Download From Shared Sacrifices to Constructive Contributions - Some Controversial Governmental, Corporate and Consumer Challenges (When Most of the Western World Is in Economic Troubles)

From Shared Sacrifices to Constructive Contributions--Some
Controversial Governmental, Corporate and Consumer
Challenges (When Most of the Western World is in Economic
Troubles)
Dr. Robert G. Vambery
As most of the Western World is embroiled in economic
troubles, calls are being made for greatly increased efforts to
remedy the situation through aggressive monetary and fiscal
policies. Both of these are essential but their effectiveness
depends greatly on the chosen specific measures that will be
implemented. Needed are not only shared sacrifices but
constructive monetary and fiscal contributions from
governmental, corporate and consumer groups. This paper
indicates measures that progress from sacrifices to constructive
contributions. It then discusses fiscal and monetary problems
being faced and concludes that the challenges are great and
long lasting and not subject to temporary solutions.
Introduction
In the summer of 2012, most of the Western World and to a degree the rest of
the global economy find themselves in dire difficulties that threaten to expand from
financial crises to social disorder, animosities among previously friendly nations and
even violence.
Calls for ―shared sacrifice‖ may be welcome but more is needed if significant
improvements are to be achieved in the short to intermediate time span.
Constructive contributions need to be made by governments, corporations,
employees and consumers. All of these groups must create value rather than just
reallocate losses. It is principally from the additional values created that some of the
past incurred burdens and the new obligations that will arise can be financed.
This paper points to some controversial challenges for governments,
corporations and for consumers about which to undertake measures immediately, or
soon, with potentials for improving their economic environments, accelerating their
recoveries and avoiding social disorder.
The alternatives include: for governments—the avoidance of deflation and the
management of a useful level of inflation; for corporations—the mobilization of dormant
cash accumulations; for consumers—the shift from cheap, short lived products to
consumer durables and ability-enhancing knowledge.
__________________________
Dr. Robert G. Vambery, Pace University, Lubin School of Business, Department of International Business
Robert G. Vambery, Ph.D., Professor of International Business, Pace University , 1-Pace Plaza, New
York, NY 10038, Tel: 212-618-6572, [email protected]
1) Governments: Reward rather than rob savers and constructive corporations
There is a far reaching consensus that under its legal mandate, the two key
functions of the Federal Reserve Board of the United States are 1) foster price stability,
that is, control the rate of inflation so that it stays at moderate levels and 2) foster full
employment, that is, promote favorable monetary conditions for employment so as to
stimulate the economy while avoiding high levels of inflation or, alternately, decelerate
economic activities, in case full employment has already been reached and the rate of
inflation may be aggravated.
After the first year and a half of the Obama Administration (2009-2010) together
with the Bernanke Chairmanship at the Federal Reserve Bank, the Fed continued an
aggressive easy-money policy through monetary easing and the reduction of relevant
interest rates to between zero and one percent. The Chairman also announced that this
low interest rate based monetary policy would be maintained for the several coming
years.
Similarly, President Obama‘s Treasury Department published an up to ten
year long budgetary projection with near one trillion dollar annual deficits planned for a
decade. This could be viewed as an indefinitely continuing super-Keynesian
expansionary fiscal policy or the preparation of an economic catastrophe that may out
do Greece‘s worst economic problems.
The Chairman of the Joint Chiefs of Staff, Admiral Mike Mullen, stated in August
2010 that the Government‘s deficits and the rising national debt constitute the greatest
security threats to the United States.
{National Debt Poses Security Threat, Mullen Says
By Army Sgt. 1st Class Michael J. Carden
American Forces Press Service
DETROIT, Aug. 27, 2010 – The single biggest threat to national security is the national
debt, the chairman of the Joint Chiefs of Staff said yesterday, underscoring the
importance of good fiscal stewardship and a need to stimulate economic growth.
American taxpayers are going to pay an estimated $600 billion in interest on the
national debt in 2012; Navy Admiral Mike Mullen told (the Detroit Economic Club) local
leaders and university students here.}
This combination of very loose monetary policy together with extreme Keynesian
fiscal stimuli may not only have been in order at the beginning of the financial crisis
associated with Mr. Obama taking office but was likely a necessity in face of the
prevailing banking crisis and escalating rates of unemployment. After about a year and
a half of implementing measures to deal with the aforementioned challenges, the
Administration declared partial success and named the second quarter of 2010 to be
―recovery spring‖.
Unfortunately, although there was some recovery, most importantly in the
banking sector, the GDP growth rates and the rates of reemployment of workers
stagnated and continues to stagnate.
Is the country better off in the summer of 2012 than it was at the beginning of
2009? The answer is yes. But the improvement is moderate especially in view of the
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multi-trillion dollar fiscal deficits incurred by the Administration along the way and the
additional multi-trillion dollar expansions of the Federal Reserves‘ balance sheets,
whose exact magnitudes and makeup the Fed usually does not reveal in great detail.
An important question to which the answer is very likely also to be positive
maybe: ―Is the Federal Reserve robbing tens and tens of billions of dollars annually
from those corporations and individuals who have been reasonable and responsible
savers rather than squanderers of funds and who under a reasonably ethical and moral
economic system could and should have been able to expect to earn interest at rates of
5% or more to compensate them for inflationary impacts, opportunity costs, and the
astoundingly valuable contributions they made toward providing borrowable capital and
economic stability for the country and also for the dollar based world financial system?‖
Instead of 5% to 8% annual interest rates, many liquid asset holders are being
punished with ½% to 2½% pittances in lieu of normal, moderate interest incomes.
Federal Funds Target Rate
Month/Day 2002 2003 2004 2005 2006 2007 2008 2009
2010
2011
2012
Jan 1
0%1.75% 1.25% 1.00% 2.25% 4.25% 5.25% 4.25% 0.25%
0%0.25%
0%0.25%
0%0.25%
Apr 1
0%1.75% 1.25% 1.00% 2.75% 4.75% 5.25% 2.25% 0.25%
0%0.25%
0%0.25%
0%0.25%
Jul 1
0%1.75% 1.00% 1.25% 3.25% 5.25% 5.25% 2.00% 0.25%
0%0.25%
0%0.25%
Oct 1
0%1.75% 1.00% 1.75% 3.75% 5.25% 4.75% 2.00% 0.25%
0%0.25%
0%0.25%
0%-
0%-
0%-
Dec 1
1.25% 1.00% 2.00% 4.00% 5.25% 4.50% 1.00% 0.25%
0.25%
0.25%
Source: Federal Reserve Bank
Is the Federal Reserve a criminal-like or crony capitalist-like operation?
Though the question is reasonable, a fully qualified answer with a high degree of
certainty may be difficult to offer. However, it can be observed that the Fed lends money
to banks at not too far from zero interest rates and the banks then lend money to the
Administration by buying Treasury instruments that also pay interest at very low rates.
Though the marginal incomes for the banks are moderate, the incomes and the profits
going to the banks are certain.
In this circle of money flows, the Treasury can obtain most or all of the funds it
wants to raise and can enable the Administration to give away vast sums to its
supporters. The banks do not need to pay interest at reasonable rates to attract
deposits, because the banks are able to obtain risk-free money at just above zero rates
of interest.
Is this not very similar to what The Economist reports about China? ―China‘s
economic model is also unfair to its own people. Regulated interest rates enable the
banks to rip off savers, by underpaying them for their deposits.‖ (May 26, 2012, p.11)
Because savers in the US are receiving extremely small returns on their assets
they do not have incomes from which to spend in ways that would adequately stimulate
the nation‘s economic recovery. Moreover, savers remain very reluctant to dip into
capital as they observe that not only are their accumulations of funds not growing from
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interest income but are shrinking in purchasing power as a result of prevailing inflation
rates which are often knowingly understated by governmental agencies and authorities.
The Administration can be unhelpful also. For example, for two consecutive
years, claims of zero percent inflation rates were used to deny social security payment
recipients their usual cost of living adjustments. Yet in Congressional testimonies, the
Chairman of the Fed identified inflation rates to be 2%. An associated result is that
retirement beneficiaries will receive 4% less in annual benefit payments not only for two
years but for the rest of their lives.
Many corporations are also in the group of reluctant investors. On the one hand,
many hold huge reserves in cash equivalents on which they are earning trivial returns
but on the other hand, many are deeply frightened by the radical expansion of
regulations and mandatory entitlement programs that are potentially harmful to the
corporations‘ economic growth generating investments.
The outcome is that consumers are sitting-on rather than spending money.
Similarly, many corporations are sitting-on rather than investing money. The combined
effect is domestic economic stagnation as well as negatively aggravating impacts on the
attempts of many foreign countries to emerge from their financial crises and deep
recessions.
2) Corporations: Cope with global competition
Global competition is fierce. Competitors can come from virtually any corner of
the world. There are now many examples of multinational corporations that originate
from newly industrialized and even from developing countries.
It is desirable to be an innovator but competitiveness can also be established
through becoming a high speed reverse engineer and adapter. Difficult to develop
business practices and managerial methods that proved to be successful can be rapidly
imitated and then enhanced with some obviously useful modifications, upgrading and
updating.
The competitive threats to established multinational corporations may be like
showers of well-aimed arrows whose sources maybe hard to foresee or to ever identify.
Many companies live on the edge of death.
The usual sources of competitiveness in international markets continue to exist in
a number of small as well as very large countries. In the cases of the two frequently
mentioned countries, both China and India enjoy certain demographic and
governmental advantages that are difficult to counter. Both have very large numbers of
very low income workers; very many young, trainable and diligent employees; relatively
few older people to support and governmental funds available for capital investments
and for infrastructure projects. Both have taken tremendous but not equal strides in
economic development, though they do not care equally about issues such as political
freedom, individual liberty, transparency or dedication to national defense.
But both as well as many other countries are learning fast from the previously
established and economically dominant countries and their corporations. They often
select to apply the most advanced technologies and to incorporate best practices into
their scientific, engineering and managerial systems.
How can then corporations defend themselves against this demographic,
political, scientific and managerial onslaught?
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Corporate success is a managerial and ownership responsibility. Corporations
need to take both defensive actions and forward moving developmental actions.
On the defensive front, companies need to develop and retain capable and loyal
workforces and counter the opposite trends that prevail in the Anglo-American based
business communities. Though it is an enormous challenge, advanced human resource
management thinkers and practitioners are addressing this essential issue.
Companies also need to much better protect their innovations and advanced
technologies against all forms of industrial espionage. Nor should they foolishly give
away their technological advantages through over-friendly communications or through
―let‘s save the world‖ do goodism.
Even universities do untold harm to the competitiveness of their own countries
through the unbridled distribution of knowledge and through give away programs where
they don‘t even collect fees from tuition and reduce the academic competitiveness of
fellow educational institutions. Just go to a Chinese university and try to acquire some
truly advanced information. The attempt might quickly be classified a form of espionage
or an action against the interests of the People.
Continuous innovation is the call that Professor Porter has been trumpeting for
many years to the MBA and the business leadership communities. Indeed, that remains
a key source of sustainable competitiveness. But relying principally on innovation has
become less and less sufficient as it can be copied in part already during its
development process, as intellectual property protection measures are only partially
effective and as cyber espionage and cyber-crime become globally widespread
practices.
3) Consumers: Contribute to rather than detract from business growth
China is rich, the US is poor. Whenever this statement is put forth it elicits
immediate laughter from many, especially our Chinese friends. But China has over
$3,500 billion in American money while the US has $16,000 billion in American
governmental debt, which is miniscule compared to the additional $80,000 billion of
unfunded future payment obligations of the Federal and State governments which are
more likely to grow further rather than shrink with the passage of time.
Those who deny this estimate of the colossal ―debt is the threat‖, as Democratic
Party Senator Conrad Kent has been warning and demonstrating for over a dozen
years, are using single entry book keeping. In their accounting the credit side lists all the
assets and accounts receivables of the US government and then does not turn to the
debit side, because any realistic listing and summation of the debts plus accounts
payable become too horrible to deal with or even to contemplate. The sixteen trillion
dollar debt, rising by a new trillion a year, is already frightening, and yet it is not being
dealt with seriously.
How did the US come to this predicament? A large part of the answer maybe:
―We gave it all away‖. Though there is much merit in this statement, it is not completely
accurate. To a large extent, others have earned much of America‘s money away.
A frequent reminder put forward is that 65% to 70% of the US economy is
accounted for by consumption. But this statistic may overestimate the usefulness of
consumption and of consumption as a percentage of GDP, if (a) the consumption
figures are made up of the summation of final, retail-sales level payment receipts but
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much of the value added portion of the final prices went to pay for production and
distribution costs in foreign countries and (b) much of the domestically added portion of
the value created that led to the constitution of the final product prices was associated
with shuffling the product among various stages along the supply chain or around the
country among various levels of distributors.
Since current estimates are that manufacturing contributes only 11% to 15% of
the US GDP and yet consumption constitutes close to 70% percent of GDP, a
significant portion of the GDP attributed to domestic producers may actually have been
the results of the efforts of foreign makers of products which were eventually landed in
the US and went through value increasing processes.
The concern about the likely overestimation of US GDP maybe partially corrected
by subtracting the landed value of all imports from the total value of all items sold inside
the US at the final retail customer level.
Much consumption involves the actual elimination of products that existed
before the acts of consumption. Afterward, often only debris and pollution remain.
Financially, much consumption results in capital destruction. Successes in
expanding the consumer side of an economy can be the path to speedier
impoverishment, especially if much of what is consumed came from abroad and if the
economy runs significant trade deficits.
An exception may be the case of countries that run big trade deficits for years
and then default on their payment obligations. Or similarly, they delay for long periods
the settlement of their cumulative current account deficits and eventually make
payments using their inflation ravaged, diminished value currencies.
The interpretation still holds that trade surpluses can enrich, that trade deficits
can impoverish, and that consumption can constitute capital destruction.
Clearly, a significant way to stimulate the economy toward a robust recovery
could come from a substantial shift of purchases away from suppliers of imports to
suppliers of domestic products. This may actually not be possible in many instances,
because an enormous variety of imported products do not have corresponding
domestically produced substitutes. However, because much consumption is
discretionary, it is possible to substantially change the mix of products consumed.
Moreover, it is possible to implement far reaching shifts from the purchase of
discretionary manufactured products to domestically produced discretionary services.
(Spending on self-improvement may be one of the more desirable forms of such
redirected consumption.)
As wise as the preceding suggestion maybe, it is almost certainly likely to be
accompanied with a decline in the standard of living and in some cases the quality of life
as purchases are shifted to more costly domestic products or as purchases are
redeployed from the most desired choices to compromise alternatives. Nonetheless,
this might bring about enormous benefits for the country‘s economy: although the cost
of what is purchased may be increased by, for example, 20%, the benefit maybe the
other 80% in earnings that did not leave the country in the form of payments to the
foreign suppliers.
This suggestion does violate the global optimization of production and
consumption allocations suggested by Ricardo‘s Theory of Comparative Advantage.
However, it is readily observable that many countries have been enriching themselves
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for decades by being Ricardian free traders for exports and mercantilist protectionists
for imports. It may be quite alright for the trade deficit countries to turn this situation
around for some time by substantially increasing benefits to themselves from
international trade, while reducing only somewhat the perpetual gains accruing to the
mercantilist nations.
Does a country list need to be presented again? China, Japan, and even
Germany, if we include the so called enlightened self-interest behavior of not only
German corporations but of German consumers also who are aware that by giving
preference to domestic products they may gain significantly more than lose from
nationalistically biased purchase decisions. Importantly, it is assumed here that the
inspirations for these decisions are economic and are not motivated by prejudices
toward any other nation.
Despite the fact that enlightened self-interest thinking and the associated
changes in consumer choices would have great net benefits for the US economic
recovery, it is very difficult to get Americans to adopt this line of thinking. While
Americans tend to think of themselves as Americans first, when it comes to shopping,
consumer-sovereignty reigns, bargain-hunting rules, and the widest unencumbered
choices among available products are wanted. The result is that Americans are a nation
of consumers who use the motto ―Shop ‗til you drop!‖ and it became a nation that
shopped and it dropped.
Implications and Discussions
While attempting to stimulate individual national economies as well as the closely
connected members of the global economy, it is important to observe that capital
destruction is not a form of either Keynesian or of monetary stimulus.
Zero percent to one percent interest rates are offered to the economic system by
central banks in their attempts to reverse recessions and to bring about emergence
from lengthy periods of stagnation. However, following some initial success, after a
while, they have shown themselves to have little impacts on investments and on
consumer expenditures.
The initial successes may be caused by the assumption of investors that days
with better business prospects have arrived and that the fully distributed costs of capital
investments became significantly reduced due to substantially lowered financing costs.
Initially, where the investments are for the maintenance and replacement of working
equipment, the low interest rates do attract investments. However, when the new
investments are supposed to be for additions to the inventory of productive capacity so
that total output can be increased, then it becomes more essential to face realistic
expectations of rising demand for products and services than just desirable reductions
in the cost of financing capital investments.
Central bankers also, not only corporations, need to be cognizant of the fact that
the demand for investments is much more demand elastic than it is interest rate elastic.
A reasonably certain rise in the demand for end products and services is dramatically
more likely to cause corporations to invest than is a reduction in the interest costs
associated with a proposed investment.
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This may be regrettable for central banks, because it emphasizes the difficulty
faced when they try to stimulate economic growth. However, it is a quite important call
from the view point of corporations: businesses will make investments if there is rising
demand for the corporations‘ products and services that can be sold at prices sufficient
to absorb substantial financing costs. Yet there is no point in making new capital
investments, even if the interest rates to be paid on borrowed capital are very near or at
zero, if there is not a reasonably assured prospect of rising demand for the end
products of businesses. Otherwise, there is no point in creating additional investments
to increase production.
Perhaps the case of Japan provides the biggest and the longest running
illustration of the ineffectiveness of the zero percent to two percent interest rate
strategy. Since about 1993, Japanese monetary authorities have been making capital
available at minimal rates of interest to banks, to government agencies, to potential
investors and indirectly to consumers. With the aid of low interest capital, the
government of Japan has been running levels of expenditures way above levels of
government revenues, thereby incurring and continuously adding to huge government
deficits which by 2012 may have cumulatively reached about 260 percent of Japan‘s
annual GDP. In the short to intermediate run, there is limited prospect of a reversal in
this deficit trend. Yet, all the public spending and all the public works projects left Japan
with the well-known ‖lost decade‖ of the 1990‘s followed by the now ongoing years of
just above stagnation level growth rates.
Interestingly, in 2011-2012, there are strong pressures in both the countries of Western
Europe and in the United States to follow various versions of the failed Japanese
stimulus strategies.
Conclusions
The conflict associated with the proposed dual approach of increased
investments and increased consumption:
1) In the short run, the Keynesian approach of increasing both investments and
consumption using deficit expenditures is likely to be somewhat effective for a
period. The deficit stimulated rise in demand for consumption will generate
increases in production, first through higher rates of utilization of existing capacity
and later also from the output from somewhat increased capacity. However, after
the newly produced goods and services are consumed, virtually nothing tangible
remains. Moreover, past savings of both producers and consumers may have
been used up and some additional debts may have been incurred.
2) In addition to increases in the national debt resulting from the just mentioned deficitsourced investment and consumption expenditures, contributions to the national
debt owed to foreign countries may have risen also, nearly to the extent to which
the investments and consumption involved imported products and services
Where is the money?
How can it be that all three constituents of the often-heralded Triad of the U.S.,
the European Union and Japan are all in significant financial troubles, great recessions
and stagnation? The supposedly richest and most powerful segments of the world
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community find themselves indebted, weakened and bewildered. Where is the money
with which to meet debt obligations, to maintain and enhance living standards and to
pay for the costs of security and military strength?
Part of the answer maybe: They consumed it, squandered it and gave it away.
For much of the past forty years, various countries of the Triad (the U.S. on the
largest scale) engaged in private consumption and government handout processes at
expenditure levels significantly above the incomes produced by their economies. The
discrepancies were and are being financed by credit, both internal and external.
Importantly, the countries that seemed to be living within their means by not running
huge government deficits and earning significant surpluses in their international trade
positions achieved their alleged wealth increasing statuses by selling products to buyers
who issued debt instruments in exchange, rather than paid for their purchases with real
goods and services. As the debt instrument accumulations grew, and the debts were
rolled over or their maturities extended into the long-term, the real values of the original
earnings diminished under the impacts of inflation and devaluations.
On top of this, there have been and continue to be outright debt reschedulings
and debt defaults, both in the domestic and in the international banking systems.
Furthermore, various debt obligations of nations to one another have not been honored.
In some other instances, enormous re-labelings of asset valuations were implemented.
For example, Japanese stock market levels are now at about 25% of their valuations of
twenty-five years ago and many real estate prices are near one-half of their levels
reached in the 1980s.
Unfortunately even for the now much touted Germany, a big part of the benefits
of their hard work and relatively favorable fiscal responsibility, both at the governmental
and individual citizens‘ levels are evaporating. The advice to and the demand on
Germany to save the Euro and the European Union seem to be: ―Let yourself be robbed
now, because if you do then you may return to your hard working and responsible ways
and be better off than if you stagnate because those who rob you do not have the
money or the credit standing needed to continue to employ you.‖ As repugnant and
hard to swallow this advice is, it may be better and even necessary to accept and
implement.
What not all observers realize is that the challenges faced now by governments,
monetary authorities and business communities are even greater than the term ―the
great recession‖ implies.
The challenge is not as great, fortunately, as that presented by the great
depression which was reversed to a large degree by the preparations for and conduct of
World War II.
Crucially, it would be undesirable to rely on solving the unemployment problem
by drafting as much as 20% or more of the labor force into the military as was done
during the Great War. Yet perhaps the magnitude of the economic challenge is
somewhat comparable to that faced by the needs for post-war reconstruction and the
conversions from wartime to peacetime production systems.
Under current circumstances, governments and monetary authorities are called
upon to accomplish the feats of alchemists. But instead of converting iron into gold, they
are asked to convert diminished value debt instruments into full value financial assets.
Beyond that they are asked to issue vast quantities of new debt instruments for the use
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of countries and citizens who already failed to have the ability and willingness to service
debt obligations incurred in the past.
Are the Triad countries then to be engaged in a successful game of super
deception?
Step 1: Pretend that the already outstanding debt instruments are worth nearly
as much as their face values indicate.
Step 2: Issue vast quantities of new debt instruments and give them to those who
are not meeting their debt obligations now.
Step 3: Proceed for the near and intermediate future with the assumption that
the debt defaulters will be able and willing to meet their obligations in the future.
Step 4: Ignore the reality that neither the past nor the new debts will be paid off
fully in real terms.
Step 5: Anticipate that in the future devaluations and inflation will be used to
eliminate much of the debts.
Does all this mean that borrowing and irresponsibility succeed? There are both
pros and cons encountered in the process of finding the answer.
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