Suggested Answers to Short Quiz

[johnkarls]

.
SUGGESTED ANSWERS TO THE SHORT QUIZ

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Disclaimer = Many of you assume that the answers to these monthly short quizzes are contained in the suggested reading materials. Usually there are no more than 2-3 days between the arrival of my copy from Amazon.com before the weekly e-mail that contains the quiz is due to be sent. Accordingly, the quiz typically comprises primarily questions I would like to see answered and, to some extent, questions for which I already know the answers. Both are particularly true this month!!!
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Question 1

What is Louis Hyman's basic theory?

Answer 1

That consumer debt has driven demand and, therefore, the entire economy.

Question 2

Is his emphasis on the American economy as being debt-driven rather than consumer-driven useful?

Answer 2

Debt-driven vs. consumer-driven may appear to be opposite sides of the same coin but it is useful to the extent that the debt-driven lens focuses attention on the ability of consumers to incur debt and the psychology of whether consumers are willing to do so.

Question 3

What was the character of the American economy and its financial structure prior to World War I?

Answer 3

It was overwhelmingly agrarian. Personal loans were virtually non-existent; to the extent they existed, they came almost solely from relatives or loan sharks.

Question 4

What were, and when were, the Louisiana Purchase? The Treaty of Guadalupe-Hidalgo? The "Oklahoma Land Rush"?

Answer 4

All three represented opportunities for Euro-Americans to displace Native Americans on the land (please see Q&A 5-8).

The Louisiana Purchase (1803) was Napoleon's attempt, in the wake of the ruin of the French economy by the French Revolution (1789-1799), to sell assets at the beginning of his reign to finance his impending invasions of the rest of Europe. For 60 million francs, he sold to the U.S. 828.8 thousand square miles bordered by the Mississippi River on the East and Canada on the North, with a diagonal border to the Southwest from what is now the State of Louisiana northwest to include Oklahoma (except for the panhandle), most of Kansas, Eastern Colorado, most of Wyoming, and all of Idaho and Oregon.

The 2/2/1848 Treaty of Guadalupe-Hidalgo ended the Mexican-American War. Mexico had only achieved independence in 1821 as a result of war with its Spanish colonial master when Texas declared its independence from Mexico. In 1845, Texas importuned the U.S. to annex it in order to maintain its independence from Mexico. Mexico declared war on the U.S. and, as a result 3 years later, lost Western Colorado, Utah, Nevada, New Mexico, Arizona and California in addition to Texas (except for a southern sliver of Ariz. & N. Mex. which the U.S. bought shortly thereafter).

[Incidentally, when Brigham Young and the first 11,000 Mormon settlers arrived in Utah on 7/24/1847, they thought they had escaped persecution in the U.S. by FLEEING TO MEXICO!!! The closest fighting in the Mexican-American War was taking place in Texas and, courtesy of the U.S. Navy, in California. The Mormons must have thought it a continuation of their bad luck to be sucked back into the U.S. a mere 6.5 months after their arrival in the Utah which had always been part of Mexico from its beginning!!!]

The Oklahoma Land Rush started at high noon on 4/22/1889. An estimated 50,000 people lined up for the race to claim 160 acres each from the 2 million acres of "unassigned lands" comprising approximately half of the Oklahoma Territory and some of the best unoccupied land in North America.

[For anyone wondering why the nickname of the University of Oklahoma is "sooners" - the "sooners" were Oklahoma Land Rush participants who "jumped the gun" and snuck into the unoccupied territories beforehand.]

Question 5

What is the difference in population densities between Native American hunter-gatherer societies and European-newcomer agrarian societies? What implications does this difference have for whether the European agrarians would be able to displace the Native-American hunter-gatherers?

Answer 5

Agrarian societies can support extremely high population densities, and hunter-gather societies can support only very low densities. The greater population numbers for the high-density European-newcomer agrarians spelled disaster for the Native Americans, even if they had had comparable weaponry.

Question 6

Was there a famous phrase = "Go East, Young Woman"? What was the meaning of the correct phrase?

Answer 6

The famous phrase was "Go West, Young Man." Since personal loans were generally unavailable, entrepreneurial opportunities were almost solely confined to going west and creating with "sweat equity" a farm or a ranch or a mine.

Question 7

What is primogeniture? Does it help to explain the economic success of Europe and America? And the decline of the Arab Empire which had far outshone backward Europe from 800 AD > 1800 AD?

Answer 7

Primogeniture means the oldest son inherits everything.

In Europe where primogeniture was the rule and America where it was often practiced, it meant that successful enterprises such as a farm or ranch or a whatever weren't frequently fragmented into pieces that were uneconomic.

Arab culture included the division of property at the death of the parents among all the children equally which, incidentally, was one of the reasons why algebra was invented by the Arabs (algebra was also necessary, together with geometry and precision astronomy, to make the required pilgrimage to Mecca across vast deserts and oceans).

However, the division of economic enterprises with every passing generation meant that in the Arab Empire there were few accumulations of sufficient capital to exploit new technologies when they became available during what, in Europe and America, was known as the "industrial revolution."

Question 8

If under primogeniture, the oldest son inherits everything, what happens to the younger sons and what happens to the daughters? In this regard, is there a similarity in function between the worldwide empires of Britain, France, Spain, etc., and the American West?

Answer 8

The English always joked that the second son entered the military and the third, if any, became a cleric.

In reality, the worldwide empires of Britain, France, Spain, etc., and America's West provided a new world in which new enterprises could be created with "sweat equity."

Daughters, on the other hand, were sold like cattle. Except that cattle fetched a positive price and daughters fetched a negative price (aka, a dowry).

Question 9

What was the significance of the growth in the mortgage market between World War I and World War II?

Answer 9

Young people who were raised on America's farms, were attracted to the cities that sprang up around industrial enterprises by the dream that if they worked hard, they could afford a family and, perhaps, they could even own their own homes.

Question 10

Did the Post-World War II boom have anything to do with Louis Hyman's theory of a debt-driven economy? With the traditional analysis of a consumer-driven economy?

Answer 10

The post-war boom is probably the sole example of debt-driven vs. consumer-driven NOT being the opposite sides of the same coin.

By way of background, there was a war-time boom that was fueled by production of war materials and that finally pulled the American economy out of the Great Depression after more than a decade of disaster.

However, in simple economic terms, the war itself had to be financed by taxation or by governmental borrowing -- or the failure to use either method to remove all of the additional purchasing power that was being generated by our war-time work force would have created unbelievable inflation for the few consumer goods that were available.

By and large, the federal government opted to finance the war by borrowing -- mounting a huge campaign to sell "war bonds" which everyone felt it was their patriotic duty to buy.

Following the war, the "big picture" is that everyone began cashing in their war bonds in order to buy cars, homes and "everything else under the sun."

Incurring consumer debt to make purchases was largely unnecessary.

Question 11

When did auto loans become prevalent? Credit cards?

Answer 11

Auto loans became prevalent following World War I.

Credit cards became prevalent following World War II.

Question 12

Louis Hyman notes that all interest (not just mortgage interest) was fully deductible for federal income tax purposes until 1986 -- is his theory of why it had been deductible historically accurate?

Answer 12

Probably not. Interest expense of any kind had always been fully deductible ever since the federal income tax came into existence 70 years earlier. It was probably deductible for the same reason that "debtors' prisons" were abolished = the belief that debt should not be an abyss from which there was no escape.

Question 13

Louis Hyman claims that credit was available to minorities and to women!!! Does this ring true?

Answer 13

No.

"Red-lining" was the notorious practice of lending institutions that no loans would be granted if they were secured by property in certain areas no matter how credit-worthy the borrower -- which meant that neighborhoods could be transformed into slums almost literally overnight before the red ink outlining them on the maps of the lending institutions had dried. "Red-lining" applied solely to minority neighborhoods or neighborhoods that were becoming predominantly minority.

"Red-lining" was actually instituted by the Federal Housing Authority in 1934. The Fair Housing Act of 1968 outlawed "red-lining" and the Community Reinvestment Act of 1977 imposed additional legal restraints.

However, lending institutions have always loaned less to minorities and women because of income inequality. In addition, lending institutions were also prejudiced in general against minorities. And probably engaged in the same prejudice practiced by employers against women that they would be likely to forsake careers and financial commitments in order to marry and have children.

Question 14

What was "the flaw" in Fed Chairman Alan Greenspan's understanding/misunderstanding of the American economy?

Answer 14

Even though our book was recommended by June Taylor (aka Utah Owl) because it was credited as the basis for the Sundance Film Festival documentary "The Flaw," our author mentions Greenspan only once. And that reference related to another matter.

On 10/23/2008, Greenspan testified before Congress that the financial meltdown had been caused by the failure of Congress to regulate derivatives. He had opposed such regulation since the early 1990's. He described his position as a "flaw" in his understanding of how the economy operated.

In reality, there were at least two flaws.

And Greenspan is still ignorant of the most important flaw.

And fails to understand the less important flaw.

The most important flaw???

As we have studied in the past, both European-based and American-based multi-national companies have located their manufacturing operations in low-wage countries such as China and India -- causing, incidentally, quite a few economists to assume that the growth in the economies of China and India represent more than the exploitation of their cheap labor by European and American companies.

European continental countries, in general, follow the Napoleonic Code in legal matters and tax their companies on a territorial basis, which means that profits from their Asian manufacturing is exempt.

However, U.S.-based companies can only compete by having tax-haven subsidiaries engage in the same kind of "contract manufacturing" with Asian factories using the American company's technology and to the American company's specifications and under the American company's supervision, etc., etc. in China, India, etc. and sell the products to their U.S. parents at a high-enough price to capture virtually all of the worldwide profit of the U.S.-based company in the tax-haven sub (which is typically a "non-resident Singapore corporation.")

Nevertheless, the earnings are trapped in the tax-haven subsidiaries because dividending them back to the U.S. parent company would trigger the home-country tax that European-based competitors do not face. And loaning the earnings back to the U.S. parent (or buying/financing U.S. assets that the U.S. parent uses) are treated as "constructive dividends" with the same tax cost.

The only thing that could be done with the earnings was to invest them in commercial paper of (aka short-term loans to) UNRELATED companies.

ACCORDINGLY, THE TRILLIONS OF DOLLARS OF WORLDWIDE PROFITS FROM EXPORTING AMERICAN JOBS HAD ACCUMULATED FOR MORE THAN A DECADE IN TAX-HAVEN SUBSIDIARIES WHICH FINANCED THE COMMERCIAL PAPER OF AMERICAN COMPANIES WHOSE JOBS COULD NOT BE EXPORTED.

In 2004, Congress enacted Section 965 of the Internal Revenue Code to provide a short time period within which these trillions of dollars could be brought home at a U.S. income tax cost of only 5.25%!!!

So trillions of dollars of short-term loans by U.S.-owned tax-haven companies to unrelated U.S. companies were liquidated and the funds repatriated to the U.S. parent companies of the tax-haven companies. The U.S. parent companies used the funds, by and large, to redeem their stock (Sec. 965 had required the funds to be invested in U.S. property but that simply meant that the repatriated funds were traced to normal capital expenditures and the regular capital-expenditure funds thus freed up were used for the redemptions).

And what happened to the borrowers???

All those U.S. companies that were unable to export American jobs and that had borrowed trillions of dollars from the unrelated tax-haven companies in the form of short-term loans which they rolled over every 90 days SUDDENLY WERE NOT ABLE TO ROLL OVER THEIR TRILLIONS OF DOLLARS OF BORROWINGS!!!

Congress forced trillions of dollars OF CONTRACTIONS in U.S. companies that had NOT exported American jobs!!! And then wondered why there were economic consequences??? WHAT DID GREENSPAN AND CONGRESS THINK WAS GOING TO HAPPEN???

Meanwhile, what happened to the trillions of dollars???

They went up in smoke!!!

The trillions of dollars of stock redemptions in 2004-2006 meant that the U.S. stock market prices for the stock that remained went through the roof!!! And disappeared!!! The Dow-Jones, for example, has never worked its way back to its 2006 highs!!!

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Incidentally, just like "crab grass," the trillions of dollars of profits from exporting American jobs have re-grown in the U.S.-owned tax-haven subsidiaries since the one-time special 5.25% income tax rates of 2004 on dividends.

In this regard, two things are risible!!!

First, the American media regularly comments on how American companies are once more flush with cash and it is just a matter of getting them to invest that cash in American jobs and the American economy.

The media fails to realize that all that cash is trapped in the tax-haven subsidiaries of the U.S. companies that have already exported American jobs. And that the re-growth of the American economy will come, if ever, from the remaining U.S. companies that did NOT export American jobs and GOT SQUASHED by their inability to roll over their trillions of dollars of short-term debt back in 2004-2006 because of the ill-informed Congressional action.

Second, the U.S. media fails to appreciate that President Obama's Deficit Commission was "the best money could buy" just like, as is noted in Q&A-20 below was chronicled in the books of 20-year Business Week Columnist Richard Kuttner and long-time Washington Post Columnist Dana Milbank, the U.S. government itself is the "best that money can buy"!!!

For the uninformed (including, obviously, all of the American media), the U.S. corporate tax proposals comprise closing a few loopholes (mainly for oil companies) in return for lower corporate income-tax rates.

For anyone who can read, the corporate-tax proposals of President Obama's Deficit Commission also included SWITCHING TO A TERRITORIAL SYSTEM OF TAXATION FOR CORPORATIONS. This means that President Obama would not tax the profits from exporting American jobs!!! And President Obama would only tax companies that are stupid enough to keep jobs in the United States!!!


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So what about the less-important "flaw" that Greenspan thinks he understands???

As we have studied several times, the 2008-201? economic meltdown was also caused by sub-prime mortgage lending, fueled by PLAIN-OLD GARDEN-VARIETY INSURANCE BY A.I.G. of the value of the sub-prime mortgage pools that were marketed to investors.

And A.I.G. had the gall to label that insurance as "credit-default swaps" in a successful attempt to fool the insurance regulators into failing to regulate the insurance!!! As a result, A.I.G. did not set aside any reserves to cover losses!!! As was and is standard practice in the insurance industry!!!

So why is Greenspan as dumb as the insurance regulators???

After all, in his testimony he lumped the "credit default swap" insurance contracts in with traditional derivatives whose regulation he had historically opposed.

Greenspan has no excuse!!!

Dresdner Bank in the 1990's was not only Germany's second-largest bank but the world's second largest real bank (Japanese banks had larger balance sheets but were typically little more than shells for re-investing balance-of-payment surpluses in U.S. Treasury notes).

Dresdner acquired Kleinwort Benson (later known as Dresdner Kleinwort Wasserstein), with which "yours truly" was an investment banker 1997-2002.

Dresdner had invented derivatives. And by the 1990's, virtually all of the derivatives comprised solely interest-rate swaps and currency swaps issued by one of six large banks including Dresdner.

If a company had borrowed with a fixed rate of interest and thought interest rates would trend down, it might want to swap the fixed rate for a floating rate. Or if it had funds trapped in a subsidiary in, say, Timbuktu and thought the Timbuktu currency would soon be in the toilet, it might want to swap the Timbuktu currency for, say, U.S. dollars.

The original mechanics were reciprocal loans. If the U.S. company described above had $100 billion of fixed-rate borrowing, it would borrow $100 billion from Dresdner at a floating rate and immediately re-loan it to Dresdner at a fixed rate (the $100 billion of cash would not even change hands). Periodically, any net difference in floating and fixed would be "settled up" with a relatively small cash payment. [Currency swaps would similarly be structured as simultaneous reciprocal loans in different currencies.]

Quite soon, the mechanics evolved into "notional principal contracts" pursuant to which the parties simply agreed to "settle up" periodically with small net payments that were calculated as if real simultaneous reciprocal loans had actually been made.

Dresdner Bank and each of the other five market makers "ran a book" of more than 5 trillion dollars of such reciprocal loans or, later, notional principal contracts. Even though the worldwide net worth of each market maker was less than 10% of the "book" it was running and virtually all of its worldwide net worth would, under banking regulations, have been required to support its other operations.

[Only the net periodic payments have ever shown up in the financial statements of either the market makers or their customers because the accounting rules permit such reciprocal loans to be netted out of existence for purposes of financial reporting. The only reason for moving from actual reciprocal loans to "notional principal contracts" was to avoid the problem of a customer becoming bankrupt since, in that event, the market maker would have to pay its debt to the Bankruptcy Trustee and then receive back pennies on the dollar with respect to the reciprocal loan.]

So why was Greenspan correct that no regulation was required???

With these historical derivatives, Dresdner and each of the other five market makers was acting as nothing more than a Las Vegas casino!!!

They were simply taking bets on fixed vs. floating, or one currency vs. another while being careful, just like a Las Vegas casino, to set the odds so that the "book" was "balanced" (i.e., their customers made offsetting bets) so that the book makers were simply raking off a percentage JUST LIKE LAS VEGAS CASINOS.

So why was Greenspan so stupid???

He obviously thought on 10/23/2008 (and probably still thinks) that the plain-old garden-variety insurance A.I.G. was issuing on the value of sub-prime mortgage pools operated like the interest-rate/currency-exchange-rate "Las Vegas casinos" rather than plain-old garden-variety insurance!!!

How could an Economics PhD, much less an Economics PhD with any experience, think that putting "swap" into the name of an insurance contract somehow transforms it into a "Las Vegas casino"-type of operation???

An insurance company does NOT operate like a Las Vegas casino!!! An insurance company is NOT accepting opposing bets so that it OFFSETS the risk and creams off its percentage.

Instead, an insurance company SPREADS and DIVERSIFIES the risks (rather than OFFSETS them). Diversifying means that a property insurance company insures some homes in the Mississippi River flood plain and insures some homes in California earthquake zones -- so that it is not wiped out by either catastrophe. Spreading risk means a fire insurance company does not issue a single insurance policy on one huge mega-property, but smaller insurance policies on many smaller properties. [Incidentally, if an insurance company is not able to spread its risk sufficiently, it will offset its excess risk by purchasing an offsetting insurance policy from a reinsurance company which insures only regular insurance companies for their excess risk.]

Because an insurance company is NOT offsetting opposing bets like a Las Vegas casino, normal accounting rules require the insurance company to set aside cash in a "reserve" for statistically-expected losses with the cash invested in liquid assets during the insurance term.

[The Las Vegas casino, as explained, has no such risk unless it decides to "take a position" of its own -- that is, it acts as one of the bettors in addition to acting as the "house."]

So why is Greenspan as stupid as A.I.G.'s insurance regulators???

Who knows???

He had not previously exhibited such stupidity!!!

Incidentally, Goldman Sachs and several other financial institutions noticed that the difference between their cost of funds and the interest income on investing those funds in sub-prime mortgage pools was NOT entirely offset by the amount of A.I.G.'s insurance premiums!!!

So, just like "taking candy from a baby," they made huge investments of their own in sub-prime mortgage pools and bought the A.I.G. insurance.

THEY WERE ALSO SMART ENOUGH TO REALIZE THAT THE A.I.G. SUBSIDIARY THAT WAS ISSUING THE INSURANCE -- A.I.G. FINANCIAL PRODUCTS INC. -- was too small to be writing the insurance contracts that it was issuing. SO GOLDMAN SACHS AND THE OTHER FINANCIAL INSTITUTIONS REQUIRED THE PARENT A.I.G. COMPANY TO GUARANTEE THE INSURANCE OF THE VALUE OF THE SUB-PRIME MORTGAGE POOLS THAT THE SUBSIDIARY WAS ISSUING.

What a fine kettle of fish!!!

The savvy financial institutions required the financial value of the three HUGE PROFITABLE divisions of A.I.G. to serve as a de facto "insurance reserve" for the sub-prime mortgage pool insurance policies being issued by the midget A.I.G. FINANCIAL PRODUCTS INC. which wasn't even setting up any insurance reserves!!!

Obviously, if A.I.G. had evaluated the risk and set up proper reserves for the insurance policies its subsidiary was issuing, the premiums would have been large enough to wipe out any difference between the cost of funds of Goldman Sachs and the other financial institutions, and the interest income from investing those funds in sub-prime mortgage pools.

So is it too late for N.Y.U. to revoke Greenspan's Economics PhD???

Probably!!!

Though for the sake of its self-respect, N.Y.U. should be investigating the legality of doing so!!!

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At the beginning of this Suggested Answer, it was mentioned that there were at least TWO flaws in Greenspan's understanding of the economy AND PROBABLY THREE.

What was the third???

You have probably all heard me say prior to 2008 more times than you care to remember that it had been 30 years since the U.S. economy had experienced regular business cycles featuring recessions every 5 years or so. So America had 1.5 generations that had "come of age" without experiencing a serious recession and that "yours truly" was willing to bet that the Fed's economic models assumed the 1.5 new generations would view a serious recession with the same equanimity with which their experienced elders had.

It strikes me that the 1.5 new generations have greeted the 2008-201? recession with infinitely more panic than their experienced predecessors and that the additional panic has caused a great deal of the problem.

I would like to see a Congressional investigation into exactly what the Fed's economic models assumed and how drastically those assumptions diverged from what actually happened. [Though, of course, this is just wishful thinking because Congress is never that sophisticated.]

Question 15

Is the American economy headed into the widely-feared "second dip"?

Answer 15

Probably.

Despite the gargantuan Keynesian budgetary deficits each of the last two years (which also extend far into the future under President Obama's original budget proposal at the beginning of 2011), the American economy is facing (A) rising gasoline prices, (B) state and local government contractions because of reduced revenue, and (C) the reluctance of consumers to spend because of the reduction in value of their homes and the continuing threat of job loss.

Question 16

Why are European economies more resilient?

Answer 16

Because the typical European economy features about twice the percentage of GDP comprising governmental services. Accordingly, the governmental spending in Keynesian terms provides a great deal of buoyancy.

Question 17

Why are Asian economies more resilient?

Answer 17

They are more protective of their workers -- making sure their currencies are under-valued to generate exports, and often imposing protectionist policies for their domestic industries. In addition, many Asian countries do not permit a "free flow of capital."

Question 18

Are the gargantuan Keynesian deficits in the current U.S. governmental budgets capable of pulling the American economy out of its slump? Or, since the accumulated national debt has now reached the level of the Gross Domestic Product ("GDP") of the American economy, is there a danger that our national debt will sink to "junk bond" status (which might mean a 20% junk-bond interest rate and, consequently, the doubling of all federal tax rates because the federal budget, which has historically approximated 20% of GDP, now has to approximate 40% of GDP in order to pay the interest on the debt)?

Answer 18

It will be interesting to see!!!

My bet???

Within five years, we will be willing to "give our eye teeth" in order to pay ONLY a 20% junk-bond interest rate on our governmental debt.

Question 19

How can the American economy function properly when our politicians love to ignore the permanent American underclass? After all, Jonathan Kozol has long chronicled that 30% of Americans are illiterate as measured by, for example, whether they are capable of reading the warning label on a can of rat poison!!! And that it is our politicians' policies (or lack thereof) that condemn inner-city children to perpetuate the permanent underclass, with no realistic career aspirations other than runner graduating to pusher and/or runner's girl friend graduating to whore!!!

Answer 19

It can't!!!

But I am too "sick at heart" to discuss this issue for yet another time!!! [After all, we have already had THREE Six-Degrees-Of-Separation E-mail Campaigns aimed at President Obama on this topic, the only one of our nine topics to have more than one campaign.]

Question 20

Do such things as "free trade agreements" and the "free flow of capital" make sense for American citizens, or are these policies just more examples of how America (as documented by both Richard Kuttner, a columnist for Business Week for 20 years, and long-time Washington Post Columnist Dana Milbank in their books for our 2/14/2008 meeting) has the "best government money can buy"?

Answer 20

Of course they don't make sense!!!

And of course, they are examples of what Richard Kuttner and Dana Milbank were describing!!!

Question 21

Is there anything our government does do well from an economic standpoint?

Answer 21

Yes. Providing funding for basic research through the National Science Foundation and the National Institute of Health. AND, ESPECIALLY, THROUGH THE DEFENSE DEPARTMENT WHOSE NEW WEAPONS SYSTEMS HAVE HISTORICALLY PROVIDED ZILLIONS OF INVENTIONS WITH COMMERCIAL APPLICATIONS!!!

Question 22

What policies should be implemented to preserve for Americans the benefits of what the American government does do well?

Answer 22

It would be interesting to know whether the Federal Government issues to itself patents for all of the inventions resulting from the basic research it funds!!!

Perhaps someone else has the time to "chase that rabbit"!!!

My guess is that the federal government does not patent its inventions. And, even if it does, that it doesn't develop them commercially as aggressively as a private enterprise would.

Question 23

Are there any other economic policies that should be implemented if our objective is to protect American workers?

Answer 23

Finally educating our inner-city children - which, as every bona fide "community organizer" knows, means providing "surrogate parents" in the form of tutors and mentors (studies have always shown that "surrogate parents" are the only way to "move the needle" and such schemes as early intervention, incentive pay, vouchers, etc., etc., have only a temporary and/or negligible effect).

We should also employ some of the economic policies pursued by other countries, particularly Asian countries, with respect to currency valuation, restricting capital flows, etc. In this regard, the Fed appears to be doing a good job of trashing the value of the U.S. dollar -- which should help exports and curtail imports. [THOUGH, AS WE HAVE DISCUSSED IN THE PAST, U.S. DOLLARS ARE NOTHING MORE THAN UNSECURED ZERO-COUPON DEBT OBLIGATIONS OF THE U.S. GOVERNMENT AND TRASHING THEIR VALUE WILL PROBABLY REDUCE ALL OF OUR DEBT OBLIGATIONS TO "JUNK BOND" STATUS BEFORE THERE IS ANY BENEFICIAL EFFECT ON EXPORTS AND IMPORTS.]

Question 24

What do you think of the picture on the cover of Louis Hyman's book?

Answer 24

It strikes me as sexist!!!

What do you think???

[johnkarls]

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Q&A-14 AND THE REAL CAUSE OF THE ECONOMIC CRASH

Quite a few of the approximately 150 recipients of our weekly e-mail responded to the Suggested Answers to the Short Quiz included in Saturday’s e-mail and also posted immediately above.

All of them pointed out with respect to Q&A-14 that the “revenue estimates” of the Congressional Budget Office had indicated that the repatriations from foreign subsidiaries under Section 965 of the Internal Revenue Code would be quite modest!!!

WHAT MENDACITY!!! (By the CBO, that is.)

THE CBO IS NOTORIOUS FOR HORRIBLY-WRONG ESTIMATES!!!

[Indeed, when I was Senior Tax Counsel and Director of Worldwide Tax Planning for Texaco Inc. 1974-1987 when it was still a Fortune-Ten Company, the impact on Texaco alone of quite a few new legislative proposals was many times the CBO estimate for the entire economy.]

But why call the Sec. 965 estimates MENDACIOUS rather than mere mistakes???

BECAUSE BOTH GREENSPAN’S FEDERAL RESERVE AND THE CBO HAVE A DUTY TO AT LEAST TAKE THEIR HEADS “OUT OF THE SAND”!!!

If they had bothered to take a look, what would they have seen???

First, they would have found that the annual S.E.C. filings of each of the large U.S.-based multinational companies that had exported American jobs had hundreds of billions of dollars in liquid assets which, of course, were the short-term commercial paper of (aka loans to) the U.S. companies that had not exported American jobs.

Second, they would have found quite a few media stories that created quite a stir because many of them focused on Microsoft WHICH ALONE HAD MORE THAN A TRILLION DOLLARS IN LIQUID ASSETS AND WHICH STOCK ANALYSTS WERE VALUING AS A BANK BECAUSE ITS COMMERCIAL-PAPER LENDING OPERATIONS GREATLY DWARFED ITS SOFTWARE OPERATIONS!!! Indeed, there were also quite a few media stories about claims by CEO’s of approximately 20 other U.S.-based companies, all of which had more than $100 billion in commercial-paper operations, that their companies were being evaluated unfairly by stock analysts because their commercial-paper operations did not produce the same “bang for the buck” as their REAL OPERATIONS or the same “bang for the buck” as the results of competitors that had not exported American jobs and, therefore, did not have commercial-paper lending operations.

So why MENDACITY rather than mere mistake???

Because the DERELICTION OF DUTY by both Greenspan’s Federal Reserve and the Congressional Budget Office could not have been caused by sheer laziness!!!

All they had to do was remove their heads from the sand and open their eyes!!!

AND THEY WOULD NOT HAVE BEEN ABLE TO AVOID SEEING WHAT WAS GOING DOWN!!!

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CONGRESSIONAL “DOUBLE SPEAK”

Congress had the audacity to label the legislation which enacted Section 965 of the Internal Revenue Code as The American Jobs CREATION Act of 2004!!!

If Congress had been honest, they would have substituted “Destruction” for “Creation” in the title!!!

Why a matter of HONESTY???

Because, when they accepted the “campaign contributions” (aka “bribes” per Richard Kuttner and Dana Milbank), they could not have been so naïve as to really believe that those TRILLIONS of dollars trapped in Singapore non-resident subsidiaries and representing more than 10 years of profits from outsourcing American jobs --

(A) were stuffed in a MATTRESS!!!

or

(B) were located in a PIGGY BANK just waiting to be smashed open!!!

If they had bothered to hold hearings and put any witnesses under oath, they could not help but have ascertained with a few simple and obvious questions that --

(A) the TRILLIONS of dollars had long since been loaned by the Singapore non-resident subsidiaries of the U.S.-based companies that had exported American jobs, as “commercial paper” (aka short-term) loans to U.S.-based companies that had not exported American jobs AND HAD ALREADY BEEN INVESTED BY THE LATTER INTO U.S.-BASED PRODUCTIVE ASSETS!!!

and

(B) under the new Section 965 “tracing” rules, the TRILLIONS of dollars of cash would, on a fungibility (or substitution) basis, result in nothing more than stock redemptions!!!


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THE TIME LINE OF THE DISASTER

The time line helps to demonstrate that the cause of the 2008-???? crash of the American economy is that Congress forced a contraction of several TRILLION dollars in the productive assets of U.S.-based companies that had NOT exported American jobs.

That contraction was the hurricane!!!

Yes, the structure blown down by the hurricane had a few termites (including the real estate bubble).

But the story perpetrated by the U.S. Congress and the Federal Reserve that the real estate bubble caused the crash is A FAIRY TALE (the crash would have occurred WHETHER OR NOT THERE HAD BEEN A REAL ESTATE BUBBLE!!!)!!!

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TIME LINE =

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(A) Section 965 is enacted 10/22/2004.

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(B) The TRILLIONS of dollars of dividends, as a practical matter, had to be made between 10/22/2004 and 12/31/2005 -- [technically the American-jobs exporters could have gambled with dividends between 1/1/2004-10/21/2004 that the legislation would pass, and fiscal-year companies had as much as an extra 9 months beyond 12/31/2005 to make their dividends].

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(C) The TRILLIONS of dollars of forced CONTRACTIONS in the productive assets of the U.S. companies that had NOT exported American jobs were probably spread from 2005 through 2007. This is a shrewd guess based on --

(1) the fact that only the TRILLIONS of dollars of dividends had to be made by 12/31/2005, and if the TRILLIONS of dollars of “commercial paper” (aka short-term) loans could not be liquidated in time, such “cash cows” as the Singapore non-resident subsidiaries would have had little trouble in borrowing whatever couldn’t be liquidated to make the dividends [with, if necessary, the U.S. parents depositing the borrowed portion of the dividend with the original lending institution (although Section 965 did require “cash” dividends, in today’s modern economy “cash” almost always takes the form of an “electronic funds transfer” (“ETF”) so Congress merely required three ETF’s = ETF No. 1 (a loan from original lending institution to tax-haven sub), ETF No. 2 (a “cash” dividend from tax-haven sub to U.S. parent that exported American jobs), and ETF No. 3 (a deposit by U.S. parent back to original lending institution) and the original lending institution insisting on a small differential in the interest rates to cover its cost of setting up the two accounting entries resulting from the two ETF’s in which it was involved and policing the gearing of the U.S. parent deposit withdrawals to the tax-haven sub loan repayments],

and

(2) as a practical matter, the TRILLIONS of dollars of “commercial paper” (aka short-term”) borrowings by the U.S. companies that had NOT exported American jobs probably could not be “rolled over” at the end of the typical 90-day term WITH EVERY “COMMERCIAL PAPER” CREDITOR DEMANDING IMMEDIATE REPAYMENT -- so, as a practical matter, the creditors probably gave the U.S. companies that had NOT exported American jobs a “grace period” of a year or so to scrape up the TRILLIONS OF DOLLARS of cash -- rather than getting a bankruptcy court involved which would only have delayed the whole process.

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(D) By the end of 2007, Congress was in such a PANIC over the NOSE-DIVE of the American economy after only 1-2 years of TRILLIONS OF DOLLARS OF CONTRACTIONS in the productive assets of the American companies that did NOT export American jobs, that Congress worked ON AN EMERGENCY BASIS to pass the ECONOMIC STIMULUS ACT to rebate $300 per person (including minor dependents) of 2007 personal income taxes (maximum $1,200 for a joint return with 2 or more minor dependents).

Irony = the Economic Stimulus Act also included accelerated depreciation for 2008 investments in new property!!!

Why ironic???

Because the U.S. companies that had NOT exported American jobs had just been forced to CONTRACT their operations by TRILLIONS OF DOLLARS and THE “COMMERCIAL PAPER” (aka SHORT-TERM) BORROWING MARKET HAD JUST BEEN DESTROYED!!! So where was the money going to come from to make the investments in new property???

Congressional PANIC???

The Second Session of the 110th Congress convened on 1/3/2008 rather than the traditional middle of January, and final passage occurred in both the House and Senate on 2/7/2008 -- LESS THAN FIVE WEEKS AFTER CONGRESS CONVENED!!! [Probably close to a Guinness record except for Acts of War, of which there have been none since 1941.]

The final House vote = 380 yeas – 34 nays!!! (Dems 215-6 & GOP 165-28)

The final Senate vote = 81 yeas – 16 nays!!! (Dems 49-0 & GOP 32-16)


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FINAL LESSONS???

Congress and the Federal Reserve were lucky that they had created the “real estate bubble” so that they could perpetrate the FAIRY TALE that the bubble had been the cause of the 2008-???? economic crash (the crash would have occurred WHETHER OR NOT THERE HAD BEEN A REAL ESTATE BUBBLE!!!)!!!

While engaging in a COVER UP of the true cause = the TRILLIONS OF DOLLARS in 2006-7 contractions in productive assets they forced on U.S. companies that had NOT exported American jobs!!!

And Americans were/are too stupid to hold accountable “The Best Government That Money Can Buy”!!!