Friday, January 27, 2012

Obama Memo #9: Save America with Debt-Free, Asset-Based Approach, by Sioan Bethel

Prologue

“When you, here, every one of you, were kids, you all admired the champion marble player, the fastest runner, the toughest boxer, the big league ball players, and the All-American football players. Americans love a winner. Americans will not tolerate a loser. Americans despise cowards. Americans play to win all of the time. I wouldn't give a hoot in hell for a man who lost and laughed.” -- General George S. Patton

“Americans can always be counted on to do the right thing...after they have exhausted all other possibilities.” -- Winston B. Churchill

After four years of stimulus packages, bailouts, quantitative easing [QE 1&2] and austerity measures, the patient, America, is feverishly moribund. Millions have lost their homes, millions more at risk, millions out of work, Occupy Wall St is on the march, banks still imperiled while not lending, and political leadership is contentious and ineffectual; with the promise, of more of same. More of same will inevitably lead to social unrest. A weakened nation is a matter of national security.

Obama Memo#9 demonstrates why government monetary and fiscal policies have been and will continue to be ineffectual in the face of the $15.8 trillion Debt/ $1+ trillion Annual Deficit starting line. That is why it is absolutely necessary to seriously weigh a proposition to monetize or securitize U.S. public assets to the tune of $32 trillion and use this infusion of “debt free monies” to not only redress our chronic economic dilemma but uitlize these new resources to boldly define our future.

Since these assets have been heretofore overlooked, there is no need for additional borrowing, taxation or over-issuance of fiat money. The cost-benefit ratio is $0:$32 trillion. In an Age of Abundance as opposed to one of Austerity, fiscal policy can: incorporate tax holidays for the public and business, spur public investment, spur consumption, increase human capital investment, correct the perilous vector of unfunded liabilities, augment support for research and development here and in space, refine education, all of which will produce a tsunami of wealth effects.

Memorandum #9

January 22, 2012

To: President Barack Obama

From: Sioan Stephen Bethel

Subject: Revision of the U.S. Debt $15 trillion/$1 trillion+ Annual Deficit Starting Line with 32 trillion “debt free” notes is essential to help solve the U.S. economic dilemma.

The Federal Reserve Bank policy to stimulate GDP growth [MV = PY] and sundry U.S. fiscal policies have been obstructed by the $15 trillion U.S. Debt/$1 trillion+ annual deficit starting line, which debilitates monetary expansion, austerity and deficit spending measures alike. The securitization or monetization of U.S. real assets gold reserve, without a gold standard, and public land with mineral estate for effectively $32 trillion will help to solve the nation’s economic dilemma and positively re-adjust the Debt/Deficit starting line to the point conventional macro and micro economic policies can regain full torque and traction.

Flagging Measures

Fed Policy [MV = PY] blunted by:

The breakdown in money velocity, as banks and consumers fail to lend and spend, respectively. Fed money base expansion since 2008 = 247%; while M2 expansion, for the same period = 34%. Declining Velocity = 2.12, 2007; 1.80, 2008; 1.67, 2009. Empirical studies by Carl F. Christ and others reveal that monetarist and Keynesian tools work best for economies that start with a balanced budget.*

Negative multipliers net less than 1 [a loss] in fiscal stimulus efforts, i.e. $780 billion TARP. The Christine Romer and Jared Bernstein Multiplier Study [White House] estimated a multiplier of 1.54, a 54 cent gain for each dollar of stimulus. Actual result, 2009 = 0.96%, a 4 cent loss for each dollar of stimulus, declining to 0.40, in 2011, a 60 cent loss.*

Muted wealth effects, evidenced by falling house values and stock market obliquity [spotty participation]. House values dropped sharply from 2006 level then rose slightly due to “Homebuyers Tax Credit,” 2011 prices decline to 2003 level; a 21% drop from a median price of $329,000 to $260,300*

Federal Reserve’s $16 trillion outlay to select banks and corporations during 2008 economic crisis [2011 GAO Audit], failed to allocate money to sustain endangered American homeowners [8-10 million], at cross purposes with arch Fed monetary expansion policy i.e. support of a key wealth effect, home values.

Wan response to inflationary fear by banks, businesses, and consumers: failing to borrow and invest at Fed initiated negative real interest rates and slack consumer spending despite this incentive; with currency devaluation a collateral effect of negative real interest rates* Inflation targeting double downs on inflationary fear; will it work? Former Federal Reserve Chairman, John C. Volcker at the spring 2006 Grant's Interest Rate Observer Conference, told the audience "A great mantra of central bankers these days is 'inflation targeting.' I don't understand that nomenclature. I didn't think central bankers were in the business of targeting inflation. I thought we were supposed to be targeting stability.”

“Federal Reserve furiously printing money just to maintain nominal GDP growth in the face of declining velocity” – Currency Wars, James Rickards, 2011.

Long-run threat of price inflation due to excess money printing looms over any nominal GDP growth.

Securitization/Monetization of U.S. Real Assets

Federal Reserve GDP growth policy is stymied despite the $16 trillion extension to select banks [domestic and foreign], and select corporations [GAO report, July 2011]. Re-adjusting the nation’s balance sheet, the Debt/Deficit starting line, is essential accounting to help solve the nation’s economic dilemma. This adjustment requires the monetization or securitization of American real assets.

Gold Reserve –Earlier Deployment

The American Gold reserve, 8,133 tons, without a gold standard, has a commodity value of $400 billion at $1,500 per troy ounce. If monetized or securitized with a 10% cover ratio, this gold reserve will yield 4 trillion inconvertible gold notes, effectively $4 trillion [note the gold is not sold]. All Federal Reserve Notes in general circulation from 1933-71 were backed by a 25% cover ratio, an arbitrary consideration in the present fiat money era.

These new "debt free" inconvertible gold notes, separate and apart from Federal Reserve Notes in general circulation, can be used to amortize or re-purchase foreign creditor debt holdings. In the case of re-purchase, debt interest payments become disposable income, perhaps $2 trillion per decade, depending on interest rates. The contra-lateral proof for this approach exists in the standard practice of gold banks which lease portions of the U.S. gold reserve for 1%, in turn, securitize them into a $6-7 trillion annual gold market. Bullion Bank Trading – A Closely Guarded Secret - Precious Metals - Resource Investor Source: resourceinvestor.com

The earlier deployment of the U.S. Gold Reserve not only prevents but supersedes its use as a backstop for total economic collapse; shifting the initiative to achieve American economic stability, if not prosperity.

There would appear to be no conflict with the “owner of record” of the gold reserve, the public, securitizing or monetizing the gold even as small portions of the gold are leased to bullion banks, though a technical and legal review is advisable.

U.S. Public Land with Mineral Estate

Benjamin Franklin preferred land backed currency to the precious metal-backed kind [History Magazine Cover Story, October 2010]. He successfully argued for its adoption in Colonial Pennsylvania in 1729, and later printed this type of currency for the Colony. His example was later adopted by the French (Assignat, 1792) and Germans (Rentenmark, 1924).

The United States possesses 700 million acres of public land with mineral estate i.e. oil, natural gas, coal etc. With a modest valuation of $10,000 per acre, the land will yield $7 trillion at a 100% cover ratio (1x); $14 trillion at a 50% cover ratio (2x); and $28 trillion at a 25% cover ratio (4x). The Marcellus Shale tract alone is valued at $1 trillion, one of scores in the U.S. [note public land is not sold]. There would appear to be no conflict with the “owner of record” of public land, the public] securitizing or monetizing the land even as small portions of the mineral estate are leased to private sector interests, though a technical and legal review is in order.

With 32 trillion inconvertible gold and land notes on hand, effectively $32 trillion, America can tame its national debt and unfunded liabilities with enough money left over for robust human capital development, public investment, and tax holiday for the populous and business, all of which generate additional wealth.

Assessment

The introduction of 32 trillion gold and public land inconvertible notes and their intervention to retire or re-purchase foreign creditor held U.S. debt, effectively redresses the U.S. financial economic problem while restoring conventional macro/micro economic policies [MV=PY] to proper working order. The money also affords fiscal policy latitude, a 6-8 million homeowners bailout, a tax holiday for the populous and business, and public investment; all with intended wealth effects. These propositions require no borrowing, taxation, or over-issuance of fiat money, and are thus perfectly suited to America's troubled body-politic.

*Data collected from “Currency Wars,” by James Rickards. Special thanks to Mr. Rickards for his fine exegesis of contemporary Federal Reserve and U.S. fiscal policy.

Codicil – Power Distribution Curve in Strategic Decision Making

Much has been made of the misuse of the bell curve distribution in Value at Risk (VAR) models, a major contributing factor to the 2008 financial and economic crises. The assignment of total risk to the tail-ends [.10%] of the normal bell curve distribution disproportionately minimized the risk, scale, and complexity of the ensuing crisis.

The more appropriate power distribution curve [L- shape] would have revealed the small but constant risk of large scale and complex economic disorders [a flock of Black Swans closely paralleling the horizontal axis] heightening vigilance, judgment, and preventive protocols in the markets and regulatory bodies.

The surfeit of conventional economic policies, monetarist, Keynesian, and austerity, to address the chronic maladies of the 2008 debacle, cluster around the mean/median of bell curve distributions in decision making. Bracketed in counterfactual claims of effectiveness, they have thus far failed to deliver a breakout from the double envelopment of America’s past, present and future economic liabilities.

A $32 trillion asset-based approach that matches the scale and complexity of the U.S. $15 trillion debt/$1trillion+annual deficit problem, yet lies outside conventional economic policies, is a Black Swan solution for a Black Swan problem.

Codicil II

The over simplistic dichotomy between the public and the private sectors is good for politics but poor for governance in America. The taxpayer bailout of the financial sector in 2008 and continuing economic crisis underscore this point. Thus it is unseemly that public assets, land and gold, are leased for pennies on the dollar to private interests, when their monetization or securitization on behalf of the nation yields trillions of dollars. There is no inherent contradiction between conducting both operations, since the owner of record, the public, can value assets while continuing to lease them.

A Fillip for the Eurozone

In the case of the Eurozone, a reduction of the gold cover ratio of Euros, from 15% to 10% would produce 1/3 more "debt free" Euros, separate and apart from those in general circulation, with which to amortize or repurchase a significant portion of EZ sovereign debt; with a lot left over for public investment, tax reduction and human capital investment. In the case of re-purchasing debt (public/private account), debt interest payments would become disposable income, perhaps 2 trillion Euros per decade. The gold cover ratio is arbitrary in a fiat money era. Why then is the EZ borrowing money with an 11,000 ton gold reserve? Ostensibly, the gold reserve is there in case of a complete meltdown that its earlier deployment can prevent. The same rationale is applicable to the U.S.

Epilogue

“Insanity: doing the same thing over and over again and expecting different results.” -- Albert Einstein

There are no “magic bullets” to solve the present economic crisis, say those leaders and their clerical economic advisors, who were of a consensus that no crisis was imminent. Historically, this has always been the initial reaction, look a gift horse in the mouth, especially one worth $32 trillion. The nation desperately wants change, deliverance, the question is will they and their elected leaders know it when they see it, let alone demand it?

Federal Reserve and U.S. fiscal policies have been pushing on a string to increase GDP for the past four years. The Congressional Budgets Office (CBO) projects a $24 trillion U.S. National debt in 2022 irrespective of monetary, fiscal and austerity measures. With the continuous political star wars, this is an underestimate. Debt interest payments on a debt of this magnitude would approach $1 trillion annually or more, depending on interest rates. These numbers mask the real pain, suffering and stultification that a significant part of the nation is bearing. Shall we study and try new alternatives, can we do better?