Protecting Your Investments With Foreign Securities

Let’s say that the economic crisis really does turn in to a full-blown depression, currency crisis, inflation or deflation spiral and obviously further deterioration in the stock market. What can you do to protect your investments? Not a whole lot, but there are a few alternatives that should be considered. What I’m about to suggest is not an easy thing to do, because it requires knowledge far beyond traditional investing and hedging in The United States.


The premise on which this analysis is based is that the U.S. economy as a whole, including the financial economy, the government, the local governments and U.S. corporations are all in very bad shape, and hence cannot be trusted as investment vehicles. Furthermore, if the U.S. government is in bad economic shape, that fact has word-wide implications on most investments.


The real core of any investment is what’s actually behind it. In the end it comes down to what someone else is willing to pay for that investment, and that in turn has everything to do with the environment in which the investment is situated. If the U.S. economy is sinking, then U.S. corporations will suffer, and U.S. stocks will sink too. (also, in case someone forgot, the U.S. stock market was and is a house of cards…)


If the U.S. government is doing poorly, and is at the same time drastically lowering interest rates, not only does one not get a good return on U.S. Treasuries, the government may actually default on the Treasuries, or inflation will make the principal worth much less. In the end, all this has to do with the way a country is run in the long term. Keeping your money inside a country that is poorly run will deteriorate all your assets domestically and internationally. The key to protecting yourself during a catastrophic crisis could then be to find a different, well-run country, from which to buy Treasuries.


If you can find a “well-run” country, you can then invest in that country’s Treasuries, or government debt. The taxpayers of that country will stand behind the debt and guarantee its value. That, in turn, means that for your investment to be safe, those taxpayers must have jobs and overall security, and the government of the country must have responsible long-term policies. Otherwise you run the same risk that you run in buying U.S. Treasuries. In order to analyze what country might be a good one to invest in, one must know about mainly the political and fiscal situations in that country. A well-run country has:


- a persistent budget surplus


- a diversified economy


- a sufficiently regulated financial sector


- a long-term political commitment to fiscal responsibility regardless of ideology


- an independent national (or supra-national) bank committed only to fighting inflation


Being able to identify countries according to all these conditions is certainly not easy, and one must know a lot about international comparative politics, history, law, government studies, institutional studies, economics and much more. However, I would like to suggest two countries that fit these descriptions: The Netherlands and Sweden.


The Netherlands has for centuries been involved in trade and business in a prudent way. The commitment to sound fiscal policies is very strong, and just like Sweden, this country consistently supports the heavy spending of the EU while getting less money back in return. The country responded well to the economic crisis and took pre-emptive steps to protect its prudent, venerated banking sector.


Sweden has a more inconsistent history of financial prudence, but has more recently gone through crises that has made the commitment to sound economic dealings very strong. Sweden is most of all famous for its efficient government institutions. When the economic crisis started in the U.S., the former Swedish minister of finance, Bo Lundgren, offered to testify before Congress on how to deal with the crisis, which is very, very similar to the Swedish crisis of the early 90s. The Bank of Sweden recently had to suspend its sales of Treasuries because demand from abroad was too high. Obviously there were some investors who were thinking in a similar way to what I am describing in this post.




Addendum - What’s wrong with the traditional hedging strategies?


U.S. stocks: Traditionally, stocks are supposed to at least keep pace with inflation and pay dividends, so that they make for good investments in the long run. We now know that the stock market was a house of cards, and there is no imaginable reason why the stock market should be a good investment anytime soon.


Foreign stocks: Before the crisis, a lot of people were talking about the idea of de-coupling. that meant that it was thought that other economies were operating independently of the U.S. economy. We now know that that idea was completely misguided. Hence, foreign stocks more or less equal U.S. stocks, and as such don’t constitute good investments.


Cash: In 2008, the Federal Reserve increased the money supply enormously. That creates a huge potential for massive inflation in the future.


U.S. treasuries: Danger of default and massive inflation, in addition to non-existent returns.


Treasury Inflation Protected Securities (TIPS): Danger of default and even lower returns. Danger of deflation.


Municipal bonds: Clear danger of default. Local and state governments have not been able to sell bonds lately because confidence has already evaporated to some extent. This is because a lot of construction projects have fallen through because of the credit crisis. Many states are in a state of fiscal emergency. If all this weren’t enough, rampant fraud with respect to these assets are beginning to come to the surface. that is why Bill Richardson had to withdraw from his attempt to join the Obama administration.


Savings account: Danger that the FDIC will run out of money. In a catastrophic crisis, this is not at all a distant possibility.


Gold: Subject to much speculation and danger of loss of value. Still, by owning a commodity, you will probably be better off than with the abovementioned assets.

Obama Knows

I have recently been quite disturbed by the appointments that Obama has made, especially with respect to his economic team. Yesterday, my wife tried to console me by saying: “he has a plan”. By that she meant that the appointments don’t necessarily translate into the policy favored by the people Obama has chosen, who largely constitute a restoration of the Clinton economic team. I put a lot of blame on Clinton for the situation we are in today, and I also blame Reagan and Bush Jr., but I don’t blame Bush Sr.


In a speech at George Mason University, Obama spoke in very serious terms about the economic state, and he, I believe, correctly identified many of the upcoming challenges. What Obama realizes is that the challenges we face are not limited to the restoration of confidence in the financial markets. This is not about even about the financial markets anymore. We are unavoidably facing a paradigm shift in the way that this country functions.


To put this in perspective, we seem to be facing a budget deficit of around 2 Trillion dollars with the Obama plan. The current estimated value of “toxic” financial assets is now around 8 Trillion dollars. If it would take 8 Trillion dollars to clean up the financial markets so that those markets can again provide America with across-the-board prosperity (which they can’t), but 1 Trillion dollars to provide direct relief according to the Obama plan, then the choice seems easy. Obama suggests something pretty simple: to funnel taxpayer money directly back to the taxpayers who need it, instead of giving it away to financial institutions in the hopes that, some day, that money will trickle back to the taxpayers. The latter was the Paulson plan.


I am definitely not a fan of deficit spending, even in a crisis. Normally, I would have argued that fiscal restraint, followed by a time of a baptism of fire would be called for. However, since the people of The United States have essentially no societal protection with respect to incomes, pensions and healthcare, such a harsh experience would probably be too devastating. To set the record straight, what we really should be talking about now are things like the following:


real dangers to future American competitiveness, a deterioration of the fabric of society, hunger, poverty, crime and the like.


Obama makes the case that the only way to deal with the situation is to mortgage our economic future. I reluctantly agree.


Here’s an important quote from Obama’s speech:


“We could lose a generation of potential and promise, as more young Americans are forced to forego dreams of college or the chance to train for the jobs of the future, and our nation could lose the competitive edge that has served as a foundation for our strength and standing in the world. In short, a bad situation could become dramatically worse.”


We cannot move forward thinking that the financial markets are going to provide prosperity and security for Americans, we must provide that among ourselves. That is the only way.

Like it or not - Burris is right

The Governor of Illinois, Rod Blagojevich, certainly seems to be a criminal. There are phone conversations in which he’s talking about selling Obama’s Senate seat, and the circumstantial evidence of Governor Rod being a crook is overwhelming. However, in the eyes of the law he is not a criminal, yet. He has not been convicted, and he has not even been indicted yet; he has only been accused of criminal activity. That means only one thing: he is still legally the Governor of Illinois, with all the powers of such a Governor.


Last week, Governor Blagojevich named Roland W. Burris as the junior Senator of Illinois to replace Obama, and Burris accepted. Today, Burris showed up in Washington for the 111th Congress, eager to get to work. However, he was shown the door by the Secretary of the Senate, Nancy Erickson because she did not accept his credentials. Burris proceeded to make the following statement to the media:


“Members of the media, my name is Roland Burris, the junior senator from the State of Illinois.”


For a replacement Senator to be named by the Governor, paperwork has to be signed by both the Governor and the Secretary of State. This is an old tradition dating back to English colonial times. In Illinois, the Secretary of State, Jesse White, has refused to sign. Theoretically, it is now argued by the Senate, this fact makes it impossible for Burris to become a Senator until White has signed. I beg to differ.


The Constitution specifically mentions that no specific tests should be required for membership in the Senate. In this case, what the Senate is actually trying to do is to:


impose a test on a would-be Senator with respect mere accusations of wrong-doing of the Governor who appointed him


It is clear that the Constitution overrules Illinois state law in this matter. The Constitution says nothing about signatures from the Secretary of State, and the Supreme Court has ruled that the Senate cannot impose any additional tests on would-be Senators. We’re not even talking about the appropriateness of the would-be Senator himself, but that of the one who appointed him. I believe that it would be very difficult to make an actual legal case that Burris should not be the Senator of Illinois. Like I said, Governor Blagojevich still has all the powers of a Governor, end of story.


This debacle certainly raises some important questions, however. The most important one, in my view is:


Who can veto a Senate appointment?


From the Burris debacle, one could deduct that the ones who can veto such an appointment is: 1. a Secretary of State, 2. a Secretary of the Senate, and 3. the Senate collectively.


Imagine if all Secretaries of State were to get together and decide to block all Senate appointments. They could then do so until people that they liked were appointed instead. These Secretaries could gain control of the Senate. Imagine if the Secretary of the Senate were to start blocking would-be Senators to achieve political goals. That would become an enormously powerful position. If the Senate started imposing all kinds of different tests on would-be Senators, the American political system would become infinitely more gridlocked than it already is.


I think the whole thing stinks, but if you want to follow the law, Burris must become Senator. The American political system fosters corruption because private donations to politicians are allowed, which makes it possible for criminals like Blagojevich to become Governors.

Fighting Off Depression

Paul Krugman writes today in The New York Times about what the new administration should do to fight off a depression. Krugman believes that large-scale Keynesian deficit spending is what is needed in a situation like the current one. He also rejects the Friedmanite theory that capital injections into banks can be a way to fight off a depression.


Krugman is certainly a decent economic thinker, but he is not known for his consistency. He used to advocate capital injections into banks, but is now apparently against those. He used to call Thomas Frank’s theories on the so-called “Southern Strategy” “erroneous” (theories having to do with poor people voting for Republicans, even though that goes against their economic self-interest), whereas he now writes about them all the time, as if he came up with them himself. Krugman, like Bernanke, lacks an ideological determination and clarity of vision.


Now, I agree that something has to be done to try to avoid a depression, but things are more complicated than Krugman make them seem. First of all, Keynesian spending is just a band-aid approach. Second, Friedmanite bank capital injections usually work, but only if they are highly controlled by the government. Third, a depression in The United States is something very different compared to a depression in every other industrialized country, because The United States does not have a social safety net.


Short-term solutions is without question the usual name of the game in terms of American politics, and also in terms of American academic economics. As I wrote in my last post, ideology is absent from American politics. If the government does not have a clear-cut ideological vision, a series of band-aid approaches tends to dominate politics. The result is the same if the ideological conviction is a conservative one, in which case (according to conservatism) band-aid approaches constitute the second-best solution, second only to doing nothing. Keynesian spending can indeed provide some short-term relief if a depression is looming. Perhaps more than anything, it can provide a “psychological stimulus”, where people see other people working, building things, and things happening in general. This can bring back confidence in the system. The question that I’m asking, however, is: should confidence in the system be quickly brought back by Keynesian spending?


I would argue that the problems we are experiencing today are much deeper than a problem of confidence. To apply a series of band-aid approaches so that we could go on as before would be a grave mistake. Like I said, there is nothing wrong with spending during a crisis per se, but you should never spend money you don’t have. Spending is good, deficit spending is bad.


I turn again to Sweden, that went through a very, very similar crisis in the early 90s. Sweden had tried the Keynesian model for 30 years, but ultimately rejected it when it became clear that it was artificially supporting a system that was not sustainable. That system came to an end in the early 80s. With these lessons in mind when the crisis came, the Parliament worked out a crisis package with broad, multi-party (yes, there are more than just two parties in Sweden…) support. The solution, thought the government, was not deficit spending, but:


1. spending reduction,


2. capital injections into banks (where the government took control of those banks, not just gave away the money like a bunch of idiots…) and,


3. Long-term commitment to budget surplus and a pay-as-you-go system for government spending


This may sound like some type of anti-government Republican credo, but keep in mind that government spending makes up over 40% of GDP in that country, whereas it makes up less than half that in The United States. Let me say this once and for all: sound fiscal policies should have nothing to do with what ideology you subscribe to.


Number 1 and 2 in the list above were meant to stave off the crisis, but by no means quickly get rid of it and continue like before. The government realized that something had to give, and the recovery was painful, but real. The third action, or commitment, was actually realized, and it was meant to set the country up in such a way that the next big crisis would be easier to get through.


This is exactly what ended up happening. To be sure, Sweden is currently going through a lot of pain and job losses, but the government’s coffers are full because budget surpluses for over 10 years have created a readiness for the crisis that we see today. As a result, Sweden can use the surplus that has been built up to spend its way out of the crisis without running a deficit. That’s the beauty of the whole thing: you achieve crisis relief without setting the country up for the next crisis by means of deficits, loans, and all the rest of it.


The United States now has a chance to set the country up in the same way that Sweden did in the early 90s. By doing that, the country will be more sustainable in the future, and be able to weather the next crisis as Sweden weathers the current one now.

Without Ideology, There Is Only Anarchy

The word “ideology” has a somewhat offensive ring to most Americans. You often hear politicians on the campaign trail saying things like “Americans are not interested in ideology”, or “we will work in a non-ideological, bi-partisan manner”. All that ideology really is, is a coherent structure of ideas that are meant to appeal to voters. So how can that in itself be offensive?


When the United States was founded at the end of the 18th century, it was founded on the idea of independence from the British king. That a subordinate country broke free from a colonial power was certainly nothing new, but the great novelty in the American case was how this was done, and how the new country moved forward. If a political commentator in 1788 would have guessed what the future of America was to be, using history as a guide, he or she would most likely have guessed that the heroes of the revolution would battle it out with each other for supremacy in order to ascend the “American throne”. In other words, we could very well have had a “King George Washington”.


The founding fathers chose instead to give away power to a segment of the general population, using a model that resembles that which was used in ancient Greece, where property-owning men were made a part of the political process. Indeed, many argue that the parallels between contemporary American and ancient Greek democracy are many still today, especially with respect to Socratic ideals of the good citizen and politician who is financially and morally responsible for his household, community, as well as being a prudent policy maker in the legislature. Another important factor and parallel was the belief that politics should be primarily a local affair. This early model of democracy is hence based on the leadership of a (hopefully) benevolent elite.


When The United States was founded, all European countries were still dictatorships. This fact created a struggle for something better in Europe, which eventually created the ideologies we know today. Without question, the two most important ideologies to come out of this process are liberalism and socialism. Conservatism is not an ideology, as much as it is an absence of ideology, because it only seeks to conserve, and not to renew. Today, in the entire western world, with the exception of the United States, the political landscape in each country is basically made up of two blocks of somewhat opposing ideologies:


Right: Classic liberals along with conservatives, and


Left: Socialists along with social liberals.


The United States hence defies what seems to be the “natural order” of a Western political landscape, in that it has two blocks on the right (Republicans and Democrats), and none on the left.


Due to the fact that America was never a dictatorship governed from within, the struggle for political change with respect to economic differences between different segments of the population never quite took off. America was only a dictatorship vis-à-vis its colonial power, and not vis-à-vis a domestic dictator or domestic elite. Also, The United States was founded before a real crystallization of the ideologies occurred, so little inspiration could have come from them. At the time of its founding, The United States had the most modern form of government on earth, but because of the inherent, incredibly conservative nature of the constitution, that was eventually about to change in a big way.


Being the first one to embark on something has its pros and its cons. The early adoption must be followed by constant updating, otherwise you run the risk of lagging behind quickly. The United States was among the very first to adopt standards for electricity and TV, never to change them after that. Hence, the low Volt grid (110V as opposed to 230V in most other countries) is less efficient, and the American TV standard now has a lower resolution than that of most other countries. The United States never updated its constitution to include things like proportional representation, a unicameral legislature, a separation of the head of government from the head of state; things that most citizens of other Western countries now enjoy.


The American political system can now only be described as an 18th century dinosaur in an increasingly complex world. The recent financial crisis is the perfect example of how the individual nature of American politics is unable to deal with complex problems. Because the system is based on the perceived good personal qualities of the “benevolent elite” (meaning the individually elected Congressmen), American politics has become an awkward expression of the individual gut feelings of the elected individuals. When the financial crisis came, a motley crew of individuals who had no idea whatsoever about what they were doing or what they were dealing with, signed away trillions of dollars of taxpayer money in the biggest misguided give-away in history. The inability to act swiftly, responsibly, intelligently and successfully is, in a nutshell, the biggest problem with the American political system. In order to act swiftly, responsibly, intelligently and successfully, you don’t need a gut, you need an idea.


Negative statements about ideology from American politicians come as no surprise. Systems and institutions have a way of perpetuating themselves in their own self-interest. American politicians have been able to convince voters for centuries that ideology is bad, because that is all that voters are ever exposed to. If ideology were introduced in a big way in American politics, it would not only make it more difficult for wealthy individuals to get elected on vague policies; politicians would be able to be held accountable on a moral and philosophical level. That would in turn, by definition, take away large elements of self-interest from politicians and give that self-interest to voters. Naturally, an American politician would not want to do this.


As a direct result of this, the vagueness and lack of ability to foresee the actions of an elected politician creates a highly watered-down political process in a do-nothing government. Politicians won’t want to do anything because that goes against their self-interest. In that situation, politics inevitably moves towards a type of anarchy. Small government, less regulation, less social security, less concerted action in all things political; these are all anarchic tendencies.


Without ideology, there is only anarchy

Manifest for a U.S. Parliament Part 2 - Every Vote Counts

A political system is only as good as the voters make it. If voters don’t take responsibility for the workings of their system they will inevitably be taken advantage of by the politicians that they vote for. People who choose to go in to politics are always highly driven individuals, and unless the political system is set up in such a way that the interests of the voters is the foremost concern at all times, politicians will make the system work primarily for themselves. A system that allows large-scale monetary contributions to individual politicians, such as the American system, is hence a recipe for disaster. Likewise, a system that only allows two parties, will foster collaboration between those two parties to the effect that no other party can be allowed in to the political system, and very large parts of the population will be shut out of politics in terms of their wants and needs.

I will now continue this second part of the manifest with prescriptions for how the American political system can be made better and truly work on behalf of its voters, whatever the needs and convictions of those voters are.

Proportional Representation

What makes the American political system different from most other political systems (save for some other Anglo-Saxon countries) is the lack of proportional representation. If 49% of voters in a given constituency vote for a certain party, those voters could receive 0% representation in the legislature. This is not an anamoly either; it happens all the time. In a system with proportional representation, if 49% of voters vote for a certain party, that party receives 49% representation from that constituency in the legislature, no more, no less. How could anyone seriously say that proportional representation is unfair, unjustified, or in any way unsuitable? It directly transcribes what the voters want!

The votes would be counted according to the D’Hondt method (more on that some other time), and a party must receive at least 8% of the national vote in order to be represented in Parliament. That rule ensures that extremist parties are not represented in Parliament.

The Inception of a U.S. Parliament

The two houses of Congress would be merged into one unicameral Parliament, with a fixed number of seats, perhaps 501. Elections would be held every 4 years. Each state would be awarded a number of seats based on population size, in the same way as the present electoral college awards votes for President based on population size. Each vote in the Parliament would be decided by means of a simple majority, with the exception of a vote of no confidence in the President or the governing party or coalition, which would be decided by a two-thirds majority. Filibustering would be removed as a tool entirely.

The Usage of a Mixed Personal and Party Vote – The Party-List Ballot

One of the common objections to a political system that is based on political parties, as opposed to individual politicians, is that such a system takes away the ability of the voter to vote for a politician that he or she particularly likes. This problem can be remedied by the party-list ballot. In such a system, the voter takes a ballot for the party that he or she likes, and on that ballot, the party has listed the politicians that it considers best suited for the job of being a member of Parliament. The party lists politicians in order, 1, 2, 3, and so on. Any politician on the list can be ticked off, and the vote would go to that party, and that specific politician who has been ticked off. If the voter chooses not to tick an individual off, the vote goes to the party, and the person who is number 1 on the party’s list. When all the votes are counted, the voters may have defied the choices of the party, and number 1 and 2 on the list, may have been exchanged for number 5 and 12 as the party’s representatives in Parliament.

End the Role of Money in U.S. Politics

As I wrote in my last post, the ability of individuals, corporations and organizations to make large contributions directly to individual politicians is making a mockery of the political process. All such contributions must be made illegal immediately. Period. Political advertising on TV and elsewhere must also be ended, and campaigns should be conducted purely through debates in the media. Each political party would be given a set amount of money from U.S. taxpayers, end of story.

Decrease the Power of the President

There’s really only one appropriate word to describe someone who is head of state, head of government and commander-in-chief: King. No other modern country has this configuration, and for very good reasons. To give one man such vast powers is simply dangerous, and as we have seen during the last 8 years, it can have truly disastrous consequences. However the role of the President would be changed, at least one of the three roles would have to be given to someone else in order to safeguard the country against a semi-dictatorship.

Increase Voter Participation by Practical Means

The main reasons behind the fact that voter turnout is the lowest in the U.S. among all industrialized countries is obviously that there is no point for most people to vote because there is no proportional representation. But there is also large-scale voter-suppression, fraud and other tactics that keep voters away. This must obviously be dealt with mercilessly. In addition, there is a number of practical measures that can be taken to make it easier for people to vote, such as:

- conduct all voting on Sundays

- automatically register every U.S. citizen as a voter on the person’s 18^th birthday

- create a national ID card which is sent to every U.S. citizen when the person turns 18

- allow mail-in ballots in every election

- End all electronic voting and create completely uncomplicated, nationally standardized paper ballots

If you agree with me, spread the word. If you disagree with me, leave a comment. (You can also leave a comment if you agree with me)

Manifest for a U.S. ParliamentPart 1 - J’accuse!

Over the last few months the United States has gone through a historic election and has entered the first stages of a depression, so the underlying focus of this blog, which is fair and proportional representation of the American people in the political process, has been largely ignored. More than anything, however, institutional and constitutional issues affect economic factors, in that these factors highly affect the successful implementation of an economic and/or legal agenda. The crisis we are seeing right now is, I believe, a direct result of a non-working political system.


In two parts, I will present a manifest for constitutional change, beginning with an indictment of the current system, and continuing with a blueprint for a new one.


Below I will attempt to identify the main problems with the American political system:


* The U.S. Congress is in a state of permanent deadlock due to the bicameral system


The idea of a bicameral system where one body can overrule the other is, in reality, an idea of permanently limiting political change. The result is that it becomes almost impossible to bring about fundamental political change as society changes, and the fundamental situation that existed at the time of the creation of the bicameral system will, in essence, be preserved indefinitely. At the time of the creation of the American political system, wealthy older men were the only citizens who were allowed to, and were ever supposed to be, involved in the political process. That is largely unchanged to this day, all things considered. Even when one party controls both the house and senate, the process of making law is still very much impaired because of the almost complete lack of party unity and the democratically ridiculous practice of filibustering.


* The differentiated voting cycles between the House and Senate creates divided governments


As a result of not holding elections for the House and Senate at the same time, those two houses of Congress tend to go to different parties, as the ruling party usually gets punished by voters after a while in the majority. As a result of this, every piece of legislation that politicians try to introduce will be either shot down, watered down or changed beyond recognition. Result: a do-nothing government.


* The winner-takes-all voting system produces a two-party system


It is an undeniable fact that awarding 100% of the seats in a legislative body to a party that receives the most votes in a given constituency produces a system where only two parties are ever politically viable. Theoretically, a party could very well receive 25% of the votes and still get 100% of the seats, and this has happened before in Anglo-Saxon countries. That anyone can even try to make the case that this is fair to the voters is laughable. In many cases, a majority of the voters in the U.S. cast votes that are wasted, as a majority was in the 2000 Presidential election. Also, how can it be argued that two specific parties that take turns ruling in perpetuity, is in any way a good idea in an ever changing world? And why should there only be two parties? Do the Democrats and Republicans all stem from an eternal breed of geniuses?


* The vast powers of the President make all other politicians all but irrelevant


The United States is the only industrialized country where one person is the head of government and head of state at the same time. In addition, the President is the commander-in-chief and has veto power in Congress. In other words, the President has the ability to control almost every level of American society. As we have seen during these last 8 years, it is definitely not difficult for a U.S. President to usurp vast powers. It would not be an exaggeration to say that this country is vulnerable to dictatorship, just like Russia.


* Small states have too much power in the Senate


The fact that all states have an equal voice in the Senate is frankly absurd. If acres of land could think or feel pain, then this system might make sense, but in our world it does not. I completely understand the need for regional considerations, but the legal independence of U.S. states more than makes up for potential negative effects of populous states being more influential on a federal level. U.S. voters must realize that there is a time and place for everything. The U.S. Senate is not the place to discuss the construction of a local playground, and The Montana Senate is not the place to discuss the moral implications of abortion.


* In the United States, large-scale corruption and bribery is completely legal


The financial aspects of U.S. politics are alien and preposterous to most non-Americans. The idea of both local and national politicians going around the country begging for money from wealthy people, corporations and organizations is simply unbelievable. Most U.S. politicians don’t even try to claim that they have guiding principles for the benefit of their voters, naturally because that would be too transparent in light of billions of dollars in campaign donations. In ancient Rome, votes could be bought openly, and it is frankly not much different in the U.S. today. That U.S. voters continue to accept this is beyond me.


* The United States has, by far, the lowest voter participation out of the OECD countries


This is, of course, a testament to a non-working system. Most U.S. voters obviously feel that there is no point in voting, and many of them are consistently and strongly prevented from voting, legally and illegally. Voter suppression is so rampant that it is worthy of a banana republic. Here are some numbers of voter turnout in OECD countries between the years 1945 and 2005:


The Netherlands: 84.8%


Sweden: 83.3%


Israel: 80.0%


Germany: 80.0%


Great Britain: 73.0% (fundamentally the same voting system as the U.S.)


Canada: 66.9% (fundamentally the same voting system as the U.S.)


United States (midterm): 40.6%, (presidential) 55.1%


As you can see, the three countries with the lowest numbers all have one thing in common: they all have the winner-takes-all voting system in which very large parts of the population are shut out of the political process completely.


It’s not a working system, and it needs to be changed.




Do you disagree with me? Please leave comments, and feel free to use generalizations and accusations every bit as sweeping as mine!

Obama's Healthcare Plan

Obama is a mysterious man. Ever since he started talking about his healthcare plan, I have not really understood what the plan actually is and how it is supposed to help Americans. He has made vague statements about lowering healthcare costs by implementing changes to make medical records electronic, increasing regulation and so on. The overall goal is supposedly to bring “affordable healthcare” to every American. Moreover, this affordable healthcare is supposed to be purchased by individual citizens or companies.


Obama has said that he believes that healthcare is a right. That is a very significant statement, the essence of which every modern country in the world except for The United States has long ago put into practice. The cost saving measures I mentioned above will do absolutely nothing to reach the goal of bringing healthcare to all Americans, for one simple reason:


Everything medical in this country comes with a 15-20% mark-up


That, and that alone is the thing you need to know when trying to compare the American healthcare “system” to that of any other country. If you go to the doctor, or if you need surgery in the hospital in France, Germany, Japan, Canada, Italy, Australia etc, there isn’t anyone slapping on 15-20% at every stage in the process. The mark-up there is usually closer to 0%. In The United States, from the time that you gaze upon the face of the hospital receptionist, to the time when you file for bankruptcy because of high medical bills, private companies have profited from your illness in every conceivable way.


Recently, tangible details about Obama’s future plans for American healthcare have started to leak out. It turns out that the plan is not as lame and useless as it first appeared, but cunning and circumventing in what seems to be the Obama style of doing politics when he’s in charge. It remains to be seen if he will be able to get this through Congress, but, in essence, what Obama wants to do is to create a new healthcare provider that is 100% owned by the government! Obama did mention this during the campaign in small ways, but he certainly did not make a big deal out of it, and now it seems that this is where he aims to put the emphasis. It is a brilliant plan, in that it directly addresses the issue of mark-ups on medicine in general.


Obama has said that he also wants to increase regulation of healthcare providers, define quality of healthcare, and more, but those measures will have very little effect compared to government health insurance that directly competes with private health insurance. Why would anyone buy something with a 20% mark-up if you can buy the same thing with a 0% mark-up?


If the U.S. Government made it so that both individuals and companies could buy high quality healthcare with 0% mark-up, the health insurance companies would be in big trouble very rapidly. If you also couple that with stricter regulation, the health insurance companies would have no choice but to lower premiums, increase coverage or get out of the business. It all hinges upon whether or not Obama would be able to scale up such an insurance enough, so that it would grab a sufficient market share to corner the market. A 0% mark-up health insurance would surely come in handy for a lot of struggling companies right now.


No sane person in this country should defend the health insurance companies. They have tried everything in the book to squeeze as much as they possible can out of sick people while attempting to give them as little care as possible for decades now. What’s left for a health insurance company when they’ve done all that? They support a referendum on assisted suicide in Vermont for one simple reason:

you dead = more profit

New Banks - A Pragmatic Solution

I would like to offer a pragmatic solution to the underlying problem of the current crisis: the creation of completely new banks, unrelated to all the current ones. As I wrote in my most recent post, I believe that the true cause of the economic crisis, and coming depression, is that the financial industry has spun itself off from the financial economy and created a shadow economy, what I called the “third economy”. The third economy is hidden from everyone, including Wall Street investors and banks, and is made up of the types of assets that we now know all too well, such as packaged sub prime mortgage securities. The third economy sold this to everyone, in one way or another, and spread its “assets” around the world. The third economy was able to coat crap with gold, funnel enormous amounts of money into itself, and create a global crisis.


The reason that new banks have to be created is that all the current banks are contaminated by the third economy, as if they had been contaminated by radio activity. Write-downs of assets, marking toxic assets to “market” (I put that in quotes because there is no market, and hence the assets are worthless), or any other market function does not even come close to correcting the problem. If you’ve been contaminated by radio activity you’re supposed to take a shower, but that won’t stop your cells from disintegrating.


The TARP plan was meant to accomplish something similar to what I am proposing, but again, because of the scale of the problem, all such efforts are futile. In theory, money from the TARP plan would take all those assets away from the banks and create a new, shiny bank. Another idea has been to a create a “good bank - bad bank” solution, which would accomplish the same thing: an untainted financial institution we can all trust. However, that cannot be done because the situation is far too serious as of now.


In no way is this solution a creation of my brilliant mind - it has been used before. Dennis K. Berman recently wrote in the Wall Street Journal about this, and provided a historical context. The first Bank of the United States was created under Alexander Hamilton in order to instill confidence in the financial system. The second Bank of The United States was created in 1816 specifically to deal with a currency crisis. The important thing to remember is that confidence in the financial system is evaporating quickly, and we have to do something about that. With the help of the U.S. government, new banks can be created, with new people running them, and we can partly start with a clean slate. The old banks will have to continue to struggle, and if they survive, it will be because they can free themselves from the shackles of the third economy.


The following is a simple explanation of how this could be done. Instead of spending money on contaminated banks, the government should sponsor the creation of new banks directly. Let’s say the government creates “The New Bank”, and injects $20 Billion into it that can be used to lend to the public. The creation of The New Bank would be coupled with strict regulation in the bank’s charter with respect to leverage ratios, lending standards, codes of ethics and the like. By putting it in the charter of the bank itself, a lengthy legislative process can be avoided. The U.S. government could also implement an “investment matching” procedure, meaning that if a private investor invests one dollar in The New Bank, the government could match that.


All this would create instant confidence on the part of the financial market in this new, clean and dependable bank. Also, this type of investment actually has a very great potential of making taxpayers money, as opposed to all the other bailout attempts that had absolutely no prospects of even breaking even at any point in the future.


Furthermore, new banks with prudent standards and well-capitalized business models would necessarily create a new standard in the industry, which would enhance the stability of the American economy in the future. At least until the next wave of deregulation comes along…

The Third Economy

Unfortunately, it seems that we are heading into a depression. My prediction is that the depression will begin early next year, and that it will last for at least for 2 years. I’m going to define the beginning of a depression as the point where unemployment exceeds 10% of the workforce between 18 and 65 years of age. I hope I’m wrong.


Some time has passed since the beginning of this crisis, and more can now be understood in terms of the causes behind it. Many economists have been scratching their heads, wondering why they did not see this coming. Few, however, have been publicly talking about what they actually missed. In the public mind, and in the media discussion, everything is still centered on the problem of housing. Although that is significant, it is only a result of what I believe to be the real, broader, reason behind the crisis: the creation of a shadow economy.


Traditionally, you talk about two “economies” as existing in a country: the “real economy” and the “financial economy”. The real economy is comprised of things that concern ordinary people in their daily lives, or issues that are often referred to as “Main Street” issues. The financial economy is comprised of the business of banks and other investors, known as “Wall Street” issues. The line between the two has, as everyone knows, been seriously blurred in the last few years because of ordinary people’s increasingly severe reliance on Wall Street for their well-being. This is also an important reason behind the crisis, and this reliance will make the crisis much worse on a human level.


At some point in the early 90s, the financial economy started to change. The traditional role of this industry was to provide capital for new ventures and new investments in the real economy. Capitalists would hence invest money in things that they believed would be desired by people in the real economy in the future, and would be duly rewarded if that turned out to be true. Capitalists were, in essence, rewarded for betting on the right horse. Few people argue with the wisdom of this scheme, and even Marx regarded it as a pre-requisite to his final vision.


Then came financial deregulation. Financial regulation is something that has been around for thousands of years in human societies. The idea that someone with a lot money should not be able to profit from someone who does not have a lot of money, through deception or predatory practices, has usually been among the first things articulated in law when laws first came about in Europe, the Middle East and Asia. One of the most famous examples of this is the prohibition against charging interest that long existed in Christian countries, and still exists in Muslim countries. Ancient peoples always realized that we need laws that protect us from ourselves, such as a prohibition on murder. Likewise, they understood that we needed to protect us from ourselves when it came to financial crimes.


Financial deregulation in the United States made it so that acts that were formerly defined as crimes, became defined as completely legitimate, and even greatly encouraged by the government. It’s hard to imagine a situation where physical assault is decriminalized, and consequently encouraged by the government. What I’m saying is that, just because people have trouble understanding financial regulation doesn’t make that type of regulation any less important. (A case for intelligent politicians perhaps? Anti-intellectualism is still, unfortunately, celebrated in the United States)


At some point in the 1990s, the financial markets had been sufficiently deregulated and set free so that they could begin to create an entirely new business model that was not based on the traditional sources of revenue: interest on lent money and return on invested capital. When this happened, with the help of computer technology, what I call the “third economy” (the shadow economy) was created. This third economy was built almost entirely on borrowed money, a.k.a. credit.


By relaxing regulation with respect to capital ratios, leverage, accounting standards, ratings agencies, oversight, consumer protection, and much, much more, actors in the third economy were able to create a whole new, but fictitious, sector where a strange type of value-added financial service created a financial product. Traditionally, a so-called value-added service is something like taking a piece of wood and turning it into a chair. Everyone can understand that.


In the third economy, the actors would take a product from the real economy, such as a mortgage, and add its “value”-added service to it, and then sell it back to the financial economy and the real economy. Someone in the real economy would be a person with a mortgage. Someone in the financial economy would be Bank of America. Someone in the third economy would be Lehman Brothers. Lehman Brothers would take all these assets (they wouldn’t really buy them because they didn’t actually have much money), bundle them together, slap on a AAA-rating, and sell them.


In essence, the service that Lehman Brothers supposedly added, had no value at all. Because Lehman Brothers had access to so much credit, they could perform this trick over and over again, while giving off the illusion that they were adding a service. The combination of a worthless service sector employing millions, and non-existent capital created a giant bubble, and a new sector in the economy.


Going back to the example of the wood and the chair. Imagine that a carpenter buys a piece of wood, which he turns into a chair. A company contacts him and tells him that it will buy chairs from him at a higher price than what he could charge his customers. The company intends to add a special solution to the chairs which will make the chairs much more durable. The carpenter agrees, and starts selling all of his chairs to the company. He notices that a lot of people are buying the chairs, so he decides to buy some of them back, after they have been treated with the special solution (he does not know or own the formula, so he cannot apply it himself). He then sells the improved chairs to his own customers. This becomes greatly profitable for the carpenter, so he closes his production facility and starts only selling the chairs that have been treated with the special solution (now manufactured by someone else). After a little while, it turns out that the special solution not only does not increase the durability of the chairs, it reduces it from ten years to one year. Nobody wants to buy the chairs anymore, and customers are demanding their money back. The carpenter goes bankrupt and the company with the special solution is long gone. This is an analogy of the relationship between, for instance, Lehman Brothers and Bank of America. It could be extended by saying that the forestry company from which the wood originates also goes bankrupt, because the demand for wood has gone down the drain. The forestry company could be likened to the home owner.


Almost nobody knew about the third, shadow economy, in which borrowed money was used to add fictitious services, which in turn created the potential for more money to be borrowed by everyone. The third economy made it seem as if there were more money in the economy than there really was, and that it had been spread around for the benefit of all. The impact on the economy as a whole is as simple as it is brutal. Imagine that you thought you had $10,000 yesterday, but today you know for a fact that you only have $1,000. How would you act tomorrow?

Unclaimed Property - States Turn to Robbery to Fix Budgets

As the economic crisis continues to spread, we are seeing more and more signs of states being in serious economic trouble. Last week, California’s Governor Arnold Schwarzenegger, declared a fiscal emergency, and the governor of New York has also warned of a coming budget crisis. Job losses are increasing, and the unemployment rate may very well go above 10% in the beginning of next year, which, by some definitions, would mean that we would be in a depression. One of the more instantly visible results of job losses in the American economy is state budget shortfalls, because tax revenue decreases dramatically when job losses occur. This also has a more direct effect on the daily lives of people, as they see services cut and libraries closed. In addition, states rely on loans and other types of financing for day-to-day operations, which is obviously highly questionable, but that source of liquidity has dried up. The states must, then, try to turn to other sources of revenue, and out of desperation, they have turned to something that most Americans have never heard of: unclaimed property.


Unclaimed property, sometimes called abandoned property, is governed by an old type of English law known as escheat. The King of England at some point in the middle ages declared that any property that does not have an owner belongs to him. For example, if someone died without heirs, the dead man’s house would become the property of the King. Fast forward a few hundred years and across the Atlantic, and we have the same laws still in place. Back in the 1970s, some people realized that the states actually had vast powers to seize all types of valuable property, and started promoting this idea. The idea was very attractive to politicians, because it could provide money for the state without them having to collect taxes. Sounds great, but where does the money come from?


Here’s a fact that should have a lot of people running to the bank: in every state, the state treasurer has the right to take your money right out of your savings account and put it in its own general fund, if you don’t touch your money in 5 years. Again, if there is no activity on the bank account for 5 years, meaning no withdrawals or deposits, the state can take your money. The same goes for stocks and contents of safe deposit boxes. The state is then usually required, by law, to publish your name somewhere in a local newspaper before they go ahead and use your money in the state budget. This is so that you can claim it back, but the states usually try to make it so that people never find out about this money.


This source of unclaimed property is nothing, though, compared to what the states get from uncashed checks. If an employer writes a check to an employee, and the employee forgets to cash it, the employer is supposed to give the money to the state after 5 years. If the employer does not do this, it becomes subject to stiff penalties, and must pay the original amount as well. The state gets the most money from starting audits of corporations. Most companies, like most Americans, have never heard of unclaimed property, so they are usually unprepared, which is what the states want. What happens in such an audit is that the corporation is contacted by the state, and is asked to provide information on voided checks going back 20 years. A check can be voided for a number of reasons, but the states usually consider any amount on any voided check as rightfully belonging to that state.


So, what happens then is that the state looks at how many voided checks the company has for a given year, and the assumes that the situation has been the same going back 20-30 years. Then it adds penalties and interest. This might be a little hard to grasp, but in essence what happens is that if a company, for example: writes 10 checks for $50, and the ten employees for whom the checks were for forget to cash them, then the company could have to pay several hundred thousand dollars to the state only five years afterwards!! This is no joke, this is legalized robbery, and I’ll provide some statistics below.


In light of the economic crisis, many states have stepped up their efforts to seize unclaimed property, and many of them have publicly stated this. Here are a few very recent examples from around the country:


Nevada - The state treasurer will “increase aggressive unclaimed property collection”. This year, Nevada was so aggressive in collecting that it more than doubled the amount it projected that it would be able to collect. So far, it has collected over $44M.


Washington State - “Increase collection to over $100M”. The state changed it’s laws specifically to be able to collect more money in recent years.


California - This state was so aggressive in seizing money from people’s bank accounts and safe deposit boxes, that it was ordered by an injunction to stop all collection efforts. Among many other things, the state seized stock certificates that a man living in England had put in a safe deposit box in California. The man was going to use the money when he retired, and never thought that the state of California would steal it. He sued the state, and the case Taylor v. Chiang, consequently changed a lot of California’s law on the subject.


California currently holds $5 Billion (!) of these funds, and collects an average of $400M per year.


Delaware - This state is the worst offender. Because almost half of U.S. corporations are incorporated in Delaware, this state can perform audits on companies all over the country. Delaware seizes unclaimed checks, gift certificates, unused airplane tickets and much more, from people all over the country. 10% of Delaware’s income comes from unclaimed property! At one time, Delaware was trying to define tips for maids in hotel rooms as unclaimed property between the time that the guest left them there to when the maid picked it up. Before the maid picked the money up, the state treasurer of Delaware could have gone in and pinched it first, according to the state. Interesting policies.


This type of behavior is yet another piece of evidence of how twisted both local and federal economic policies have become. Should grandma’s pearls in the safe deposit box or some poor teenager’s forgotten check after a summer job be what provides us with roads, buses and libraries? What may be even worse is that this type of revenue collection leads to a situation where politicians don’t need to make as many tough choices, and are hence able to abdicate from responsibility for a sustainable economic situation. Relying on private charities for poverty relief and other related issues has the same effect.

Unite and Conquer

Obama’s latest announcements of people who will make up his administration has left many scratching their heads. There must be a thousand quotes from the campaign when Obama criticized the old ways of Washington and the people responsible, including Bill and Hillary Clinton. Obama repeatedly promised change in terms of political policy on almost every major issue, and this defined his campaign more than anything else. Why then, are we seeing something that almost amounts to a restoration of the Bill Clinton administration? A lot of people thought that Obama had a secret agenda during the campaign, but who would have thought that he was actually a “Bill” in disguise?


Until Barack Obama came along, I thought I had a pretty good handle on figuring out the desires and motivations of most politicians. There are usually a number of things you can point to, like party affiliations, geographical origin, personal history, education and so on. However, Obama has spent most of his career hiding his personal agenda behind a shield of pragmatism, so most of us are left in the dark when it comes to the knowledge of the full spectrum of his actual convictions. Actual convictions are, of course, a much better indicator of what is going to happen when a politician takes office than are campaign promises.


I am going to base my analysis of the issue of Obama’s true convictions on a few things that stand out about him as an American politician. I am further taking it as a given that the American political system, in its present state, does not allow a progressive political movement in the form of a political party. The examples should be seen as functional analogies. Not much else is possible in the world of comparative governmental policy analysis.


Here are a few important examples: Obama worked as a community organizer after having graduated from Harvard, when he easily could have earned an enormous salary soon after graduation at a big law firm. Obama believes that healthcare is a right, and he believes in a more equitable distribution of income in society through a progressive tax code. These examples pertain to some of the most important convictions in what has always been the true essence of domestic politics: the economics of distribution.


Had Obama been a politician in, for instance, Germany, he most definitely would have been a member of the Social Democratic Party. (The Democratic Party would have been labeled as a conservative party in Europe, whereas The Republican Party is so far to the right that it does not have any equivalent anywhere in the rest of the industrialized world).


Conclusion: I am basing my analysis on the assumption that Obama is a progressive Democrat. As such, his true convictions should guide him towards goals such as: increased market regulation, consumer rights, free higher education, guaranteed pensions and so on (it would obviously be a stretch for me to claim that, deep down, Obama believes in all these things, but you get the picture). So why is he filling his administration with people who don’t believe in these things?? (meaning people like Gates, Geithner and Romer) There are only two options. He is either:


1. Weak and/or stupid, or

2. Cunning and/or opportunistic


1. Let’s first seriously explore the first option. Ever since Obama was elected, the political establishment and the press have been screaming about the dangers of too much change. We have heard countless calls for Obama to “govern from the center”, “reach across the aisle” and to “be a centrist”. All these comments are thinly veiled attempts of saying: “don’t pursue an un-American, progressive agenda”. Obama ran on political change, and there can be little dispute over the fact that he ran on change towards the left, not towards the center.


Is it possible that Obama has faced a storm of criticism from politicians, lobbyists and other influential people that has made him bow down to the pressure and abandon large parts of his campaign agenda? Or maybe he thinks that the current economic crisis is so severe that the Democratic “business-as-usual” is a safer play? Does he think that he won’t be able to get Congress on board with his agenda? All are, unfortunately, possibilities. If any of these examples are true, then Obama’s weakness and/or lack of understanding (aka stupidity) of the current political and economic climate has guided him to select people for his administration that have agendas that significantly differ from his own.


2. Obama’s agenda always differed rather greatly from the those of the other significant Democratic Presidential candidates in that it was more progressive, all things considered. Contrary to what I mentioned above, an opposite explanation is possible:


- maybe Obama never really thought that he would be able to push his progressive agenda through, until the economic crisis came


It certainly wouldn’t be the first time that such a development came to pass. The story of FDR’s ability to create a host of institutions and pieces of legislation in order to help the common man, as a direct result of the Great Depression, is known to most Americans. However, The United states never went as far as European countries with respect to the creation of a social safety net, and later completely reversed what had been created by FDR. As a result, the social situation with respect to income distribution, consumer rights, poverty relief, healthcare, childcare, eldercare, is currently almost identical to what it was in both The United States and Western Europe in the 1920s.


During the Great Depression, the need for political changes towards a more citizen-friendly country became apparent, and the changes were carried out comparatively swiftly. In America today, there are more parallels to the time of the Great Depression in terms of the political climate. Then as now, the influence and reverence of the capital class was in steep decline. The public disgust of Wall Street firms and executives is a good indicator of this. This tends to create a climate where political need meets political will amongst politicians and voters alike, even if the political system is in a state of permanent gridlock, which is arguably the case in The United States. I come, then, to a stipulation of a general political rule of mine for this country’s political climate:


REAL POLITICAL CHANGE ONLY COMES TO AMERICA AS THE RESULT OF A CRISIS


Presidents in the past, such as Jimmy Carter, have wanted to push through progressive agendas
by appointing outsiders who share their convictions, to important posts in their administrations. What has often become apparent after a while, though, is how difficult it can be to actually get legislation through Congress without Washington insiders. With outsider firebrands, you might have a more philosophically coherent administration, but with political insiders, you might be able to get things done. HOWEVER, if you appoint people who disagree with you, you must make sure that the various views of these people do not translate into legislation that you may not agree with, at the end of the day. Can anyone say “Dick Cheney”? In order to control his administration, Obama must rule the people in it with much authority.


To conclude this rather complicated reasoning: I think it would be pretty hard to say that Obama is stupid, or that he is a complete pushover. By appointing Washington insiders it seems that Obama is seeking efficiency of political action. Obama ran on political change, even though he may not have believed that such change would be possible. The economic crisis has given Obama an opportunity to pursue his true agenda.


Obama is on a quest to unite and conquer.

Rubinomics Revisited and Rejected

There seems to be a lot of ideological, philosophical and institutional confusion going on at the moment as the new President is awaiting inauguration amidst an economic crisis. That may not be so surprising, considering the simultaneous seismic shifts in Washington and Wall Street, but if early indications are any guide, change and renewal seem to have been replaced by old patterns of behavior. The economic lessons of the 90s are seemingly being remembered, but rejected in favor of the attempts of the 70s. Both of these decades offered seriously misguided economic policies in this country, and those policies should not be recycled; they should be remembered and amended.


Robert Rubin was Bill Clinton’s Treasury Secretary, and he became famous for an economic formula, Rubinomics, that advocated the following:


1. Balanced budgets


2. Free trade


3. Deregulation


This formula was used by a number of governments, with significant variations, in the 90s, such as Great Britain, Germany and Sweden, in addition to the United States. The formula has often been seen as one that set the stage for sustained economic growth. It is not an easy formula to implement, because it is often unpopular with voters because of the spending restraint it requires. Germany’s Gerhard Schröder lost his position as Chancellor as a result of pushing for ever more reforms and spending cuts. The way that economic policies in the West manifested themselves in the 90s, whether the policies were directly responsible or not, was generally through: lower prices of goods, greater access to credit and lower government spending.


Obama has recently appointed, for the most important economic posts, three disciples of Robert Rubin, namely: Timothy Geithner, Peter Orszag and Lawrence Summers. The President is, after all, the policy maker, but these appointments nevertheless clearly make Rubinomics the most prominent current in terms of economic philosophy in the coming Obama administration.


However, the three goals that I mentioned above do not seem to correlate very well at all with Obama’s campaign issues with respect to economic policies, and even less so in light of recent statements and the evolution of ideas among commentators close to Obama. A renewed, composite view of what I believe to be Obama’s economic policies at the present time looks something like this:


1. Budget deficits (as a result of a much higher amount of government spending to stimulate the economy)


2. Less free trade (as a result of re-negotiations of free trade treaties, energy policies, new focus on domestic production, and more)


3. More regulation (which most people realize the United States needs like the desert needs the rain)


A lot of prominent economists, such as Paul Krugman, are currently calling for the government to run budget deficits and spend its way out of the crisis. The problem of the deficit can simply be dealt with later, it is felt. In a recent New York Times piece, Krugman describes these deficits as something completely benign, and money that “we owe ourselves”. He’s right about the last part, but is that so benign? No it is not, and at the current pace of incurring government debt, this almost amounts to the government taking out a sub prime mortgage. In the end, all the government can pay for, in this situation, is amortizations on its debts. It’s a simple question of plus and minus.


I believe that there are some important lessons to be learned from Rubinomics, and the most important one being fiscal restraint. Whether you’re left or right, everyone knows deep down that you can’t actually have the cake and eat it too (otherwise you really don’t understand the issue). Both the political left and right tend to run budget deficits to please voters. If you want real, lasting political change, or if you want any kind of coherent and long-lasting strategy for the future, the answer is not to shackle the country’s future to mortgage payments that will inhibit spending everywhere else. With large budget deficits, the government becomes cash poor, and hence unable to take effective action on all issues. Politics becomes the art of the permanent crisis management. So, again, whether you’re left or right, your government will not be able to realize your political dreams in a state of permanent budget deficits. “He who is indebted is not free”, said the Prime Minister of Sweden in the 90s, and proceeded to turn the country’s budget deficit into a permanent budget surplus.


With respect to free trade, that was one of the unique aspects of the 90s. After the end of the Cold War, a whole new world of trade opened up, and a globalization that had not been seen since before WW I created lower prices on many goods and commodities. Because of the unique nature of the 90s’ free trade opportunity, I believe that free trade as an economic factor tends to be exaggerated in models and discussions of policy. The main problem with the economic models that we have is that they can only look backwards, which is why they don’t work. Economists are currently pointing to the importance of free trade as a result of what happened in the 90s, which I believe was an almost unique, one-time occurrence.


Barack Obama has, rightly, during his campaign focused on increased local production of goods and services through infrastructure investment and other measures. I believe that much more goods could be produced well, and cheaply in the United States, as opposed to in Asia. This would create jobs, make products safer, reduce global warming, help local economies and housing prices and renew domestic infrastructure. Who said less free trade was such a sin?


I need not even speak of financial regulation to anyone but the most delusional reader. But to he or she who still believes that the unfettered markets can bring the answer to your prayers, I say:


- Financial deregulation is solely responsible for this crisis, which may lead to a depression. No matter what happens, we need a massive new wave of regulation to restore what has been destroyed, and expand regulation to protect us from ourselves in the future. If you know anything about people, you must know that voluntary self-restraint seldom works, especially not in the country of lavish spending and material dreams: The United States of America.


I offer, then, the blueprint for the future economic philosophy that I believe should guide Obama and his team over the next few years, with the same three-step plan:


1. Balanced budgets (“He who is indebted is not free”. In order to achieve a balanced budget, 2 things need to happen: 1. cut military spending drastically, and 2. increase tax revenue by taxing the rich)


2. Less international trade (as a result of a push to increase domestic production as a substitute for imports)

3. Much, much more regulation