Monday, July 7, 2014
How Foreign Countries Can Help Prevent the Next Great Depression Now. November 5, 2008
How Foreign Countries Can Help Prevent the Next Great Depression Now. November 5, 2008 There is No Certainty that Thing Will Necessarily Get that Bad but There is a Definite Probability They Could Lex Loeb Contributor Network . Before the big panic and crash all that Wall Street and the financial news media was talking about was the giant foreign sovereign wealth funds that were going to mangage the US Economy buying up all the goodies on our financial markets. While a lot people were taking nationalist offense that that prospect of having the Chinese and Saudis spending billion here on American ownership assets others saw the refreshing pool of capitalism. Had the foreigners used up their sovereign wealth funds at that moment they would have wasted their money on a lot of way over priced US stocks. But it is only in hind sight after the market crash that we can now see that. Had the foreigners done it they would have had more of our pain that we would have had in some areas. General Electric sold the Saudis their plastics division for several billion dollars before the market declines. Maybe they should have sold a lot more including their rotten financing division? The Japanese purchased trophy properties in the US before their prior market collapse about 15 years ago? At the US Peak of real estate prices at the time they purchased Rockefeller Center and the Pismo Beach country club and suffered with horrible results when the US real estate market crashed. The Japanese companies that over paid for trophy properties no longer own them and the American owners who sold out to them in the first place came out ahead having unloaded those properties. Once the US Markets started collapsing the foreign sovereign wealth funds decided it was time to stop buying here for the most part although it seems they have been buying US Treasuries inflating the value of the US dollar in reaction because to earn interest in US dollar holdings a country or any other owner has to invest them in some us bank account, bond or stock as putting trillions of dollars under a mattress is absurd. The fact that sovereign wealth funds and countries have lots of US dollars only means they have US trade credits. When looking at long term inflation charts for the US dollar it is absolutely foolish for companies to save these little printed pieces of paper long term or keep them as reserve currencies but they do. One reason they do is that their governments lack rule of law and real democracy. Individuals in many countries covert their local currencies to US dollars because of the instability of their own governments and because they are often subject to confiscations by those same governments. Many of the countries with big US reserves have been following old fashioned mercantile policies that say that countries should only run trade surpluses. Unfortunately with the US dollar no longer backed by gold or silver or anything else of value the security of us power and prestige worldwide is enough to keep countries hoarding dollars in practice. There is a virtual gold mine of off shore dollars at this very moment world wide held by governments and by private individuals and a lot of it is put on deposits in banks which then go to the US to go shopping for US financial assets. That is what helped inflate the US financial bubble in the first place. It certainly was not the only factor however. Most of these countries and individuals seem to be unaware that the US dollar is a wasting asset but since their own home currencies are worse there seems to be no alternative. Big Sovereign Wealth funds should not exist especially in developing countries that need their own capital to grow. It seems silly that China should want to buy up US banks and loan to US Home owners but that is what is happening even when the US growth rate is 2 percent and theirs is over 10 percent. This strange reality of US Dollar hoarding is the fundamental problem but there is a mirror image problem that goes along with it. The US does not have any convertible trade value for our dollars. That is the mistake and one reason winy markets at locked. Foreign dollar reserves need to be spent on US goods . The Bush administration saw that problem and decided devaluation of the dollar might work and that back fired big time. That is a bad excuse for a solution to the problem. Foreigners need an incentive to use their dollar reserves not a disincentive because markets are voluntary not a gun to the buyer or sellers head. Foreigners should be immediately encouraged to trade their dollar reserves for US trade goods. The effect of this is better than if the government just went out and printed new money to get the economy going as it says to do in text books because that automatically is inflationary and amounts to the same thing as a devaluation overseas. The US has trade offices overseas everywhere you go. They should put American goods on sale with coupons Now. Boeing 747 (20% off US government subsidy for every one you buy if you place your order in the next 10 days) This is considered dumping overseas in some countries and might be an illegal trade action . If it is illegal than foreigners should be put on notice that the dollar can be automatically redeemed for $1.10 if they buy any American made goods now so it does not violate anti dumping laws. If that does not work the incentive to spend now buying in the USA might have the government offering free air fares to come shopping here or print up special new dollar notes that are worth $1.20 for immediate conversion that loose their value and go to 95 cents each if not spent in the USA in 60 days. That favors no industries in the US over industries overseas. It certainly would not hurt American businesses to get the same sort of deal from the Europeans for their offshore euros! The United States government is run by people reading official government cook books and their college economic and banking text books. There is not one creative person in finance in all of Washington DC. People who get those sorts of jobs are not renowned for having any creativity and we hope that our New President may but have no idea yet because we are worried which text book people he is going to appoint to all the major open cabinet level positions. Warren buffet first floated the idea of making the US dollar a faster wasting asset to get foreigners to spend them. I see the disincentive there as major minus in getting future trade there because it is like training a dog by beating him into submission. The Marshall plan actually seemed to work after world war two so the idea of adding a dollar incentive that has conversion shelf life allows foreigners to recoup some of the devaluation that already hit them but reduces the value if they don't spend the dollar in a prescribed period so it is their choice to make the conversion and not something they are forced to do. The reason it is sure to work, with an adverse consequence of some temporary inflation possibly, is that it will create a gold mine opportunity and that is what really makes markets move. Research done on the great American gold rushes including the one in Alaska and great California Gold Rush shows that a lot of people participated in the mania but very few ended up getting rich. As a consequence, however, The United States got California and Cities like Seattle sprang out of nothing with the Alaska action packed gold rush. My suggestion is that instead of having policy wonks pretend like they are planning the economic future to just set off a good old fashioned mania to get the world markets out of their present day funk. A real gold rush would probably be better but right now the incentives to go drill for oil are going down the drain as fast as oil prices and the new administration said it is against drilling in new areas so those hopes are dashed. Their energy policy idea is also no gold mine because economic feasibility of the technologies they want to push still do not compete very well with existing sources of energy. The tax credit incentives get to be silly when you realize that the capital goods purchased with them are probably obsolete when the pay back period calculated is reached. Those things become genuine scams unless we do actually run out of alternative energy resources and the world runs out too. Starting a Gold rush is the only real alternative to jump start an economy it always has been. The great depression only really ended when war production ramped up the economy in the US, War production was a goldmine and a gold rush but no one wants a war for that purpose . The dollar value added conversion idea is a much better idea because governments are sitting on virtual mattresses stuffed with useless financial game dollars that could be spent on anything and everything the US has to sell Now. Countries that object to the US unfair trade should be free to offer Americans 30 percent euro and yen conversion rates if they want to because A lot of BMW buyers might be inspired to spend the useless US financial euros and get their economy moving too. The best way for the US to get buyers to buy up bonds and stocks is to lower capital gains rates and a tax free haven for foreigners investing. I rather don't think that foreigners should be allowed to use discount conversion US dollar to buy us financial assets just finished goods agricultural products,natural resources harvested form mining and logging. The impasse we now have is foreigners get to buy game dollars and casino dollars in the US financial markets and they are smarter enough not to spend them. Does this cause inflation? Maybe but the federal reserve and treasury are able to retire dollars as American then recapitalize banks with the incoming currency automatically and eventually reinvest the dollars they earn from foreigners in financial instruments that help raise the whole market. The inflation theory may not be correct because foreigners did sell people in the US their goods and services to get the dollars. A down side might be foreign selling of financial interest bearing notes because they can get an immediate 20 percent discount on trade goods verses 3-5 percent for a whole year of keeping a piece of paper in a vault. The trick then is to limit the number of conversion dollars and see how it works and to set the conversion ratio at less than the devaluation looses foreigners may have already suffered holding for x number of years. The discount rate is definitely inflationary and one adverse consequence is that it allows foreigners to buy here at home at less than American competitors. It is an emergency measure to produce a gold rush mentality and the big American Sale. The idea is like the Marshall plan again that really did not cause any harm to the US economy and did not end up miss allocating a big chuck of the US economy as happens with unnecessary road or train building programs or some new silly WPA program. Why is it sure to work? Because it inspires real greed and lust for American goods. With out such a program the sovereign wealth programs either stay in fancy government mattresses wasting away or they go into financial games that wall street developed to attract offshore dollars by inspiring greed with slightly higher rates of return and derivatives that were supposed to be less risky than other financial devices. How about the US department of popular mania instead of the stimulus plan proposed that simply gets Americans to go out and buy more Sony's and Toyota's when Americans need foreigners coming back with dollars we gave them for good to buy some actual goods for a change? Again If foreigners want to give me a completive discount to pay 20 percent less for a car made in Korea I don't think that our government should try to prevent them from giving me that kind of value because someone says its uncompetitive.. The more competition the better after a market crash that does not seem to be ending yet. .