The Myth of the American Dream

          The United States of America has long been characterized as the land of opportunity. It was founded upon principles recognizing the inherent worth of each individual as embodied in the lines of the Declaration of Independence stating that “We hold these truths to be self-evident, that all men are created equal, that they are endowed by their Creator with certain unalienable Rights, that among these are Life, Liberty and the pursuit of Happiness”. It was for the ideals and principles underpinning the foundation of the United States of America that tens of thousands of courageous citizens sacrificed so much, including their lives, and the well-being of their families. The idea that if one worked hard and did the right thing, there was the reasonable possibility of creating better economic circumstances and a fulfilling life had made the United States of America an international star, holding out the achievement of the American Dream as a life aspiration. No doubt there are countless stories of many individuals and families who have, and are, realizing the fruits of these ideals. Unfortunately, as this is being written in late 2011, national polls show a growing number of dark clouds over Camelot. A recent PEW Charitable Trust poll[1] showed the largest number of Americans living in multi-generational households in modern history. This has been fueled by poor economic conditions that make living in a multi-generational household a financial lifeline. Other polls show the majority of Americans viewing their elected representatives in historically low esteem.

Some of the ideals represented by the United States of America as the land of opportunity seem to have been transformed into myths. The Brookings Institution is a nonprofit public policy organization based in Washington, DC. They have consistently ranked as the most influential, most quoted, and most trusted think tank. Their mission is to conduct high-quality, independent research and, based on that research, to provide innovative, practical recommendations that advance three broad goals:

·      Strengthen American democracy;
·      Foster the economic and social welfare, security and opportunity of all Americans and
·      Secure a more open, safe, prosperous and cooperative international system.
           Two of their Senior Fellows recently wrote an article[2] for the Washington Post in which they highlighted five myths about America. In their article they state that the idea that Americans enjoy more economic opportunity than people in other countries is contradicted by research showing that children born into a lower-income family in the Nordic countries and the United Kingdom have a greater chance than those in the United States of forming a higher income family when they are adults. They also note a myth that each generation does better than the past generation because men in their 30’s earn 12 percent less than the previous generation. If today’s families have a somewhat higher overall income than prior generations, it is because more family members are working to contribute to the overall income. While immigration and trade may serve as political straw men deserving of blame for the poverty and inequality in the United States, it appears that this too is a myth. The real culprit seems to be the increase in single-parent families that is driving the poverty rate. According to the article, the United States would have a poverty rate 30 percent lower than today if the same percent of single-parent households existed today as in 1970. Clearly, there are some significant blemishes on the American Dream causing a growing amount of social discontent.

       When considered along with a recent Associated Press Report that 1 in 2 Americans, a record number, is now classified as low-income[3], the general prevailing sentiment expressed by small business person Jonathon Smucker, participating is the Occupy Wall Street protest, is probably a fairly accurate representation of the feeling of many Americans when he said:
“Like a lot of Americans, I’m pretty ticked off. It’s not that there are rich people, it’s that the people with a lot of money over the past few decades have rigged the system so that there’s not a fair chance for anyone anymore.”[4]
      While the United States may be a glaring representation of the growing polarization between the have and the have-nots, a survey of world events suggests the increasing social and economic malaise is a global phenomenon.  Anyone interested in trying to plan their future must take notice of this state of affairs and ask themselves what might be responsible for this, as well as where this trajectory may be taking us?

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[1] Pew Charitable Trust, Fighting Poverty in a Bad Economy, Americans Move in with Relatives, Kochhar, Rakesh and Chon, D’Vera, October 3, 2011.

[2] Brookings, Five Myths About Our Land of Opportunity,

http://www.brookings.edu/opinions/2009/1101_opportunity_sawhill_haskins.aspx, Sawhill, Isabel, and Haskins, Ron.

[3] Census Shows 1 in 2 People Are Poor Or Low-Income, Associated Press, Yen, Hope, December 15, 2011.

[4] Pay Gap a $740Bn Threat to US Recovery, Financial Times, Harding, Robin, December 15, 2011.

Cronyism and Capitalism

Today I embark on a new project. I am beginning to write a new book investigating the impact of cronyism on capitalism. In part, I am going to take an experimental approach in posting on-going installments of this work. My hope is that my work will generate some interest in providing commentary and discussion that will affect the evolution of this book. Although I welcome constructive input and the sharing of ideas through discussion, realistically my expectations are that because of having received little commentary on past postings, this will be minimal. Nonetheless, I offer the following initial installment.


From media coverage, it appears that the frequency of new instances of financial indiscretions has been increasing. Additionally, the current global financial turmoil in Europe, a present, and globally in general, calls into question whether there is a systemic issue of commonality from which this state of affairs has emerged. If so, there are a number of ensuing questions whose answers would inform anyone interested in making more effective decisions with regard to the future of themselves, and their families. Note that while the intent of policy-makers, economists, and other social engineering types might be to find solutions for these problems, the intent of this work is not to solve to world’s problems, but rather to illuminate what may actually be going on in the hope that any insight which might be offered will serve as a support to the individual empowerment of the decision making which is more relevant to our lives on a personal scale. In the view of this writer, the magnitude of the issues emerging at a macro scale, and represented through the multiplicity of media coverage sources, and with often wide divergence of expert opinion, serve more to obscure and confuse the importance and relevance of these themes on a personal scale. Even in those instances where opinion appears to be rather uniform, a critical view of the consolidation of control of media sources, whether that is by government or business interests, suggest that the individual seeking more solid guidance as to more effective decision making for the present and future seek an independent, well reasoned, narrative which weaves many of the seemingly disparate global issues into a focused, comprehensible view which has bearing and relevance to our individual lives.

The intent of this work is to examine a theme which appears at the heart of many of the current issues being faced by the global financial system and economy. With capitalism serving as the setting for the current global crises, a common thread seems to be the distortion of effective and efficient use of economic resources through favoritism toward interested parties having access to controlling policy makers. As a consequence, the fundamental principal of access to opportunity via a level playing field is corrupted into a continuing consolidation of wealth and power to those established players with access to the levers of power. Notwithstanding examples of individuals and businesses that have successfully negotiated their own form of success, when viewed system wide, many of the global social disturbances represent some form of example. In the United States we have the Occupy movement, whose general identification differentiates the 99% from the more privileged 1%, or the of the Arab Spring in the Middle East initially precipitated by Mohamed Bouazizi, a Tunisian street vendor who set himself on fire December 17, 2010, as a protest of the confiscation of his wares and the harassment and humiliation that he reported was inflicted on him by a municipal official and her aides, or the large demonstrations in Russia against what are perceived to be unfair elections results in favor of Vladimir Putin’s entrenched power regime.

The idea of favoritism reaches its corrupting embodiment in the concept of crony capitalism. Investopedia, an online reference defines crony capitalism as follows:

A description of capitalist society as being based on the close relationships between businessmen and the state. Instead of success being determined by a free market and the rule of law, the success of a business is dependent on the favoritism that is shown to it by the ruling government in the form of tax breaks, government grants and other incentives.

http://www.investopedia.com/terms/c/cronycapitalism.asp#ixzz1gMQ9GiF7

The Investopedia discussion goes on to describe the difference in viewpoint between those of a capitalist persuasion, and those of a socialist persuasion:

Both socialists and capitalists have been at odds with each other over assigning blame to the opposite group for the rise of crony capitalism. Socialists believe that crony capitalism is the inevitable result of pure capitalism. This belief is supported by their claims that people in power, whether business or government, look to stay in power and the only way to do this is to create networks between government and business that support each other.
On the other hand, capitalists believe that crony capitalism arises from the need of socialist governments to control the state. This requires businesses to operate closely with the government to achieve the greatest success.

For the purpose at hand, the relevant focus appears to be cronyism more than the purported economic operating system chosen. As good arguments can be made for the corrupting effects of cronyism, whether they are grounded in a capitalist, socialist, monarchy, or whatever other economic-social system, we will primarily concern ourselves with examining the effects of cronyism, and its corrosive and destabilizing effects regardless of what system it is based within.

The approach of this work will be to examine specific examples economic malfeasance and crises with an eye toward highlighting potential roots in cronyism. More generally, we will be looking for system wide implications derived from these events, and more specifically, the background question we intend to illuminate is whether or not the individual is facing a “stacked deck” in the outcome of potential decisions they need to be making. If so, are there potential strategic course of action we can elect as individuals if we know we are in a game with a “stacked deck”?

The approach of this work will be to examine specific examples economic malfeasance and crises with an eye toward highlighting potential roots in cronyism. More generally, we will be looking for system wide implications derived from these events, and more specifically, the background question we intend to illuminate is whether or not the individual is facing a “stacked deck” in the outcome of potential decisions they need to be making. If so, are there potential strategic courses of action we can elect as individuals if we know we are in a game with a “stacked deck”?

Creditors of the World Are Not Necessarily Captive to the Debtors

In response to Martin Wolf's article in the Financial Times,  I offer the following commentary.

The conceptual framing of this argument is somewhat misleading. To begin with the phrase indicating a belief by creditors that they will inherit the earth suggests a context for concentrating wealth and power that is more benign than the underlying capitalist and human drive for dominance and control. There are enough examples in human history, and biology, be it modern or ancient, that one does not have to be much an historian to be compelled to believe that a basic survival instinct is to attempt to manage one’s environment so as to better the chances of surviving and thriving. Because of the complex web of relationships there is often some sort of mutual interdependence, sometimes beneficial, sometimes not so much.

The heart of Martin Wolf’s argument seems to suggest that the relationship between creditors and debtors is such that there is some sort of “lock” binding specific sets of creditors and debtors to one another. While perhaps the world cannot trade with Mars, specific parts of the world can rearrange their trading relationships and thier drivers of growth. For example, while no doubt the western developed world does serve an important function in sucking up the exports of China, it is also possible that through a combination of weaning itself from such heavy dependence on an export driven economy by developing its domestic aggregate demand, and shifting its trade relationships to for example Brazil, or even Russia, to meet some of its export needs it can transition from its heavy dependence its current export targets. As to being held captive because of its $3,200bn of currency reserves, it should be keep in mind that it is only held captive as long as the currency reserve exists in its current form. If these reserves begin to be exchanged for foreign equity positions representing control in strategic future resources that China needs, the current foreign reserves cease to be a control on China’s behavior, and rather serve to further concentrate power and wealth in the hands of those with capital.

Is this so different than when the Native Americans in New York sold Manhattan Island for the equivalent of $24 in baubles, or when the Soviet Union dissolved, dispersed shares of ownership of formerly state owned enterprises among the people, only to have aspiring oligarchs acquire and concentrate these assets for controlling interests in exchange for perhaps teh equivalent of a supply of vodka for a short period of time. There are innumerous other examples which can be given wherein the exchange of future earnings capacity (read indebtedness) for a more immediate gratification leads to servitude.

To suggest that because we are all on the same planet, as Martin Wolf does in his argument, the fix to the current capital imbalances are compelled by some notion of constraint by reciprocity is to have blinders hindering one’s vision as to the fuller range of feasible alternatives.

Recapitalize the Banks?

The concern about a Greek default is really more about the contagion effect. The central question is how does one contain the impact arising from a disorderly Greek default. From this follows the discussion about potential bank recapitalization. There are all sorts of sub-plots in the recapitalization schemes, from the moral hazard issue, to the inequity inflicted on those who have been fiscally responsible, to whether or not an effective scheme can really be created to many more. Politicians have been receiving the brunt of criticism because of the perceived lack of leadership in dealing with an extremely complex, and perhaps insoluble by mere mortals problem. I would be one of the last ones to come to the defense of the politicians, however, the political posture of the “deer in the headlights” when facing public outcry to “do something, do anything”, is understandable giving the mutually check-mated position the global financial situation has emerged into.

The idea of recapitalization is lacking unless one can quantify with some reasonable degree of confidence the extent of recapitalization that would be needed to effectively resolve the issues. I have heard plausible figures of up to $2 trillion dollars worth. I have not, however, seen much discussion of potential derivative exposure, and counter party risks which might amplify the amount of fiscal deficiencies,  and the number of systemically important institutions which may be impacted. If there is one thing that the institutional failures of 2008 should have taught us, it is that with the degree and scale of economic and financial integration that currently exists, it is all but impossible to see where the chips may fall, or the ensuing consequences. Moreover, when talking recapitalization, ultimately one is talking about using public money to enable those who, either directly or indirectly, were responsible for egregiously imprudent financial behaviors to retain their private ownership interest with minimal risk of loss. The backlash from this sort of thinking is emerging at the main street level that potentially will threaten governments if it continues. As evidence witness the emerging demonstrations in Greece and on Wall Street, and the rising pervasive discontent among so many of the affected citizenry. Perhaps a more honest and equitable approach to allowing Greece to default, and stabilizing the banking system would be an outright state takeover of those systemically important institutions to give the funding public an equity stake rather than a debt holders stake in future recovery. When looking at the impact of the US TARP program the argument is made that the US actually made money from many of its bailouts. I think, however, that this misses the point, if governments are going to use public money to bailout out private institutions, it should be done with the focus of maximizing the return of the investing public, as well as a policy measure to provide a consequence to those who have acting so financially imprudent, directly, or through agency. It really is time to start acting like responsible adults.

George Soros' European Crisis Solution

If one accepts George Soro’s solution to preventing a second Great Depression, the prognosis is indeed grim. His solution, while in itself conceptually problematic, appears in a pragmatic context to reside in never-never land. The bold steps he presents as necessary conditions to prevent a second Great Depression require the cooperation and coordination which would transcend the polarization and fractionalization of regional narrow self-interest at such a scale that defies observable reality. Moreover, while the conditions he proposes may or may not be necessary, he has not presented a convincing argument that they are sufficient conditions.

A nebulous foundation block of his strategy is to provide time for “Europe to develop a growth strategy, without which the debt problem cannot be solved”. The development of a growth strategy is central to every economic and business interest, as he well knows. The question which must be asked is what the potential drivers would be of any effective growth strategy, what are the competitive and comparative advantages that Europe could bring forth, and what the time frame for implementation would be? If this proposed growth strategy would be a palliative to the “debt problem”, one is assuming a sufficient rate of growth to offset the burden of debt service. Even assuming a growth strategy could be developed; getting a realistic idea of whether the growth rate would be sufficient to counter the demands of debt servicing takes us into the unquantifiable speculative realm. While George Soros is a demonstrably recognized master in the realm of speculation, a no small part has been his ability to be adaptable and flexible as changing conditions warrant. Unfortunately governmental and national policies rarely show the same nimbleness in response to changing realities.

http://blogs.ft.com/the-a-list/2011/09/29/how-to-stop-a-second-great-depression/#axzz1ZHNkRk4j

European Union Debt Crisis

The majority of the global economic discourse these days revolves around a central thesis; too much debt, and burdensome deficits. To some degree, the debt problem contributes to the deficit problem because of the requirements of servicing the debt. The actions of policy makers are decried as lacking in leadership as they stumble around seeking politically acceptable ways to resolve these issues, while at the same time being economically effective in really addressing the issues. The results have been skewed towards being politically acceptable via some form of “kicking the can down the road”. The economic realities suggest the end of the proverbial “road” may be near. The debt issue is more of a global issue than regional issue; or at least global with respect to the indebtedness of the western developed economies. Questions such as whether Greece remains part of the European Union seem a little flat when one considers that regardless of whether Greece is or is not part of the EU, the outcome of resolving this issue in any manner other than some sort of default is unlikely. Because of the integrated scale of connectedness, I doubt anyone, or any institution really fully knows what the unanticipated consequences and effects will be. Consequently, talk of “ring fencing” or containment of these issues smacks more of intellectual arrogance than a sober acceptance of the magnitude of the problem. I suspect that after all the “shucking and jiving” is done what we a headed for, and what seems inevitable, is a global restructuring of monetary regimes with some attempt at a functional global monetary unit, be it a basket of currencies, or for that matter a basket of commodities. Along the same line, it would seem that the only effectively managed way out of this global financial mess will be some sort concerted global effort to inflate away the real value of the debt burden.

Critique of Roger Altman's Financial Times Commentary

Roger Altman, founder and chairman of Evercore Partners and former US deputy Treasury secretary under President Bill Clinton offered commentary in the Financial Times suggesting America and Europe are on the verge of a disastrous recession. While he may be correct, I see several problems in his analysis.

 http://blogs.ft.com/the-a-list/2011/09/21/america-and-europe-are-on-the-verge-of-disastrous-recession/#axzz1YNL9mxwW

Roger Altman’s analysis and proposed resolution to the unfolding European financial debacle leaves much to be desired. Interspersed with a review the ongoing events are a great many hypothetical conjectures followed by conclusions presented as some sort of deterministic inevitability. Moreover, his proposed resolution, when compared to an existing model of what he proposes, does not appear to conclusively lead to a better result.

For example, he asks “How do we know that another recession is approaching?”. A more accurate statement would be “it is probable that another recession is approaching”. The simple fact is that none of us has a perfect crystal ball, and from what I can see there is no deterministic cause and effect mechanism that provides a conclusive outcome. Altman may be right, and then again, he may not be. To assert anything more than a probabilistic conjecture is at best an error of judgment and at worse hyperbole directed at serving some sort of agenda.

Altman follows by asserting that “there is no other credible explanation for the relentless fall in interest rates”. I suspect that there are readers who could provide other explanations. Whether they were credible may be more in the mind of the beholder. This is but one more example of the “in-the-box thinking” that keeps potentially great minds bouncing of the walls of the conceptual framework of worn out economic models. A failure to explore other potential outcomes and ways to reach them is more an indication of intellectual impoverishment than a deterministic economic conclusion.

Altman’s proposed resolution is “A single currency representing 17 separate nations inevitably requires a unified balance sheet behind it and, following that, a form of fiscal union. The time for denying the latter is over.” However, we already have an operating model of many separate governments with a unified balance sheet and some sort of fiscal union; that would be the United States. Clearly the observable evidence shouts out that this remedy is more than a little problematic as well.

Pending Global Financial Crisis

The situation in Europe is very serious. From my research and analysis, my conclusion is that a Greek default is already “baked in”. If this situation were limited to a Greek insolvency, it would probably be manageable by the EU. Unfortunately, there are a number of other European countries that
represent a much larger potential problem because of the size of their economies and banking system, Spain and Italy being among them. I have even heard reports that there are some German and French banks that may have some capital adequacy issues. Fundamentally, the real problem is the potential contagion effect that arises. A number of factors are at work here. One is that bond investors start to demand higher interest rates because of the greater risks they perceive in the markets. This only makes the problem worse because it increases the cost of borrowing specifically for countries like Greece. This in turn, makes their financial situation even more challenging. More generally, it would be reasonable to expect borrowing costs to increase because of greater
demand for scarce capital. So far governing bodies in the European Union such as the European Financial Stability Fund, the International Monetary Fund, etc, have been trying to make capital available, or restructure existing debt. While these efforts have taken a potentially explosive situation and put it on a slower burn, they have not been effective in resolving the issues. As in the
United States, even if a theoretically economic effective solution were possible, political differences interfere with the implementation. In my opinion, there will be sovereign defaults. However, even if we are “only” talking about write downs of loan balances, the question arises of the impact on the banking system’s in the individual countries, and globally. Here we have another aspect of the potential contagion effects because banks and insurance companies throughout the world, including the United States, hold these impaired assets as part of their own investments. Moreover, a major risk factor which is very opaque, is what “derivative” exposure these various institutions hold. Derivatives are complex artificially constructed investments that may magnify greatly the risk on the books of these major financial institutions.

So far, one response of investors has been more what I would call a conditioned reactive response, rather than a response that reflects economic fundamentals. That response has been to migrate toward what are perceived to be “safer” assets. These have included US government bonds and
precious metals. This has helped hold down interest rates of US debt. In my opinion, while some position may be warranted in US Government bonds, the US financial system is on the precipice of a disaster waiting to happen. It should be kept in mind that one of the largest; if not the largest holder of US debt is China. They are increasingly expressing misgivings about the US financial situation. We are also seeing an increasing migration of capital into assets like gold. This would be capital that presumably would have been available for additional debt purchases. Both from the governmental side as well as the banking and financial institution sides have capital adequacy issues.

At this point I do not see much that gives me encouragement of a constructive resolution to these issues. In my opinion, at least for the near to medium term future, we are looking at increasing financial and social turbulence. The historical evidence suggests that the way in which policy makers will focus their efforts will be to try to inflate their way out of extreme over indebtedness by creating more and more money. Ultimately this will probably not work, and if I were to have to speculate, I don’t think it out of the question that within three years there will at least be serious discussions among global policy makers about the creation of new currency regimes.

Since we are in uncharted territory on a global scale, this is a time a great uncertainty in which events could move more or less rapidly depending on what the precipitating factors are. For example, the effects of a major natural disaster, a terrorist act, or who knows what else, are impossible to determine in an already fragile global financial system.

In my opinion, and reflective of the strategy we are currently being guided by, the best defense will be diversification which is targeted toward addressing the realities of the geopolitical and economic environment for the foreseeable future. This doesn’t mean there won’t be some volatility, but the objective is to be better able to weather the storm, retain value, and take advantage of the opportunities that will arise in what appears to be an oncoming global financial crisis.