By Peter Forman
Published: October 13, 2008
New York-- To paraphrase the Beatles, "You don't know how lucky you are, boys, to be back... back... back in the USSA."
Regrettably, due to necessity, we have become a little bit of The United Socialist States of America. But one can hope that we can unwind some of this government ownership in the not too distant future.
In our world, economic security equals national security. A country cannot be nationally secure unless it is economically strong.
Regimes built merely on military strength are ultimately paper tigers.
Witness the former Soviet Union. It was hollow on the inside.
It fought the cold war for as long as it could until it was technically bankrupt.
Its economic weakness was due to a combination of state ownership of business (socialism/communism) and a lack of personal freedoms and rights (that normally serve to inspire and motivate its citizenry to innovate, compete, take risks, and invest).
America must avoid a similar fate.
We are entering an era that few could ever have expected with the nationalization of the banking, brokerage, and insurance industries.
It would seem that given where we are today it is the least bad of the alternatives.
But who would ever have expected the Federal Government, in the USA, to actually declare its intentions to acquire stakes in broad swaths of these sectors.
What's next? Ownership in the automobile sector too. Maybe not as far-fetched as it should be.
The USA has become much more hollow over the past few decades.
To a certain extent we have become victims of own underlying weaknesses and the ponzi-like schemes of our financial sector.
Our decline began with the fall of our manufacturing base (autos, steel, etc.) and, in turn, of our export surpluses. And while the reasons for that are varied, they were ultimately based in our higher costs of manufacturing—particularly labor costs.
No economy can maintain long-term economic strength while running massive trade deficits.
The manufacturing exports must be replaced with exports of our services or products—yet we have only done so-so in this area.
Meanwhile, while our manufacturing and exports continued to decline we continued to leverage the future by paying for it with debt. Literally and figuratively living on borrowed money and time. If we had been going into debt to acquire investment assets, that would have been justifiable.
Then entered the era of cheap money which, in conjunction with loose federal regulation, allowed financial institutions to lever their businesses to the hilt. As an example, a firm with $1 million in assets was allowed to loan $30 million to borrowers. That works until the underlying assets (like complex real estate investments) begin to lose value and the borrowers begin to default. It doesn't take much marketplace decline to quickly make these institutions insolvent.
This cascaded as insurers, banks, brokerage firms, corporations, money-market funds and just about everyone else with their web of cross investments in one another quickly became tangled in the same falling asset values and over-leveraged balance sheets.
All this while the consumers continued to spend the cheap money.
So we are now in a period in which assets have been and will continue to revalue (downwards) to prices that are more reflective of their true values. These assets were valued artificially high because of the leverage, the cheap money, the loose regulation, and a failure to recognize or correct the underlying weakness of the economy.
Like an ice pond that seems strong until it cracks in a surprise burst, it would seem that we just had an ice pond failure. And to torture another metaphor, it now seems that everyone now recognizes that the king had no clothes—that the USA did NOT have strong economic fundamentals—regardless of what Bush, Paulson, and the rest of the crew have been saying.
Enough history. Where do we go from here?
Finance and service jobs typically follow manufacturing—among the reasons why the outlook for Asia is still considered to be generally strong.
Strong economies must, like the Chinese, follow the quiet path of exporting to become economic powerhouses.
America has many challenges ahead of it. Firstly, it must establish an appropriate balance in regulation of the finance industry. Not too much; nor too little. As discussed in another recent news analysis, if certain companies are "too big to fail" and would then become a ward of the state, then the state (on behalf of we taxpayers) has a right to a level of regulation just as any underwriter might require.
Secondly, America must find export industries which can grow—no small challenge in a world flush with cheap labor.
In the meantime, one area where it can clearly succeed is in repatriating the "manufacturing" of transportation energy. America imports 60% of the 7.5 billion barrels of oil that it currently imports per annum. The imports alone are valued at between $600,000,000,000 and $1,000,000,000,000 each and every year.
By unleashing the powerful forces of a competitive bio-fuels market and electric vehicle manufacturing, it can reclaim this important "manufacturing" sector.
It can unleash a wave of up to 10 million jobs.
And help revitalize moribund automobile and other sectors.
We will leave it to other news analyses to further cover, as we already have, these alternative energy industries and opportunities.
Meanwhile there is a lot that America must begin to do.
It is time to bring energy production back home.
It is time to move beyond oil.
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