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.

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

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.

Where Are We Now?

While many of us began this new year with hopes for an economic and financial recovery, unfolding events suggest that we have a ways to go before we are on the other side of this global crisis. The economy has continued to deteriorate with huge job losses, real estate prices continue to plunge, and our major financial institutions and industries continue their financial hemorrhaging. I have been studying and monitoring events with sharply focused attention. Below, I share some thoughts regarding what is currently going on. Hopefully, you will find these thoughts helpful in better understanding this environment.

Current View
Towards the end of 2008 the United States Congress agreed to provide $700 billion to keep the financial system from imminent collapse. The Secretary of the Treasury of the United States, Henry Paulsen, and the nation’s top banker, Ben Bernanke, had testified that the United States was within days of financial collapse. Congress provided for two installments of these bailout funds.

Several months later, we have had an opportunity to get some idea of the effectiveness and efficiency of the use of these funds.

The fallout from the failure of several large financial institutions had caused the global credit markets to freeze, consequently bringing global commerce to an abrupt slowdown. The public presentation of this strategy said the bailout funds were supposed to prop up the remaining mega financial institutions of the United States and stimulate the continuing flow of money, via increased lending, necessary for commerce to continue. How unsurprising that reports now emerging present a somewhat different picture of what was really going on. A recent news article reported that the CEO of a large US bank, as well a recent PBS Frontline presentation, said the bailout funds, TARP money, was essentially forced upon some banks. The apparent reason, which was supposed to be kept quiet, was to provide money for some banks to buy out smaller, weaker banks. Shortly after the TARP funds were distributed, there actually were reports of these types of bank acquisitions occurring. To the extent that this would “privatize” dealing with failing banks, this might make some sense.

One of the ways in which these TARP funds were distributed to the banks was to buy some of their “Troubled” (read toxic) assets. If the government paid a fair price for these assets, injecting money into them would be a fairly clean process. Unfortunately, however, this would not have accomplished the objective of stabilizing the financial system any better than they actually did, as I will explain.

If the government bailout funds purchased these assets for what their actual market value was, the financial system would experience an additional shock beyond what was already occurring. In order to try to make banks appear healthier than they actually were, the government needed to pay more for these assets than they were really worth. Indeed, a recent report by a congressional oversight committee headed by chairwoman Elizabeth Warren, a professor at Harvard, came to the conclusion that of the $350 billion spent on this program, the government overpaid for what it purchased by $78 billion. An additional research report by Goldman Sachs said that the real losses in the financial system will be around $4 trillion by the time this crisis is worked through. This is in the same range as estimates by economist Nouriel Roubini, who has estimated around $3.6 trillion of losses. The last estimate I read as to the already acknowledged losses in the financial system was around $1.1 trillion.

To draw the picture more anecdotally, a commenter to an economic blog, www.nakedcapitalism.com, on February 23, 2009, put it this way:
I have a personal anecdote about Citi and the difficulty of spotting how bad their loans actually are. I'm involved with a $300 million condo-hotel development in the Caribbean. Citi has the whole loan (i.e., they didn't securitize or otherwise sell participations in the loan). Even now, we expect the hotel needs at least another $100 million to finish construction and open (we are no longer under any delusions that more than a handful of buyers will close on the condo portion of the condo-hotel). So, in other words, Citi is $275M into this project, and it's not certain that the completed hotel will even be worth the extra $100M required to complete and open. Hence, one might plausibly value this $275M loan at zero (i.e., a complete write off). I cannot imagine any stress test would uncover what a huge loss is on the way in the next 12 months. In fact, this loan has not even been pawned off to the nonperforming/distressed debt/workout section of Citi because the interest reserves make it "seem" like the loan is still performing, not to mention that completely out of date pro formas make it "seem" like (i) equity will come in to finish the project and (ii) condo sales will pay down a huge part of the principal once construction is complete. This scenario must be present in a large number of Citi loans, especially in their somewhat active foreign development divisions. Citi must be so far from solvent that it's not even funny. Only hyperinflation in the dollar could ever make it possible for the borrowers to pay back some of these loans. I'd bet that the sooner we face reality on some of these loans and just halt future fundings, the less money the taxpayers are going to lose. As it is, it's almost too late. Too bad for the US taxpayer.

This suggests that we may have quite a ways to go before we are on the other side of this crisis. Other emerging areas of troubled assets are the commercial real estate sector, as well as car and credit card debt. In an economy which is continuing to deteriorate it would seem as though these problems will get worse. The new Obama administration’s continuing efforts at intervention has not inspired much of a vote of confidence by the markets as to its probability of success.

Looking Forward
There are several take-aways from all this. There is quite a bit a rot left at the core institutions of our financial system. These banks, insurance companies, and other related institutions, provide the backbone for commerce and economic growth. Sustainable and healthy investment markets require the foundation of a healthy economy. Most fundamentally, however, the ongoing financial crisis highlights the importance of rethinking assumptions about risk.

The belief that major financial institutions such as banks and insurance companies provided the “safest” investments arose from the time when these types of institutions conducted themselves in financially prudent ways. The ongoing massive financial institutional failures we have witnessed over the last year are evidence which refutes this belief in a massive way. Moreover, because of the necessity of the United States government having to bailout these institutions in order to try to save the entire global financial system from collapse, it may call the solvency of the United States government into question.
As a consequence of these ongoing events, the challenge of trying to identify potential financial safe harbors in this environment becomes all the more important. It needs to be recognized that “safety” is relative because there are many types of risks, and consequently no absolutely “safe” investment. However, in my analysis and conclusion, trying to balance out these risks points me to reconfirm my conclusion that investments which have a “real use” value such as energy, food, and utilities, will maintain a baseline of economic value in recessionary times, as well as provided the most accelerating growth opportunities when economic conditions improve. This is not to say that these types of investments will not also experience price volatility. Maintaining sizable positions in a safe money market, both for added stability to portfolio values, as well as to take advantage of future opportunities is an additional defensive measure. Having a modest position in precious metals is intended to provide an additional measure of safety. The challenge of this investment environment is to try to have some exposure to the upside of a possible rapid economic turn-around, as well as to provide downside protection from continuing economic deterioration.

From the personal financial planning strategy perspective, a prudent response to these conditions is to seriously re-examine personal spending and expenses with an eye towards belt-tightening. Because many of us have become accustomed to a living standard which includes discretionary expenses which enhance our lives, this is never a pleasant topic. The other side of the coin, however, is that we may find that may of the things we believe we need as discretionary expenditures do not necessarily add to the quality of our lives, or our health. These are times in which we need to have an adaptive response, where we refocus on the things which are really important and take proactive steps to maintain health and manage stress. The bottom line is, I believe, that we will, at some point, emerge from this crisis wiser, stronger, and with some incredible opportunities looking forward.

Addendum
Banks must be in compliance with certain regulatory requirements. These requirements are intended to ensure a minimal degree of financial strength to protect depositors. A peculiar characteristic of banking system accounting requires that assets be carried in the bank’s accounting records at what is called historic cost. This is what the banks actually paid for these assets. When an asset, such as an investment is sold, the bank accounting record is then adjusted to reflect the actual price at which the asset was sold. This means that if a bank paid $50 million for an investment in some type of sub-prime real estate investment, and it was now worthless, as long as the bank did not sell this investment, it would appear on the banks records as being worth $50 million. Consequently, a very financially sick bank could appear healthy as long as it did not sell, or adjust (called mark to market), its troubled assets.

Reflection and Analysis

A Look Back

Shock, confusion, and fear are probably some words which describe many people’s overall experience of 2008. As difficult and challenging as the year was, it is important to try to make some sense out of what happened, what is happening, and provide some analysis towards a sense of where things are likely to go. To this end, I am offering my thoughts on this subject with the recognition that the complexity and magnitude of world economic events can cloud even the best crystal balls. Having said this, those of you who have read my book, The Emperor’s Clothes, know that I discussed many of the issues of this global financial crisis prior to their occurrences.

The news of the past year has been filled with details of the institutional pillars of American finance, such as Merrill Lynch, Lehman Brothers, Washington Mutual, Fannie Mae, Freddie Mac, and many others, collapsing or being taken over because of pending collapse. This has been followed by the frenzied attempts of the world’s Central Banks, such as the U.S. Federal Reserve Bank, coming up with one scheme after another to try to prevent a complete breakdown of the global financial system. Indeed, while trying to get support from Congress for a $700 billion bailout package to save the U.S. banking and financial system, the chairman of the Federal Reserve Bank, Ben Bernanke, and the U.S. Secretary of Treasury, Hank Paulson, testified before Congress that the U.S. financial system was within days of collapsing.

Massive indiscriminate selling pressure was created as a result of this financial turmoil. These institutions were forced to raise capital to meet their regulatory requirements. At the same time the credit markets froze up, capital very difficult to acquire. This made the situation even worse. Hedge funds are investments for institutions and very wealthy individuals. They operate by borrowing huge amounts of money using their invested positions of stocks, bonds, and more the esoteric derivative investments, as collateral. Some of these funds borrow 30-40 times the amount of actual dollars directly invested in them by their investors. The lenders who provide this money to the hedge funds have lending requirements which require the hedge funds to come up with more money if the value of their investments drops too much. During the financial turmoil, the decline of the investments in these hedge funds forced the hedge fund managers to start selling their investments whether they considered them good investments or not. This amplified the overall selling pressure and made a bad situation even worse.

Today, there appears to be some degree of stabilization from the worst of the turmoil. It will be many years, keeping many scholars employed, trying to sort out the details of what actually happened. The one thing that is abundantly clear is that financial imprudence at all levels of our society, and throughout the world, became institutionalized into an acceptable form of conduct. Imprudent lending, and imprudent borrowing, created a vicious destructive cycle of over-consumption and over-indebtedness. As with many extreme indulgences, when the party is over, we are left with a big hangover and a big cleanup job. Right now the United States in particular, and the world economy, in general, has one gigantic hangover, and a daunting clean up job.

Looking Forward

Currently the governments of the world have made massive commitments toward maintaining financial and economic stability. On a global scale, I have read estimates of up to $7 trillion dollars already committed to various bailout type endeavors. The bailout line also seems to be getting longer each time the government responds to an industry or business in financial crisis. The auto industry is the latest example. Following this bailout, I have read accounts of state and local municipalities, and the commercial real estate industry lining up to be next. When the government starts handing out money, there is no shortage of willing, ready, and potentially deserving takers.

Even if one considers these policies to be necessary to prevent an even more disastrous financial collapse, a number of issues arise which impact what the outcomes are that we can expect. One of these issues is the implementation of these policies. For example, the early reports on the banking system bailouts leave much to be desired as to the accountability of the use of the funds. The reports indicate that many of the recipients of the bailout funds are unable or unwilling to account for their use. Other reports suggest a business as usual attitude for many of these troubled institutions. They seem to feel at liberty to pay huge bonuses and compensation packages, and provide extravagant perks to the very management personnel who contributed to bringing about this disastrous situation. It was only when the spotlight of public opinion focused on some of these issues that public relations considerations brought about a more contrite demeanor in these institutions. This suggests to me that the only thing that has really changed is the public relations campaign.

Another issue, which I refer to as the elephant in the living room is: How are all these bailouts going to be paid for? In addition, the other component of trying to climb out of what is being referred to as the worst financial crisis since the Great Depression, is the massive economic stimulus package being put together by the incoming Obama administration. It may, perhaps, be necessary, but there are also consequences. It is the consequences that, in my opinion, will provide both the hazards, as well as the long term opportunities from an investment and financial planning perspective.

Current discussions of the economic stimulus package lead me to believe that by the time it becomes policy it will have a cost ranging from $1-$2 trillion over a two year period. The funding for this will be added to the operating budget deficit of the United States. Prior to all these bailouts and economic stimulus packages, the United States had already needed to borrow $60-$70 billion per month in foreign money in order to continue funding its operations. Luckily, China, the petrodollar countries, and the other countries accumulating U.S. dollar reserves were doing well and were quite willing to continue lending money to the United States. The question that must be asked now is: How willing and how able are these countries going to be to continue loaning money to the United States to fund its budget deficit?

Many of these countries are having a more difficult financial time themselves in the present financial crisis. Many of these countries were, prior to this financial crisis, considering reducing the amount of money being loaned to the United States. In addition, because of this financial crisis the credit worthiness of the United States has deteriorated, and there are alternative places where these countries can deploy their financial resources which may be more directly beneficial to themselves. The funding requirements of the United States its meet the Budget Deficit needs may rise above $150 billion per month; the conclusion is inescapable of a potential funding crisis as being one of the major consequential fallout of the current attempts to contain this financial crisis.

It is exactly here that both the risks and the opportunities reside. In my estimation, the results of these circumstances will result in escalating interest rates, which is another version of credit availability reduction, and a damper on economic growth. This would be an unacceptable outcome for our government whose interests are critically tied to economic growth. The policy response will be an attempt to create vast amounts of money in order to effectively devalue debt, and consequently the dollar. Current economic policy discussion focuses on the immediate deflationary impact of the global financial crisis. However, I believe we will be seeing a very real potential of rapidly escalating inflation by the later part of 2009.

If we remember that the basic function of money is as a store of value and the viability of this function becomes impaired, it is important to consider where economic value will be best preserved, or even increased. Some of investment areas which I will be scanning for appropriate opportunities will be in areas such as precious metals, as well as real use assets such as energy, food, and materials. The added benefit to these areas, apart from providing a potential defense against some of the forces I discussed, is that when the global economy begins to get through this financial catastrophe, these will be among the things which will be crucial to growth and in consequently high demand, with limited supply.