Economic Stimulus

During the Clinton years much was said about "bridging the digital divide." On Charlie Rose recently Leo Apotheker, CEO of German software giant SAP referred to enterprise-wide computer networks as a "nervous system." In listening I drifted back to the time just before the event of 9-11. What if government computers (at C.I.A., F.B.I., etc.) had all been able to "talk" and share/ analyze/ intelligate aggretized data? What if there had been an interchangeability and exchangeability? Aren't these largely the kind of "hi-tech" public works projects we need in today's economy? (Many have warned of the negative impacts of excess efficiencies with respect to excessive automation, largely a result of internet and related technologies. But America is desperate.) Government bureaus and agencies are no different than subsidiaries of large corporate holding companies: getting systems to interact and share intelligence creates greater efficiencies. During the Bush years, a huge emphasis on guns, versus butter. A lot went into defense, but not necessarily aimed at the high-tech/DARPA/technology transfer side.

We need hi-tech projects--i.e. more government contracts--as part of the stimulus. More computer literacy and training, perhaps a coupon for a laptop for every family, bundled with varying levels of training. (Is there non-combat training the military could do more of with our young people?) We need more intra-agency network communications that are seamless. And we need policies that hire U.S. workers here in the U.S. to do this hi-tech retrofitting and implementation. We need most of the heavy lifting to come from U.S. plants. We can't borrow Chinese inflows simply to turn around and pay U.S. workers to then go to Best Buy for Chinese-made goods.

The much touted Resolution Trust (Aggregator) Bank may ultimately take all the toxic debt now on bank balance sheets and it may issue 30-50 year bonds. Similar to the Resolution Trust Corp. for the American S&L's back during the Reagan era. Or, nationalization may happen. The key is solvency, and having banks that are NOT too big to succeed. We'll see.

In light of California's deficit, Gov. Schwartzenegger has announced an initiative to consolidate redundant state agencies, in hopes of increasing efficiencies, thereby reducing costs. (At the Federal level, Obama is doing the same.)

The systemic contradiction is that greater efficiencies promote more layoffs. Our ultra-efficient tech age has translated into Chinese factories that at half-capacity can out-produce world consumption rates three-fold. One wonders: is war (or recession) the only means to diminish excess systemic capacity (and hence raise scarcities)? Fact: we have too many people...too many mouths to feed--homo sapiens has been too successful.;-) See:
http://www.debtdeflation.com/blogs/2009/01/31/therovingcavaliersofcredit/

The Hidden Cost of Globalism

Despite what the Cato Clowns claim, the U.S. Trade Deficit tells the real tale. Housing is a symptom. It's not just about capital inflows to an attractive, stable U.S. market. It's about real value creation, which is what design and manufacturing are all about, and which today is mostly carried out in Asia. When a $15/hr. job in the U.S. is transferred to a lower cost $3/day zone--and its product later reimported back to the higher cost zone--a net liability is incurred. (The entire supply chain is also off-shored when a job is transferred.) Consider the differential in terms of buying power distortion. Someone making the product in the $3/day zone should be buying it there. (The imbalance occurs when there's inter-zonal trading. It's not a bad thing, but it does create imbalance.) The higher cost zone is effectively borrowing, not buying, the so-called "savings," booked as profit by the private enterprise. The public sector absorbs/realizes this net liability, and accordingly profit is posted in the private entity that transferred the higher production cost to the lower cost zone. Our public liabilities show up proportionate to China's surplus (and indeed, it's more complicated because we're dealing with a global system that includes trade with other nations and includes petro dollar transfers, too). But the fact remains that--for accounting reasons--goods should remain in the zones they are produced in to avoid imbalance. Is this practically feasible? For the most part, no it is not. Hence, a global trade adjustment factor (i.e. an algorithm, deflator or multiplier) is needed to offset imbalances as they occur--at the point when trade exchange crosses zones. Not so much resembling an actual tariff, but a data adjustor in terms of global accounting metrics. Not unlike--in theory--the way a graduated lock system in say, the Panama Canal Zone, works. It's designed to prevent major flooding and offset the sea level differentials. (The increasing trend toward outsourcing cannot be blamed on unions only--it has affected all industries, even non-union service industries. Adding a surcharge to all undocumented or outsourced labor is a similar strategy...but it is basically a tax.)At the very least, outsourcing due to cheaper labor costs off shore has served to reduce real wages here at home--and I submit this is key to understanding the housing problem.

(Indeed George Soros has discussed this surcharge mechanism rather extensively, and has been talking about it for years, primarily as a trade-only currency adjustment metric. See the Balassa-Samuelson Theory, wherein purchase power parity=exchange rate.) The fact is, China's trade surplus is in large part a result of various accounting. And, our excessive trade deficit is also largely the result of accounting inaccuracies, in the way trade (and inflows, outflows, currency differentials, etc.) is measured. (Also, see the Big Mac Index for reference.)

Again, the policy key is to avoid a liquidity trap. The aim is not just to reflate, but to create knowledge worker jobs (and long-term sustainable wealth) from the bottom-up. Tax cuts are great, sufficient taxable income is first needed for folks to be paying taxes. Wiping away consumer credit card balances would only mask the underlying problem. Simply driving new consumer purchases--by rebate checks--sends dollars back over to China, and really does not promote capital formation here in the form of new investment. The big box stores are a huge contributor to our problem right now. Even large capital projects benefit primarily union trade labor, and service workers only secondarily. Wealth creation originates with innovations financed at a ground base level, often through localized incubators. Much of the "top down" financial engineering innovation from Wall Street--aimed at automation and cost reductions--didn't work, and resulted in more debt and exported jobs. We need a new approach. M&A alone does not create value. And alas...we need an entirely new mortgage paradigm...with variabilities on each side of the ratio...more shared risk and fluidity all the way around. Perhaps loan balances that float with resale prices?

According to Harvard Professor, Niall Ferguson, "The delusion that a crisis of excess debt can be solved by creating more debt is at the heart of the Great Repression. Yet that is precisely what most governments currently propose to do." Hence, we--the collective 'we'--shall see what is in store.