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.

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.

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.

Financial Meltdown; Part Two?

How fast things can change; in either direction. I studiously try to avoid thinking in short term time frames. It usually leads to sub-optimal, emotionally driven decision making, rather than longer term strategicially driven decision making. Sometimes, however, near horizon events are compelling enough to warrant shorter term tactical changes of direction.

I do not see the global financial system being on the verge of a financial apocalypse, at the present time. Last year, at this time, presented a distinct possibilty that we were. Nonetheless, there are a number of very troubling signs on the near term horizon. One of these is an increasing probabilty of a sovereign debt crisis acting as a catalyst for global financial meltdown part two.

A number of countries and regions, such as China, Brazil and India, appear to be economically strong and gaining traction. In and of itself, this might lead one to believe in the underlying attractiveness of some portion of capital allocation to these regions. I concur in the the underlying premise of longer term opprtunity in theses regions. However, there are a number of factors which temper my longer term view of these opportunites, and their derivative considerations, to warrant shorter term tactical changes.

Among these considerations is the growing potential of sovereign debt crises acting as a catalyst for "Global Financial Meltdown, Part Two". The United States and the European region, in general, are seriously problematic. Several countries, in particular, are at the leading edge of a potential governmental solvency crisis. These are Greece, Spain, Italy, and England. S & P recently lowered the debt worthiness rating of the second largest economy in the world, Japan. Because of the growing deficit problem in our own country, and a Congress that may not be able too deal with it, even if the U.S. Congress were to be functional, it appears that the United States may not be too far behind with respect to a solvency crisis within the next five to ten years. This is but one of a number of signifcant factors which should prompt some additional strategic thinking away froma "full steam ahead", business as usual mentality.

As should be quite evident from our recent experiences of the 2007-2008 global financial meltdown, as people ruah for the exit, even assets which have strong underlying fundamental strength get painted with the same brush of value deterioration as panic sets in. Indeed, from a longer term perspective, these can be rare opportunities for the investor, assuming the emotional, pyschological, time, and financial abilities to withstand the ensuing trauma and economic dislocation.

In my opinion, a more prudent approach would be to err on the side of caution. After the financial market runups from March 2008, it appears to me unreasonable to expect, and improbable to achieve an immediate followup to this. The chances are that if we have really turned the corner with regard to a sustainable economic turnaround, there will be many years of compelling opportunties ahead. On the other hand, if reconsideration of the financial landscape leads one to believe in at least a reasonable prospect of financial meltdown, part two, it would be prudent to consider a more defensive portfolio allocation.

These are soome of hazards of the economic and investment landscape at the present time. It does nott consider unaccounted for contingencies, which seem to always arise in some form or other. It presents a set of risks, as well as a set of opportunities. In my opinion, the best way in which to deal with this environment is to maintain a vigilent and critical view of ongoing events. It is necessary to be responsive, while not over-reactive, as to how they may impact our longer term strategic outlook. It is important to keep in mind is that no one has a perfect crystal ball, and that because of institutionalized imprudence, there really is no safe harbor left. The most effective management will how well potential risks and rewards can be balanced in the midst of growing global economic dislocations and the financial restructuring resulting thereof.

Mega Bailout

For a financial crisis of the monumental proportions now officially acknowledged to exist, the thought that a well thought out “solution” can be cobbled together in the time period of a week or so, has more of the hallmarks of an act of desperation rather than of sound public policy. Though it may be a needed response, the probability of success is anything, if not unclear. Moreover, the ramifications of the indirect effects, let alone the direct effects would require, from a more prudent perspective, some more in depth analysis before committing a potential $700 billion to this end. It is tempting and, at least temporarily, reassuring, judging by the market’s response to such a sketchy proposal, to believe that throwing a massive amount of money at this problem will make it go away. There are many unanswered questions.

Some observations, thoughts, and questions are:

In billions of $s:
AIG Bailout $85
Fannie-Freddie Rescue $200
New Bailout Proposal $700
Next $??

It looks like we're talking some pretty big money. We already depend upon about $65 billion per month being loaned to the U.S. to continue operations from foreign sources. Essentially, the U.S. was already insolvent before this latest bailout proposal. It is difficult to see how the U.S. dollar won't be adversely affected. The actions of the Government seem to lend credence to the idea that the "ultimate" solution will be to "monetize" debt. This would be a very inflationary factor.

How long will foreign sources continue to lend to the U.S. under assumptions of high credit worthiness. The U.S. is no longer considered the best credit risk in the world by some rating agencies. This may push the cost of continuing to finance U.S. government operations with foreign capital higher. Control of the U.S. economic and financial future has been effectively transferred to foreign sources of capital.

If this new bailout entity is to purchase toxic assets from banking institutions, how are these assets to be valued if dubious models and assumptions came up with spurious results to begin with, what model and assumptions are now to be used to assure the use of public funds is not directed towards supporting fictitious valuations? Moreover, if the capital requirements of institutions holding these assets requires raising more capital now, presumably the thinking is that by taking these assets off the balances sheets if these financial institutions will allow them to more easily raise capital. Even is this were true, if would seem that with the U.S. Governments need to raise capital to fund these bailouts, and quasi-bailouts, with the entry of institutions also entering the capital markets to recapitalize, might there be some degree of competition for funds and a “crowding out” effect? If so, wouldn’t this push up the cost of capital and put a additional damper on economic growth?

The manic response of the markets to a very sketchy solution to an enormous problem defies a rational context of financial analysis. The events of the last several weeks demonstrate how greatly sentiment, and the absence of sound thinking, appears to be driving market responses.