- We were promised a "New Economy" of high-tech
tradable services to take the place of the offshore manufacturing economy.
Wondering what had become of the "New Economy," Duke University's
Offshoring Research Network searched for it and located it offshore. Yes,
the activities of the "New Economy" are also outsourced offshore.
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- Call centers, IT operations, back-office operations,
and manufacturing have long been moved offshore. Now high-value-added proprietary
activities such as research and development, engineering, product development,
and analytical services are being sent offshore. All that's left is finance,
and it is crumbling before our eyes.
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- Independent broker-dealers are disappearing: Merrill
Lynch, Bear Stearns, Lehman Brothers. These venerable institutions were
too thinly capitalized for the risks that they took. Merrill Lynch is now
part of the Bank of America, and Lehman Brothers is history.
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- Ill-advised financial deregulation led to financial concentration
and not to more efficient markets. Independent local banks, which focused
on financing local businesses, and Saving and Loan Associations, which
knew the local housing market, have been replaced with large institutions
that package unanalyzed risks and sell them worldwide.
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- Regulation over-reached. The pendulum swung. Deregulation
became an ideology and a facilitator of greed.
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- Deregulating electric power gave us Enron.
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- Deregulating the airlines destroyed famous American brand
names such as Pan Am, shrank the number of companies, and caused a decline
in service. When airlines were regulated, they could afford standby equipment,
and cancelled flights were rare. Today, the bottom line prohibits standby
equipment, and mechanical problems result in cancelled flights. When economists
calculated the benefits of deregulation, they left out many of its costs.
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- There are no longer any blue chip companies, which means
that investing for retirement has become a crapshoot. People realize this;
thus, the privatization of Social Security has no support.
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- If we look realistically at the US economy, we see that
what is not moved offshore is being bailed out. Last year, the US Department
of Energy was authorized to make $25 billion in loans to auto manufacturing
firms and suppliers of automotive parts. Last week the Secretary of the
Treasury took $5 trillion dollars in Fannie Mae and Freddie Mac home mortgages
under its wing.
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- The Congressional Budget Office says this action by the
Treasury means "that the operations of Fannie Mae and Freddie Mac
should be directly incorporated into the federal budget." <http://cboblog.cbo.gov/>http://cboblog.cbo.gov/
Their revenues would be treated as federal revenues, and their expenditures
as federal expenditures. If the former were greater than the latter, there
would be no reason for the takeover.
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- The open question is: what do these new liabilities do
to the Treasury's own credit standing?
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- For now, this question is submerged. The traditional
practice of fleeing to the US dollar and US Treasury bonds during periods
of financial stress and uncertainty has boosted the dollar and kept interest
rates low. But sooner or later the large US budget deficit, worsened by
recession and bailouts, and the large trade deficit, which requires constant
recycling of dollars held by foreigners into US financial and real assets,
will result in renewed effort on the part of foreigners to lighten their
dollar holdings.
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- When this time arrives, US interest rates will have to
rise in order for the government to be able to continue to rely on foreigners
to recycle the dollars acquired in trade to finance the US government's
annual budget deficit.
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- The current financial problems have pushed into the background
the larger problems of the US budget and trade deficits. Goods and services
for American markets that US corporations outsource offshore return as
imports, which widen the US trade deficit. Moving production offshore reduces
US GDP and employment and increases foreign GDP and employment. Moving
production offshore reduces the export capacity of the US economy while
raising the import bill.
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- Therefore, how is the trade deficit to be closed? One
way is through the dollar's loss in exchange value, which would reduce
American consumers' real incomes and leave them too poor to purchase the
offshore goods and services.
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- How is the budget deficit to be closed when jobs are
disappearing and GDP (tax base) is being relocated offshore?
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- Not by higher taxes. Higher taxes are problematic for
a recessionary economy in which unemployment, properly measured, is already
in double digits ( <http://www.shadowstats.com/>www.shadowstats.com
).
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- Some people have speculated that the budget deficit will
be closed by dismantling entitlement programs such as Medicare. However,
considering the cost of medical insurance, this would be catastrophic for
tens of millions of older Americans.
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- The more likely avenue will be a raid on private pensions.
The Clinton administration's appointee, Alicia Munnell, as Assistant Secretary
of the Treasury for Economic Policy argued that private pensions should
face a capital levy to make up for the fact that their accumulation was
tax free. I expect that the federal government, faced with its own bankruptcy,
will resurrect this argument, as it will be preferable to printing money
like a banana republic or Weimar Germany.
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- In the 21st century, the US economy has been kept going
by debt expansion, not by real income growth. Economists have hyped US
productivity growth, but there is no sign that increased productivity has
raised family incomes, an indication that there is a problem with the productivity
statistics. With consumers overloaded with debt and the value of their
most important asset--housing--falling, the American consumer will not
be leading a recovery.
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- A country that had intelligent leaders would recognize
its dire straits, stop its gratuitous wars, and slash its massive military
budget, which exceeds that of the rest of the world combined. But a country
whose foreign policy goal is world hegemony will continue on the path to
destruction until the rest of the world ceases to finance its existence.
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- Most Americans, including the presidential candidates
and the media, are unaware that the US government today, now at this minute,
is unable to finance its day to operations and must rely on foreigners
to purchase its bonds. The government pays the interest to foreigners by
selling more bonds, and when the bonds come due, the government redeems
the bonds by selling new bonds. The day the foreigners do not buy is the
day the American people and their government are brought to reality.
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- This is not the financial position of a superpower.
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- Will what happened to Lehman Brothers now be America's
fate tomorrow?
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