Economic Armies

It strikes me that there's a tremendous false sense of security being generated by Congress, the Obama administration and the media surrounding the effect of the stimulus packages being discussed. Perhaps people are in denial. Consider that the U.S. government has 3 ways in which to raise money.

It can tax us;
It can sell debt in the form of treasury securities;
It can print money.

Increasing taxes is widely regarded as a terrible idea especially during a recession, and we’re already among the highest-taxed individuals and businesses in the world. The appetite (especially from foreign governments) for U.S. treasury debt has waned because of the massive amount of treasuries they already hold, low rates of return, and the devalued dollar; which leaves only one option for generating the huge amounts of money needed to 'stimulate' spending - printing it. Since 2002, the Fed has steadily increased the money supply, and continues to do so.


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The Fed and treasury total supply of money (in green on the chart) has nearly tripled since 2005 and jumped by 60% in 2008 alone. The massive amount of liquidity being injected into the system has taken a back seat to curing the deep recession upon us, but this will inevitably result in high inflation and a continuing debasing of the U.S. dollar.

When hyper-inflation happens, prices for goods and services here will skyrocket. Although the effects of inflation are and will continue for some time to be softened due to foreign currencies also feeling the effects of the global slowdown, the fact remains that we are a debtor nation and will continue to either borrow from individuals or governments via treasury debt to the extent possible, or print money to operate. If the dollar is de-valued far enough, sovereign wealth funds who now hold enormous amounts of U.S. currency reserves through treasury bonds and trade surpluses (China and Saudi Arabia together have over 2 TRILLION in U.S. dollar holdings) will likely not re-invest in bonds when they mature; and may finally opt to sell U.S. dollars for better performing, alternative currencies or allocate a greater portion or their reserves to gold. This would be catastrophic to our economy well beyond what we’re seeing now. And this is a fraction of the total U.S. currency reserves held by foreign nations. Here we're finding that economic armies truly are more powerful than military ones.

In addition, the sovereign wealth funds are now using our $70 Billion per month trade deficit against us to purchase large stakes in highly de-valued U.S. companies. Thus we're currently exporting our wealth and systematically relinquishing ownership of our country to support our excess consumption.

• Saudi Arabia owns over 30% of Citibank in New York;


• A chemical company controlled by the Saudi Fund purchased a GE plastics business for $11 Billion;


• China invested a 10% stake in the Blackstone Group, a U.S. private investment firm;


• Two international investment companies headquartered in Kuwait purchased Aston Martin from Ford Motor Company for $925 Million


• Istithmar, an investment arm of the Dubai government, bought Barneys New York for $942 million


• Before it was acquired by Bank of America, Merrill Lynch sold a special class of stock worth $6.6 billion to funds managed by South Korea and Kuwait

Even roads and bridges built by U.S. taxpayers are being sold off, and so far foreign-owned companies are doing the buying. Few people know that the tolls from the U.S. side of the tunnel between Detroit and Windsor Canada are paid to a subsidiary of an Australian company which also owns a bridge in Alabama. In 2005, the City of Chicago sold a 99-year lease on the eight-mile Chicago Skyway for $1.83 billion. The buyer was a consortium including Macquarie Infrastructure Group of Sydney, Australia, and a publicly traded transportation infrastructure company in Madrid, Spain. These are not government wealth funds, but the 'sell to foreigners' paradigm is gaining momentum and will continue as long as we are dependent on others to sustain our government operations and entitlement programs.

The U.S. Fed and Congress are essentially trying to revive our economy at all costs with money we do not have, and in doing so are exacerbating the problem and risking collapse of our currency. Even if we see a temporary bounce in the stock and credit markets near term, the fact remains that at some point in the future the velocity of money will be such that inflation will be out of control. We also have to withstand a commercial real estate meltdown which has just started. When inflation hits, the Fed will have no choice but to raise interest rates to curb spending.

There's no painless solution. Government spending has to come down. Congress should cut capital gains, dividend, and corporate tax rates. The U.S. has the second-highest corporate tax rate in the industrialized world, with a federal rate of 35 percent. The average corporate tax rate in the European Union countries is 24 percent. India and China have lower corporate tax rates. Ireland implemented a 12.5 percent corporate tax rate, and their per capita GDP is now one of the highest in the EU.

Many international competitors of the U.S. have established and maintained zero capital gains tax rates - including 14 out of 30 Organization for Economic Cooperation and Development (OECD ) countries, China, Taiwan, and Singapore. These governments seem to get it.

We need to find ways to produce and export more and import less, and move away from being a nation of borrowers and over-consumers and towards being one which saves and produces again. These changes, along with drilling for and ultimately exporting oil and natural gas could put us on the path towards being a creditor nation instead of a debtor nation. The U.S. could have the richest sovereign wealth fund in the world with the right leadership and re-prioritization at all levels of government. Instead we have massive debt and trade deficits. Someone in Washington with some fortitude needs to stand up and explain the hard truth, as unpopular is it might be.