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The Walls of Jericho

    “AND THE WALLS CAME TUMBLING DOWN!!”

 A quote from a biblical story. Perhaps biblical stories are but historical episodes embedded within the confines of the world’s religions. Whether by earthquake, the sounds of trumpets blowing, or indeed “a miracle” is not primary to the story. The same as that which may have applied to” Noah’s Ark” when that part of the world at that time in history was suffering a prolonged deluge of rain. Historically, the walls must have fallen.

So why that precise name to this article --- and the precise quotation? The reason is that today, as of April 19^th, in the year 2008 the “trumpets are sounding” --- and the economy of the world is about “to come tumbling down!

 Where is the economic logic to increasing debt load --- horrendous capital and profit losses declared on a daily basis --- yet stock market prices keep rising! Is there any economic logic at all to suffer these losses --- yet see the prices of the shares of these self-same companies increase!

The “sub-prime mortgage” debacle burst in August of 2007. To be followed by the ABC paper (asset backed commercial paper) – and several “other alphabetically called paper.” Collapsing hedge funds, and financial institutions running out of capital. Yet no one hears the sound of the trumpets.

Central Banks offering “band-aids” --- and mini-money market auctions. Out comes the chewing gum and “sticking plasters” to paper over the cracks in the crumbling walls. Dropping interest rates is “the elixir of life” --- “the holy grail.” Perhaps, at this stage one could call it --- “fiddling while Rome burns.”

In order to understand what is about to unfold, we have to examine the basic blocks of the economic structures of countries. The foundation stone --- the linchpin and the keystone to ALL economies --- is JOBS. Without jobs, without income --- no economy can exist. If the basic elements of job creation and the preservation of the incomes derived from these jobs is not “nurtured and protected --- then ALL ELSE is to no avail. In economic terms “disposable income” is the driving force that nurtures all economies.  To this, one has to finally add --- that the purchasing power of the currency thereof be protected by all possible means. 

This in turn brings us to a number of other factors, which will all determine the above. Debt creation; Taxation; Interest rates are but several of a host of others. If one has purchased something which has an intrinsic value of say $100 --- and borrowed $40 in order to make the purchase --- then its value – in the hands of the owner has diminished by 40% --- until such time as the debt has been repaid. Thus all debt diminishes in value. Taxation in all its forms, including excise, sales taxes or hidden consumption taxes diminish disposable income, and as a result, thus inhibits job creation and economic growth. Thirty-five years ago some economists stated that the ideal for economic growth was to ensure that disposable income be no less than six months of annual income. Some went so far as to state it to be --- seven months of annual income. Thus taxation is of tremendous importance in determining economic growth. And finally we arrive at interest rates.

Central Banks, in whose hands this “tool” has been placed make a dreadful job in applying it. The underlying theory seems to be that it is the cure for all economic ills. Lower the rates to generate cheap debt --- and to raise interest rates to dampen the economy and slow inflationary pressures. So let us examine this philosophy in detail.

Inflation: The present global reason for inflation is the extraordinary rise in the prices of all minerals, oil and other commodities. To a large extent it was fuelled by demand as economies expanded--- primarily in China and India. Coupled to this was the weakening in the value of the US Dollar in which currency all of the above are priced. WE shall return to this particular factor at a later stage as it has a tremendous influence on the approaching fall of the “WALLS OF JERICHO.”

None of these metals, commodities or oil were in short supply, so that factor has had no influence what so ever on price rises or inflationary pressures. Thus to a large extent --- as far as any country’s inflation is concerned --- it was primarily IMPORTED INFLATION. Thus No amount of interest rate manipulation is of any help or consequence! The only solution in combating imported inflation – is to do with less of the product and perhaps additionally, for governments to lower or eliminate any tariff / excise etc on those imported commodities. Alternatively government can invoke temporary punitive tariffs to dampen demand and conserve supplies.

Domestic Inflation: A number of factors come into play, and it depends as well on the strength or weakness of the economy and to the purchasing power of that country’s currency. In other words, strong purchasing domestic currencies require little assistance in combating domestic inflation. Other factors as well are usually in play, specifically that of COMPETITION, which tends to keep inflation in check. Generally speaking, as far as domestically generated inflation goes, it is best left alone – as it tends to sort itself out over time.

A term often used to describe the reason for domestic inflation is – quote: “too much money chasing too few goods.” To a large extent either over-exaggeration – or nonsensical! Where does that “extra money” materialize? Given that disposable income and the savings derived there from is the only source for purchases – it is either a fallacy, or debt is utilized to generate the extra purchasing power. In which case lowering interest rates in order to increase debt is counter-productive, as IT IN ITSELF fuels inflation! Which brings us to” Money Supply”

The Money Supply usually – or should usually keep pace with the annual expansion of the economy (its natural growth). Either the Central Bank or its treasury generates the supply. The only other source is generated either from the payments of exports, the influx of profits made on foreign investments, or foreign purchases of domestic assets. However in these cases there is a lot of counterbalancing by domestic currencies moving into foreign assets. Thus the money supply should always be in equilibrium with economic growth. Interest rates that are set by the Central Bank should always range in a narrow band set between 4% and 6%. Anything above or below is inflationary.

However, having said that--- there are two occasions where the money supply should be interfered with; the one being when too much money created by debt instruments has fueled excessive price increases of stocks and bonds and all other investment avenues such as Real Estate .In this scenario excess money has to be “sucked out” of the economy and this can be done in the following manner. The government enacts a 10% or 15% surcharge on all income taxes for a stated period (one or even two years), and passes these funds on to the Central Bank who in turn will pay all taxpayers say 5% annually on these funds, and return these funds to the taxpayer when it deems it the appropriate time for this to be done. Alternatively it should float a short period bond for domestic investors only, at a similar interest rate.

The second circumstance in which the money supply is interfered with is when excessive debt circumstances arise, such as that which is presently engulfing the entire world. In other words --- THE ONLY WAY TO SAVE THE WALLS OF JERICHO!

What should have been done at the start, --- even before the housing bubble burst, was to print the currency required to keep each individual country’s economies in equilibrium wherever it was needed to be done. Central Banks should have purchased the debts that were needed t be purchased in order to stop the possibility of an unfolding debacle such as has been unfolding since August of 2007.The time for blame and recrimination could have come later. As could retribution to those who were responsible for all of this.

What is past – is past, but what is of now dire necessity to save the WALLS – is to start purchasing a major portion of the bad debt overhang – both disclosed – and as yet undisclosed. To hazard a guess, as of now possibly about 1000 Billion (a “Trillion” in dollar terms) may be needed, and if the Hedge Funds and Derivative Markets starts to unravel, then possibly another Trillion or two may be required to stave off a major Recession.

As an example: the Bear Stearns debacle. What should have happened was for the Central Bank to have called in Bear Stearns and requested what was needed by them in order to retain liquidity. In other words – what was needed to pay off those creditors clamoring for immediate repayment of loans or debt obligations? Say that $25 billion was needed for this purpose. The mere act of passing this money directly to them would have staved off a run on the share price, and by Bear Sterns payment to its creditors, it would have injected $25 billion --- to be rapidly spread between many creditors as it passed along the “Debt Line” from one creditor to another. Whatever was left over in Bear Stearns was to be used as working capital while it reorganized its other debt commitments, on the understanding that no further debt obligations were to be undertaken until they could prove satisfactory liquidity once more existed.

Should the above had happened, $25 billion of Bear Stearns debt would have passed to the Central Bank who would investigate the debt parcel to check for malpractice or malfeasance or whatever! Over a stated period of years, Bear Stearns would have had to” buy back the debts” and write off whatever losses were subsequently incurred, and finally—pay a penalty of some nature to the Central Bank, including an interest charge.

As repayments are made to Central Banks, the excess of currencies in the system is once again out of circulation, returning currency equilibrium to the economy. The point we are trying to make here --- is the primary protection of investor wealth, for it is the wealth of the small investors and their disposable income that is the backbone of the economy is protected as well. 

Debt, as such --- is Not A Crime! It is the manner of the debt, or its relationship to assets that make it a crime Credit facilities in whatever form, that are conducive to wealth creation, is good for ALL economies. However the ability to repay the debts incurred and the asset mix and their values have to be valid in the eyes of all laws and regulations. And it is basically --- in this respect that that all the present economic woes of the world have been created. 

Insufficient laws, rules and regulations exist today to police debt creation. As it does as well in policing all the forms of Stock market investments! Those that do exist, are not well policed --- and should NEVER be left to “self-policing” --- or “self regulation”! The debt instruments and investment instruments have become so complicated and convolute and proliferate in volume, that new laws and regulations should immediately be enacted and given into the hands of Central Banks for regulation and oversight.

Central Bank utilization of commercial banks as the main conduit for the dispersal of additional liquidity has to be questioned, for the banking system was as well largely responsible for some of the questionable debt creation presently troubling the world. Not only that, but they too dabbled in questionable debt investment instruments – and in consequence made vast capital losses themselves, resulting in bad capital to debt ratios. The banking system itself needs further Central Bank supervision and new regulations to curb some of their questionable practices.

The so-called “Robber Barons of Wall Street” and their counterpart” International Economic Mafiosi” operating on the world’s stock markets require similar oversight and more stringent regulation, for it is they who by their misdeeds impoverish the small investor worldwide. 

The cutting of income taxes  - or their proportional return to taxpayers is counter productive. Surely those taxes were levied in the first place  -- because they were required? It is a sign of “over-taxation” when that is resorted to. By enacting laws to protect consumer wealth and protect the purchasing power of the currency, is ALL THAT IS REQUIRED to keep an economy in equilibrium and ensure economic growth.

While on the subject of taxation, we offer the following. A change should be made to Company Taxation. Here we refer to public companies. Taxes should only be levied AFTER DIVIDENDS HAVE BEEN DECLARED AND PAID OUT! This lowers company taxes  --- and at the same time increases taxable income in the hands of investors, thus providing greater consumer income. Companies would have to pay a minimum of 65% to 70% of gross profits --- after accounting for all expenses incurred.  Income derived from “investment” such as from shares or bonds could be taxed at a lower rate  -- say 10% below the tax bracket figure of the taxpayer. For example, if their tax bracket were 25% of income, then from income derived from dividends, it would be taxable at the rate of 22.5%  --- being 10% less. Thus giving them the incentive to invest in companies.

This transfers wealth to the shareholders  --- where it RIGHTLY BELONGS! The added income is not inflationary   -- as it would be if demanded as “wage increases” by workers for labor or services rendered.

Recessions are “man-made.” They need never to occur! Like the changes in the seasons or the waxing and waning of the moon, economies slow down and are followed by growth if properly protected and nurtured. Especially so – if left well alone. Job creation and job protection is all that is needed by government. For Central Banks it is to ensure the purchasing power of the currency and the protection of consumer wealth.

Job protection does not necessarily mean--- “no out-sourcing of goods and services” for it is that   ---- in MODERATION --- that helps keep other domestic consumer prices down and thus inflation in check. That being said, the pegging of some of the weaker currencies to a fixed rate to a” so-called” basket of currencies provides an unfair advantage against open floating rate currencies. However in the OVER STIMULATION of the economies of lower value currency countries, it generates excessive requirement of raw materials, with consequent price inflation to those products.

Which brings us to the final factor --- the U.S. Dollar. In a number of other articles on this website we have brought up the desirability of having another independent world trading currency solely devoted to both world trade and the ”reference value” to which all currencies can be valued  --- including that of the U.S. dollar. To a large extent the volumetric price increases to all traded commodities is a reflection of the eroding value of the U.S. dollar. The world requires an INDEPENDENT CURRENCY whose value is stable  --- and which is backed by as tangible an asset such as gold at a fixed and constant value.  In an article named “ Central Banks” on this website we offered up the name of a” Uni dollar” for such a currency. How can one utilize an eroding value currency to both determine world prices of all traded commodities, and utilized to determine the cross-values of all currencies to each other. It makes no economic sense!

How far has the dollar fallen --- and what is its intrinsic value? In the year 2001 a barrel of oil cost $20. Today the price is way over $100 per barrel  -- and there was never a shortage on the world’s markets. In that same year the price of gold was $250 / $275 per ounce Today the price is well over $900 an ounce, and has been over $1000 an ounce. It too has not been in short supply. Other commodities whose prices are stated in dollars have even a many times higher price differential in their dollar values to the dollar than gold and oil. Just using the two named examples indicates that the U.S. dollar has devalued by 75% -- and is now worth a quarter of its previous value!

The anomaly is --- THAT AS A DOMESTIC CURRENCY  --- the U.S. dollar is still relatively strong and retains a good measure of its domestic purchasing power as a domestic currency. AND THAT IS WHAT IT SHOULD BE. JUST ANOTHER DOMESTIC CURRENCY.

 If not --- then the “economics” of the World will NEVER be fixed. All else will be to no avail!!