swaps, Eurodollar options, interest rate caps & floors, equity-index futures, T-bond futures, T-bill futures, Eurodollar futures, interest-rate swaps, equity futures, commodity swaps, foreign currency futures, over-the-counter currency options, swaptions, options on bank CD futures, etc.

FEDERAL DEFICITS = INTERNATIONAL MIXED (SOCIALIZED) CAPITALISM

Using foreign money to sustain the American government’s budget deficits is a strange form of mixed capitalism (private + public sector partnership). The American government borrows from foreign governments to help finance a wide array of American budgets expenditures, including U.S. wars. Social Security, health care, education, etc.

Challenge #4AMERICA’S

DIMINISHING ROLE IN

INTERNATIONAL FINANCIAL MARKETS

AMERICA IS SLIPPING AS THE WORLD’S LARGEST FINANCIAL MARKET

1. America’s status as the world’s largest capital market is “shrinking fast in almost every area.”

2. Bankers and politicians worry that business competition from the developing world (especially China) is draining capital away from America to faster growing foreign financial markets.

3. The U.S. has lost its #1 status for initial public corporate stock offerings (IPOs), & America’s stock markets are actually shrinking as foreign companies seek capital outside the American financial market, while an increasing number of American companies are buying back (privatizing) their own stock.

4. For the first time ever, Asian investors in America are beginning to hedge their bets because of America’s debt skyscraper. Because a growing number of Asians fear a long-term declining dollar and don’t want to be paid off in depreciated assets, Asian credit to America could begin to dry up over the next decade.

5. The American dollar has long been the main currency held in reserve status by other nations (to use in business deals around the world), but now America is the world’s largest debtor.

6. Foreign nations are questioning whether they should continue to hold large reserves of the dollar, whose value may decline in the near future (due to its over-supply in the world & America’s continuing debt lifestyle).

“Becoming a much bigger debtor nation means that the U.S. will be losing some of its world power. It means conducting our economic policies with an eye toward whether others approve. It means bearing the advice and criticism that we have dispensed ad nauseam to other countries for over a half century. It means far more intensive consultations with other capitals on our fiscal policies and our monetary policies.”

“The US might also be on the verge of a decision by foreign lenders to cease financing a country that claims to be a hegemonic power with the right and the virtue to impose its will on the rest of the world. The US is able to be at war in Iraq and Afghanistan and is able to pick fights with Iran, Pakistan and Russia, because the Chinese, the Japanese and the sovereign wealth funds of the oil kingdoms finance America’s wars and military budgets. Aside from nuclear weapons, which are also in the hands of other countries, the US has no assets of its own with which to pursue its control over the world.”

Who pays for the domestic deficit?

75% of U.S. treasury bonds are purchased by Americans; 25% by

foreigners

In 2003, Asia financed over half of both America’s trade & govt. deficits.

“The U.S. government today is unable to finance its day-to-day operations and must rely on foreigners to purchase its bonds. The government pays the interest to foreigners by selling more bonds, and when the bonds come due, the government redeems the bonds by selling new bonds. The day the foreigners do not buy is the day the American people and their government are brought to reality.”

Challenge #5AMERICA’S DECLINING STANDARD OF LIVING

“Most Americans have experienced little, if any, income growth in the 21st century. Instead, consumers have kept the economy going by maxing out their credit cards and refinancing their mortgages in order to consume the equity in their homes. The income gains of the 21st century have gone to corporate chief executives, shareholders of offshoring corporations, and financial corporations. Today recession is only a small part of the threat that we face. Financial deregulation, Alan Greenspan’s low interest rates, and the belief that the market was the best regulator of risks, have created a highly leveraged pyramid of risk without adequate capital or collateral to back the risk.”

AMERICA’S DECLINING STANDARD OF LIVING1. In 2007, the U.S. ranked 19th among

industrialized nations in preventable deaths.

2. Self-paid family health premiums average $12,106 annually.

3. Over the past decade, American insurance premiums increased 87% (not counting increased co-pay & deductibles).

4. One in 6 insured American has significant problems paying medical bills; 42% have had their insurance company refuse to pay for a medical bill.

5. A generation ago, the average American family spent 54% of its annual income of the basics of housing, health insurance, transportation, & taxes. Today it’s 75%.

6. College tuition has risen 175% in the past decade & out-of-pocket healthcare costs have doubled.

7. Hourly wages adjusted for inflation are the same today as they were 30 years ago.

8. The number of Americans with career-related pension plans fell from 30.4M in 1984 to 23M in 1998.

9. 1% of Americans own almost half of all corporate stock & business wealth; 5% of Americans own 70%.

Recent comprehensive studies of America’s America’s highway, transportation, & public services systems concluded that if quick investment actions are not taken, America will have a third-world infrastructure within a few decades. With the nation’s projected 70% increase in freight volume by 2020 & 50% population growth, the next generation of Americans face an investment crisis of sobering proportions. $1.6B will have to be spent just to bring the existing infrastructure into decent repair. “If America leaders do not act boldly, our economic growth & quality of life will be diminished.”

The Environmental Protection Agency forecasts a funding gap of $11B over the next 20 years between what is currently being invested into American water needs & the amount that is needed to provide for these needs. America’s transportation networks (ports, bridges, toll roads) are choked with overuse,wasting $78B annually in lost hours of productivity & wasted gas. The nation’s passenger railroad system (which will have to transport more urban Americans than ever in the new gas rationing era) is one of the most outmoded & dysfunctional in the industrialized world.

A national commission on transport policy recommended that the federal government should spend $225B (more than 40% higher than currently) each year for the next 50 years just to meet the exploding needs of our mass transit system. Toll roads (many foreign finance and operated) in America’s metropolitan areas will have to generate considerably more revenue more than the current $120B annually. America is in no position to make “little plans” about its infrastructure future. “They don’t have the magic to stir men’s blood. It’s time to think big again.”

THE DAWNING ERA OF AMERICAN DEBT POLITICAL TURMOIL

1. America’s runaway domestic debt will soon have to be addressed through a combination of rising taxes & spending cuts. Both of these approaches to dealing with the debt crisis will be political divisive.

2. The largest controversy will revolve around who will give up the most in disappearing government services: Rich or poor? Young or old? Working or retired? Military or social welfare benefits? Corporations or consumers? “Pork barrel” state projects or federal projects?

Challenge #6AMERICA’S QUEST TO

DEPEND ON CAPITALISM MORE THAN

GOVERNMENT

The fiscal debt failure of “Reaganomics” in the 1980s and 2000s (under George W. Bush) to reduce dependence on government led American leaders to increase dependence on neo-liberal capitalism for future economic growth. Corporations became the new champions of public policy. This emergent libertarian capitalism has raised 3 new challenges in its emphasis on laissez-faire government, new rounds of business deregulation, and escalation of Social Darwinism:

1. Will expanded business deregulation unleash new systemic corruption such as in the energy industry in the 1990s (Enron-led financial fraud) and the financial industry in the 2000s (especially the catastrophic mortgage debacle)?

2. Will the probable future decreases in government social welfare programs (the byproduct of abandoning Keynesian financial stimulation) neutralize the anticipated gains of libertarian corporate economic stimulus?

3. Will the possible escalation of crime and social problems stemming from truncated government social welfare programs diminish the economic stimulus of consumerism?