America's History of Empowering Wealth

by Jarl Jensen

Ronald Reagan won the presidency by promising a cut in taxes and regulation. Reagan pledged to a laissez-faire approach would re-ignite the consumer market.

  Despite cuts in many areas, Reagan was unable to fight against the effects of foreign owned government debt. No amount of tax cuts could prevent the government from deficit spending. Under Reagan, the national debt nearly tripled from USD 997 in 1981 to USD 7.8 trillion in 1989.

  Why were two administrations unable to turn the economy around? The answer can be found in the sale of national debt to foreign governments to fund deficit spending. By Reagan’s second term the economic recovery was fueled by cheap imports, credit card spending and a retail boom. At this point America’s citizens had adjusted and were taking advantage of the new economic possibilities of a strong dollar and a government that borrows money from foreign entities. Reagan professed the virtue of a strong dollar.

  Selling National Debt: The Secret Policy that Propelled Stagflation

  Finding answers to explain why the American economy tanked in the 70s and 80s is difficult if you only look at the official monetary policy of the Fed.

  The infamous 20% fund rate implemented by Volker in 1980 is heralded as a bold policy to save the economy from disaster. Ultimately, it transferred all the economic pressure to tax paying citizens and created a recession. All the while, the fed’s monetary policy sanctioned the sale of national debt to finance further deficit spending. The high interest rates made the dollar even more valuable forcing the American economy to import cheap foreign goods and transition the economy to depend on it for growth. The transition meant the upheaval of almost every citizen who had to figure out a new way to make a living.

  Until the 1970s, foreign nations owned less than 5% of the national debt. As the American economy began to sag in the 70s, this percentage began to rise. By 1975 it was at 17%. Foreign governments are not stupid their strategy is to prop up the American economy with debt, so they can sell their cheap products now and eventually they will collect their debt with interest. Thirty years on, and the international ownership of US assets has increased dramatically.

  Many consider post WWII a period of virtuous economic expansion in America. The national debt built up through the war was dramatically paid down through high taxes and an expanding economy after the war. The debt built up during WWII was owned by American citizens when the debt was paid back it went to the citizens who used the money to spend, expanding the economy. This is very different from the mess we find ourselves in today.

  Five Reasons Foreign Owned National Debt is Addicting to the American Government

  Expanding the national debt allows for lower tax rates for the wealthy. The wealthy pay for the campaigns of America’s politicians. In essence, it’s almost impossible to be elected to higher office without the backing of wealthy sponsors who want lower tax rates.

  Lobbyists are paid by wealthy American’s to get congress to pass legislation important to their business interests. Congressmen often take part in the benefits that the businesses receive from the passed legislation. This is why many politicians leave office wealthier then when they entered office. Many tax loopholes are written into legislation by lobbyists, while it’s great for their business interests its terrible for the deficit.

  Low Interest Rates: When foreign countries buy American debt, they essentially hold off on buying American goods and services. This makes the American dollar go up in value since the American government is being paid for by another country. In a global economy, the government benefits because it keeps inflation down as products from other countries are less expensive. This allows the federal reserve to keep interest rates low and that allows the economy to grow from more borrowing.

  Debt is Cheap: As foreign governments buy American debt the dollar gains buying power which reduces inflation. Reduced inflation means the Federal Reserve can lower interest rates on loans. These interest rates represent the cost of borrowing money. A lower interest rates means the governments cost to borrow money is less. This makes running a deficit seem reasonable even attractive.

  A strong dollar benefits business in a global economy. A strong dollar allows businesses to take advantage of lower labor costs and lower costs of raw materials. In turn, businesses tell their lobbyists to promote a strong dollar which indirectly means deficit spending.

  Like a Heroin Addict the Pain of Withdrawal will get Ugly

  America’s dominance is now significantly based on borrowing from foreign countries. The deficit is paying for our military, wars and tax cuts. The wealthy are roaring like the 1920’s and our military is flexing its power all over the world. For some these are indeed roaring years.

  But like a strung-out junkie, the high doesn’t last forever, the illusion of great wealth and power are not real when its paid for with borrowed money from a foreign country. Unlike the virtuous American own debt of WWII which ignited our economy when repaid, the current debt built up by our government will stifle and sniff out the American economy of the future. As the American economy is burdened with debt repayments less money will be available to expand the economy. Therefore, the economy will most likely shrink which means fewer jobs. Fewer jobs means lower pay. As the American dollar depreciates our dependence on foreign products becomes a liability that will set off inflation. The inflation will cause the federal reserve to raise interest rates. The cost of borrowing will go up which means the economy will shrink even further with even fewer jobs.

  The real sting will be felt in the stock markets. Higher interest rates mean that buying debt will be more attractive then investing in stocks. Imagine, there will be little reason to invest in stocks when your savings account is yielding 7,10 or 15 percent in interest. This will mean that stocks trading at their current level of 20 times earnings will not be attractive until they are trading at 7, 5 or 4 times earnings.

  Perhaps you are willing to wager that quantitative easing will once again save the day like it did in 2008 and the years that followed. If quantitative easing is tried while foreign governments are looking to debase the dollar, which would allow them to buy American products and assets at a discount, quantitative easing would only add fuel to the fire. Interest rates would indeed go down and the stock market would be artificially propped up once again. However, this would be at a steep cost to the value of the dollar which would see a dramatic decline relative to foreign currencies. The liquidation of American assets would begin just like it did for Greece when their debt burden become too big and unsustainable.

  The last hope for America would be the great status of the American dollar as the default reserve of global trade. The truth of the matter is that the American dollar has been used to suppress the economies of foreign countries since the IMF was established at Bretton Woods. The IMF made loans that had to be repaid in dollars trapping dozens of third world countries with debt that they could never repay. However, a devalued dollar would allow these debts to be repaid at a discount and the rest of the world would be happy to dump the dollar burden that they have lived under for all these years. These repayments would actually trigger a further slide in the value of the dollar.

  Nixon’s Deal with the Devil

  The trouble began when Nixon took office. Global trade was taking off and America was buying. Countries like Japan, France and Germany were exporting cars and goods into America and the stock pile of American Dollars was piling up. At the time these governments had several choices. They could buy American products, they could buy American debt, or they could buy America’s gold reserves. Nixon did not want to sell America’s gold reserves and America’s products were too expensive. This left our national debt as the only alternative. When Nixon refused to sell the gold, he effectively made the dollar not have a gold guarantee. In essence, the dollar was worth a dollar and not worth any gold, this is called FIAT money or a free-floating currency.

  The Federal Reserve IS the Devil

  In Nixon’s defense America would have eventually run out of gold.
The real culprit is the inflexible policies of the Federal Reserve. The Federal Reserve is owned and operated by commercial banks. Their main objective is to keep the financial sector healthy which is made up of the commercial banks, a glaring conflict of America’s interest. The banks benefit from the sale of debt. They make money from selling financial products like treasury bonds. Nixon’s greatest mistake was to not recognize that the federal reserve had put America’s economy in a box.

  The Federal Reserve’s Impotence

  Many people think that quantitative easing is a powerful weapon the Federal Reserve can wield to save America from a future financial collapse, a repeat of the Great Recession. The truth is that quantitative easing is a trick that only works as long as the dollar is held in reserve of our trading partners. The value of the dollar is completely dependent on the FX exchange which means international trade and money flows. If the dollar starts flowing back into America while the Federal Reserve is pursuing quantitative easing, then look out the ‘big fall’ will be triggered.

  Conclusion

  Many people condemn President Carter for his policies but the economy he inherited was already deep into borrowing from foreign countries. It was President Nixon that was in power when the trouble began. Reagan and Volker added fuel to the fire with tax cuts and sky-high interest rates. Now Trump is trying to repeat what Reagan has done with Tax cuts and interest rate hikes; it’s like letting the drug addicts into the pharmacy. This may very well set up America for the ‘big fall’ as the reckoning of debt payments come due. The tragic irony is that, when foreign governments come to redeem their assets, it will fall on the taxpayer who have to figure out how to foot the bill. This will likely mean a very large portion of everyone’s work will be undervalued and funneled towards debt repayment and that sounds like pain to me. The only way to get real money into the hands of consumers is to simplify the inputs to the economy once and for all before our foreign debt bearers come to cash in on our years of exuberant borrowing.

  The Consequences of a Slave Nation

  Echoes of the Civil War are still being felt today. Although the negative impacts of slavery were outlawed years ago, the rise of automation brings to bear many of the same economic issues.

  Let me explain further by proposing a thought experiment. Suppose the South won the Civil War, and slavery became legal in the Confederate States.

  How would the national and global economy adapt to this type of situation?

  A Dystopian Past and Future

  To begin with, there would be a huge labor shortage in this small portion of America. Businesses from around the world would flock to this unfettered zone of pure profit, as the allure of free labor would be too much to overlook. Corporations have always gone where the labor is cheapest, and they would champion a free-labor zone as a huge contribution to wealth and prosperity for all (but the slaves)…

  It would be far from that. Let’s assume that Confederate slaves began producing goods for the rest of the world. The huge labor surplus would be created in the rest of the world,, as nations would shift domestic manufacturing production to the Confederacy. However, something else would happen in this transplantation of labor — something that would slowly destroy the entire global economy.

  When you remove manufacturing labor (or labor of any kind) from a domestic economy, you create higher unemployment. As any economic theorist will tell you, unemployment is bad for the economy. There are two fundamental reasons for this:

  . Unemployed people are tight for cash and will not spend money like they used to. An economy with low demand is one that simply cannot grow.

  2. Unemployed people will seek government subsidies. The welfare state would balloon if all manufacturing labor was transplanted to the Confederacy. While domestic corporations make a killing on the free labor, governments are putting themselves in massive debt to keep their population alive.

  The Confederacy Would Also Suffer

  It is not only the rest of the world that would suffer. The hub of all manufacturing would also come to economic ruin for the exact same reasons. The slaves would essentially be like pawns in a global system of domination and oppression, unable to make any money of their own and thus unable to invest back into the economy. Demand would stutter to a halt as personal debt would rise. Work would become devalued beyond compare. The entire economic system would be sucked dry by the greedy corporatists who did not realize their castles were in fact made of sand.

  Slavery, Technology, and the Paradox of Growth

  You cannot have an actual growth economy when demand is either static or shrinking. That is what would have happened in a slave economy before too long. If labor is devalued, and the majority of labor itself is isolated to one region, you get a lopsided economy that does not work for anyone in the long-term.

  Slavery and advanced technology are similar on this point. Automation is the distant echo of slavery because they both lead to economic ruin. Decreased consumer spending is the result of a lack of income, and who will have income when there are no jobs left? That is what would have happened if slavery was allowed to continue, and that is what will happen if robots replace all our meaningful work.

  Conclusion

  Optimizing America is a new ideology that offers a solution to this structural problem. By limiting the lending power of the federal reserve, the government will no longer artificially inflate the economy for the benefit of banks and corporations — the very institutions that got us in this mess in the first place.

  Why ‘Trade War’ is an Oxymoron

  The notion of a ‘trade war’ between America and China is a hot topic on the tongues of politicians today — and yet it could not be more of an oxymoron. Viewed pragmatically, it is impossible to have a trade war when two nations are happily doing so much business together. As it turns out, the American trade imbalance with China suits the intentions of the Federal government. It allows them to finance further spending by selling their debt to foreign countries like China, who want to own as much American currency as they can afford.

  Trading Paper Money for Products

  Trade is essentially swapping products for dollars. One country produces a collection of goods and sells them to another country for currency. Since America enjoys the strongest currency in the world, only they can use dollars to buy products. Other countries are forced to buy American products to equalize the trade. If they do not cycle currency back into the market in exchange for a product, they risk holding money that will devalue because of inflation. This is the case for China, a country that has a healthy trade surplus with the United States.

  However, China is not buying products back from the United States. They are buying government debt issued in the form of Treasury Bills, Bonds, and Notes. Buying debt is very different from buying products — for both America and China. On the one hand, selling government bonds artificially increase the value of the USD, as each bond comes with interest. The Fed underwrites the repayment of bonds, which means they will pay it no matter what. On the other hand, selling debt only delays the purchase of American products to a later date. The interest paid on the treasury bonds will mean that China will get much more for the dollars at a later date. And most importantly manufacturing today goes idle as China and other countries hold off on buying American goods and services. This period of idle productivity is rotting America to the point of being unable to compete because America is not evolving its capabilities.

  Despite these issues with selling debt, the American government continues to do so because it offers two short-term gains:

  Cheaper Borrowing Rates. Bond yields go down when there is strong demand. Or to put another way: the cheaper the bond value is, the higher your potential yield is. The government promises to pay back the bond value plus interest rate over the determined period. So, in the first place, it is in the interest of the government to keep demand high so that their payout is lower for each bond. In the second place, increased d
emand means more borrowed money for the government to invest.

  Lower Tax Rates. If the government can access liquidity from selling bonds to foreign countries, they do not need to raise taxes. Lower taxes increase earnings for American businesses. It also increases the strength of the American dollar relative to other currencies. Thus, the cycle of buying cheap products from overseas continues!

  So why not limit the sale of government bonds? That would be the right answer if you were looking to optimize the American economy for manufacturing and the workers that it employs. However, the government is more interested in funding their military. America already has the most impressive army in the world by a long shot. In 2018 the military budget will be over $824 billion — and they need to finance this behemoth somehow.

  Conclusion

  The real issue behind the trade war is America’s national debt. If the government were fiscally responsible, they would be selling products manufactured in America to the Chinese. That is how trade should work. Instead, they choose to leverage the value of USD despite the potential for economic ruin. So when Donald Trump says a trade war is good, he is vouching for a broken American financial system that sells debt to finance the military-industrial complex. If the President and Congress were sincere about creating jobs and balancing the trade deficit, they would first and foremost address the national debt. For more straightforward logical arguments about today’s issues sign up for our newsletter here.