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CHAPTER 4
GLOBAL
FINANCE
Global Finance PRISMS
1.
2.
3.
Are the benefits of
Keynesian national
financial deficits greater
than the costs?
Should FDI be used for
political purposes?
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’t
include his non-cash,
capital wealth)
1.
2.
3.
TWO WAYS TO MEASURE TRADE
BETWEEN NATIONS:
Current Account: Annual exports of
goods & services – Annual imports of
G&S
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).
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%
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)
3.
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:
Compromise a nation’s
financial freedom
2. Eliminate skilled labor
BC jobs
3. Weaken currency
control
1.
Boost the economies of
rival exporting nations
5. Weaken the trade deficit
nation’s foreign policy
power
6. Boost national
consumption >
production
4.
FEDERAL GOVT DEFICITS:
1.
2.
3.
4.
Increase a nation’s
international indebtedness
Empower creditor nations
Jeopardize the debtor
nation’s standard of living
Weaken the nation’s capital
account
FDI is the pie
1.
2.
3.
Foreign direct investment is the global
economy’s blood circulation system.
Circulating capital, technology, &
knowledge nourishes the growth of
nations, corporations, and stockholders.
Nations that invest in one another have
a stake in one another which prompts
cooperation. You don’t “bite the hand
that feeds you.”
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.
2.
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)
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.
4.
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.
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.
2.
The EU has invested the most in
other nations (55% of the
world’s total); the U.S. is second
highest with 25%.
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.
2.
3.
4.
5.
Technology sharing
Job creation through trade
Immigrant labor
Supply chains: global sourcing
of raw materials for
manufactured products
Corporate joint ventures
U.S. HIGHWAYS FOR SALE
1.
2.
3.
A new FDI trend in America has foreign
companies buying or leasing American
highways & bridges.
An Austrian-Spanish corporate
partnership paid $3.8B for a long-term
lease on the Indiana Toll Road.
An Australian company obtained a 99year 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.
4.
5.
6.
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.
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.
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:
Belgium
 Miller and Coors beer: South Africa
 7-11: Japan
 French's mustard: Britian
 Citgo gas: Venezuelan government
 Frigidaire: Sweden
 Holiday Inn: Britain
 Shell gas: Netherlands
 Chrysler
building in New York: Abu
Dhabi
 Church’s Chicken: Bahrain
 Crown Plaza hotel, New York: Saudi
Arabia
 Trader Joe: Germany
 Dial soap: Germany
 T-Mobile: Germany
 Toll 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 7088% 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
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
1.
THE 3 CHALLENGES OF DOING
BUSINESS WITH FOREIGN CUSTOMERS
1. Currency risk
2. 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 DEBT
Ireland: $448,000
UK: $151,000
Netherlands: $137,000
France: $68,000
Germany: $54,000
Spain: $50,000
USA: $42,000
Russia: $2599
Brazil: $1234
China: $271
India:$130
U.S. DEBT AS % OF ANNUAL GDP
2001: 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 exchanges
around 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.
2.
3.
4.
5.
The nation is prominent in global
business
Institutional stability
Low national debt
Healthy economy
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.
3.
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.
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!
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).
4.
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 & IMPORTING
1.
2.
3.
Importers (consumers) want their
nation’s currency to be overvalued
(because it buys more imports)
Exporters prefer undervalued currency,
which makes their exports cheaper for
foreigners to buy
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.
2.
3.
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.
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.
Weak exporting nations have a tough
time controlling the value of their
currency.
(Don’t run out of)
Foreign Currency Reserves
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.
1.
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.
3.
THE
DRIFTING
AMERICAN
DOLLAR
Why does a nation’s currency
supply revolve around its trade
balance?
Trade DEFICIT causes:
Currency supply causes:
Currency value
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 DECLINED
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.
1.
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”)
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.
1.
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.
3.
1.
2.
FREE TRADE CAPITALISM CAN FUEL
CURRENCY MELTDOWNS
Advocates of free market capitalism
oppose governmental interference into
FDI flows such as restricting crossborder movement of capital.
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 DOLLARIZATION
1.
2.
3.
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.
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.
Dollarization proponents contend that
fewer currencies lower inflation and
interest rates.
INTERNATIONAL
FINANCE LESSONS
LEARNED FROM
THE 2010 DEBT
CRISIS OF GREECE
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 overleveraged nations, & these remedies are
politically-unfeasible.
4. Currency depreciation , higher interest
rates, higher employment, & lifestyle cuts
are inevitable for most debt-plagued
1.
AMERICA’S
st
21
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” (debtbased 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 CUTS
Federal meat inspection: 7.5% budget drop over
the past 20 years
Coal mine safety: 45% budget drop since 1979
Consumer product Safety Commission: cut 40%
since the 1970s
Occupational 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
DEREGULATION
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
2.
banks and corporations like Enron to hide
their liabilities from the general public.
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).
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.
3.
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.
2.
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.
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
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.
1.
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.
5.
9.
10.
11.
12.
13.
Over the past decade, Americans have
tripled their amount of credit card debt.
In 2004, the federal government took in
the same amount of money as in 1999, but
spent 34% more.
More than 40% of U.S. government debt is
owed to foreign nations, including $500B
to China & $720B to Japan.
The average college student owes $15,500
upon graduation ($19,400 for grads from
private schools)
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 INDUSTRY
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.
1.
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.
4.
STALKING THE BANKRUPT
A 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, Tbond 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 #4
AMERICA’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 longterm 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 #5
AMERICA’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 LIVING
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.
1.
5.
6.
7.
8.
9.
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%.
College tuition has risen 175% in the past
decade & out-of-pocket healthcare costs have
doubled.
Hourly wages adjusted for inflation are the
same today as they were 30 years ago.
The number of Americans with career-related
pension plans fell from 30.4M in 1984 to 23M
in 1998.
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
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?
1.
Challenge #6
AMERICA’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:
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?
1.