The United States is quickly coming to resemble a post industrial
neo-3rd-world country. Unemployment, lack of economic opportunity, falling
real wages and household incomes, growing poverty and increasing
concentration of wealth are major trends in the U.S. today. Behind these
growing problems are monetary inflation created by the Federal Reserve's
monetary policies, federal government deficit spending and the dominant
influence of "too big to fail" banks and large corporations in
Washington D.C., which has altered the direction of law in the United States.
To make matters worse, the U.S. government faces a historic fiscal crisis.
High unemployment, lack of economic opportunity, low wages, widespread
poverty, extreme concentration of wealth, unsustainable government debt,
control of the government by international banks and multinational
corporations, weak rule of law and counterproductive policies are defining
characteristics of 3rd world countries. Other factors include poor public
health, nutrition and education, as well as lack of infrastructure--factors
that deteriorate rapidly in a failing economy.
Apparently ineffective regulation and relatively little law
enforcement action by the federal government in the wake of the sub-prime
mortgage meltdown resulted in widespread speculation that special interests
had taken priority over the rule of law. Critics have also charged that the
federal government's policies threaten to eliminate what remains of the
American middle class.
Accelerating Concentration of Wealth
In response to the economic downturn that began in 2007 and the start
of the financial crisis in 2008, the U.S. federal government and the Federal
Reserve resorted to a radically inflationary policy intended to save banks
and to shepherd the U.S. economy through a recession. Instead, radically
inflationary policies greatly increased the concentration of wealth.
Under ordinary circumstances, monetary inflation has the effect of
redistributing wealth in favor of those who receive newly created money
first. The value of money is reduced as a function of the number of currency
units in the economy but recipients of newly created money can spend it
before it loses value. In a declining economy, however, the wealth
redistribution effects of inflation are magnified.
When the Federal Reserve or the federal government supports banks and
financial markets through liquidity injections, bailouts, asset purchases,
quantitative easing, etc., the lion's share of financial support, i.e., newly
created money, is captured by the largest financial institutions and by the
wealthiest 1% of Americans. Money printing skews the distribution of money
over the economy while the value of money, i.e., the purchasing power of
wages and savings, is reduced. The overall effect is a wealth transfer from
proverbial Main Street to literal Wall Street.
Looming Fiscal Crisis
U.S. government debt and deficit spending have markedly accelerated
over the past decade. For
example, The U.S. Department of Homeland Security (DHS) was created and the U.S.
military grew to 3 million active duty and reserve personnel, not
including contractors. Since 2001, the U.S. spent
approximately $1 trillion on military expansion while the
total cost of the U.S. wars in Afghanistan and Iraq has been estimated to
exceed $3.7 trillion.
Although the U.S. federal
government remains in denial, the Congressional debt ceiling debate and
subsequent U.S.
credit rating downgrade on August 5, 2011 were only the tip of the
iceberg. In fact, the United States faces a historic fiscal crisis.
As of 2012, the majority of
new federal government debt will stem from interest on existing debt.
Treasury bond issues totaled $2.55
trillion in 2010, roughly 2x the federal budget deficit of $1.3
trillion. Artificially low U.S. Treasury bond yields, created by the
Federal Reserve's quantitative easing (QE1 and QE2) programs and by its
current "Operation Twist," only slow the rate at which the federal
debt balloons.
The U.S. federal government's
fast growing debt is $14.94
trillion, approximately 100% of GDP. Additionally, future liabilities
total $66.6
trillion based on generally accepted accounting principles (GAAP
accounting) and using official data from the Medicare and Social Security
annual reports and from the audited financial report of the federal
government.
- Medicare:
$24.8 trillion
- Social
Security: $21.4 trillion
- Federal
debt: $10.2
trillion* (not including intra-governmental obligations)
- State,
local government obligations: $5.2 trillion
- Military
retirement/disability benefits: $3.6 trillion
- Federal
employee retirement benefits: $2 trillion
The eventual insolvency of the
U.S. federal government cannot be averted through any combination of taxes, budget
cuts or realistic GDP growth. Inflationary policies, i.e., increasing deficit
spending by the federal government and debt monetization by the Federal
Reserve, would devalue the U.S. dollar and potentially trigger a
hyperinflationary collapse of the currency. To stave off the inevitable,
interim measures might include tax increases, exchange controls, nationalization
of pension funds or other measures similar to those taken in 3rd world
countries.
Dominant Corporate Influence
In a 2009 radio interview on
Elmhurst, Illinois' WJJG 1530 AM, Senator Dick Durbin (D-Ill.) explained that
"...the banks--hard to believe in a time when we're facing a banking
crisis that many of the banks created--are still the most powerful lobby on
Capitol Hill. And they frankly own the place." Senator Durbin was
unequivocal in saying that the federal government of the United States is
controlled by banks. Simon Johnson, former chief economist of the
International Monetary Fund (IMF), had reached the same conclusion one month
earlier in his widely read article The
Quiet Coup. Johnson explained that the finance industry had effectively
captured the U.S. government, a state of affairs typical of 3rd world
countries.
Corporate influence over the
political process, as well as over the tax and regulatory policies of the
United States, is at an all time high. The federal government is the largest
single customer in the U.S. economy and, through taxation or regulation, the
government can grant or deny market access to private companies and can
either prevent or mandate the consumption of their products and services. As
a result, virtually every large corporation in the United States seeks to win
the government's business and to steer government tax policies and regulations
in their favor. Naturally, politicians who accede to the wishes of particular
corporations are given campaign funds to ensure their reelection. In the past
decade, the amount of money spent
on lobbying has more than doubled and there are currently 24 lobbyists
for every 1 member of Congress.
The interdependence of elected
officials and the largest U.S. corporations reached a new high with the 2008
bank bailouts. The influence of private corporations and de facto
industrial cartels (comprising the largest corporations in each major
industry) over tax and regulatory policies creates significant economic
distortions that ultimately compromise the sustainability and the stability
of the economy. Ideally, the government would be an impartial referee, rather
than an active business partner that overwhelmingly
favors large businesses over small businesses, despite the fact that
small businesses account for the vast majority of American jobs.
Impact on the Rule of Law
Corruption, cronyism and weak
rule of law are typical of 3rd world countries. The United States exhibits a
clear corporate influence over elections and legislation and, arguably,
relatively little law enforcement action where large, legally well-equipped
corporations are concerned. Reports of so-called crony
capitalism have appeared in the U.S. news media, but the term "corruption"
has been avoided, along with discussion of fundamental reforms.
A cursory examination of legal
developments over roughly the past decade evidences a pattern in which U.S.
federal law systematically favors the largest financial institutions, as well
as a paradigm in which financial institutions heavily influence both the
regulations that putatively govern their activities and the laws that apply
to consumers of their products and services. The financial crisis that began
in 2008 and the subsequent response
of the federal government appear to follow logically from prior
legislative events:
1.
1999
Gramm-Leach-Bliley Act (GLB).
The Act repealed key provisions of the Banking Act of 1933, commonly known as
the Glass-Steagall Act. In the aftermath of the Great Depression, the
Glass-Steagall Act prevented depository institutions from engaging in high
risk financial speculation.
2.
2000
The Commodity Futures Modernization Act (CFMA). The Act deregulated over-the-counter
(OTC) derivatives, such as credit default swaps, referred to by Warren
Buffett as "financial weapons of mass destruction." OTC derivatives
were at the heart of the financial crisis that began in 2008 and are the root
cause of the "too big to fail" doctrine. The Act preempted state
gaming laws that had prevented banks from speculating in OTC derivatives with
no connection to underlying assets.
3.
2001
USA PATRIOT Act. The
financial provisions of the Act allow banks to collect additional financial
information about account holders, for example, linking business accounts to
the personal financial records of business owners, thus weakening both
financial privacy and the corporate veil. The Act enhances the ability of
creditors to collect and allows federal authorities to monitor financial
transactions and to obtain financial records without a subpoena.
4.
2005
Bankruptcy Abuse Prevention and Consumer Protection Act (BAPCPA). The Act, which was sponsored by banks
and credit card companies, effectively eliminated the concept of a
"fresh start" by allowing banks and credit card companies to engage
in collections activities, in effect, forever. As a result, small business
owners who end in bankruptcy are less likely to ever start another business.
The Act places banks in front of bankruptcy courts, creates liabilities for
bankruptcy attorneys and contains many widely criticized, anti-consumer
provisions.
5.
2008
Emergency Economic Stabilization Act. The Act, commonly referred to as a "bank
bailout," authorized the United States Secretary of the Treasury to
spend $700 billion to purchase distressed assets, especially mortgage-backed
securities (MBS). Instead, the funds were given to foreign and domestic banks
to offset their risky MBS, OTC derivatives and other losses. The bank bailout
set a precedent of socializing losses but keeping gains private. The Act
effectively bound the fate of the U.S. Treasury to that of the largest U.S.
financial institutions.
6.
2010
Citizens United v. Federal Election Commission. The Supreme Court of the United States
held that corporate funding of independent political broadcasts in candidate
elections cannot be limited under the First Amendment, overruling prior case
law and guaranteeing the ability of corporations to influence elections
without meaningful restrictions. The Court's decision gave carte blanche
to corporations to influence elections, legitimized the interdependence of
elected officials and large corporations and created a precedent under which
the rights of corporations supersede those of citizens.
7.
2010
The Dodd-Frank Wall Street Reform and Consumer Protection Act. The Act failed to restore critical
provisions of the Glass-Steagall Act, significantly regulate OTC derivatives,
break up "too big to fail" banks, prevent another financial crisis
and prevent further bailouts. The Act created a Consumer Financial Protection
Bureau, but did not repeal any provision of BAPCPA or restore the financial
privacy of U.S. citizens removed by the USA PATRIOT Act. The Act failed to
provide adequate funding to the government's watchdogs, the Securities and
Exchange Commission (SEC), the Commodity Futures Trading Commission (CFTC)
and the Federal Bureau of Investigation (FBI), potentially hobbling enforcement.
The Act has also been criticized for the burden it places on smaller
competitors in the financial sector, which could ultimately result in an
increased concentration of financial power in "too big to fail"
banks.
Critics have alleged that,
underlying the sub-prime mortgage meltdown that triggered the financial
crisis in 2008 was rampant fraud. Fraud
has been alleged at virtually every level from the assessment of property
values and credit risk; to the loans themselves and to their securitization
as MBS assets; to the ratings of MBS assets as AAA; to hedging or betting
against MBS assets in the OTC derivatives market (perhaps including financial
firms allegedly betting against MBS assets that they themselves created and
sold to clients as AAA assets). After the crisis, a seeming pattern of fraud
continued apparently unabated in the robo-signing
foreclosure scandal where documents submitted to courts were falsified.
Despite an avalanche of alleged crimes under existing federal law, no firm or
individual of any significance in the financial crisis has yet been
prosecuted.
President Barack Obama said in
October 2011 that the mortgage finance practices leading to the economic
meltdown were "immoral, inappropriate and reckless ... but not
necessarily illegal." Since fraud is, in fact, illegal, critics claim
that the U.S. federal government has simply failed to enforce the law. Adding
fuel to the fire, the Solyndra
loan scandal could be construed to suggest corruption at high levels and
the MF
Global debacle could be construed as indicative of weak regulation and
law enforcement and even of questionable market integrity.
In theory, selective
enforcement of the law risks the creation of two sets of laws: one for big
banks and corporations, and for their executives, i.e., those with
connections in Washington D.C. or on Wall Street, and one for everyone else.
Among other things, failure to enforce the law could create an environment in
which crime pays, but, for ordinary citizens, hard work, prudent financial
decision making, saving and investing for the long term do not.
More than any other aspect of
America's progression towards 3rd world status, the federal government's low
level of law enforcement action where "too big to fail" banks are
concerned is perhaps the most insidious because it raises questions of
legitimacy and of the social contract. A financial and legal system of moral
hazard implies that victims face double jeopardy while they are deprived of
legal recourse, i.e., those allegedly defrauded might face inflation and tax
burdens stemming from preferential treatment of favored corporations or from
further bailouts.
Destructive Tax Policies
In the face of rising
government debt, the rapidly shrinking American middle class is the primary
target of the U.S. federal government's tax policies. The eventual extinction
of the American middle class would be a key milestone along the road to 3rd
world status. Current U.S. tax policies favor the largest corporations and
this is unlikely to change in the foreseeable future. Although tax increases
exacerbate economic downturns, several tax options have been or are being discussed.
However, none of them are likely to be put in place.
- Increasing
taxes on corporate profits would result in job losses in the short term
and would affect dividends and share prices in the stock market. Lower
dividends or share prices would affect pension funds, including
government pension funds.
- Increasing
taxes on capital gains would impact the non-tax-exempt investments of
the now retiring "baby boomer" generation and would reduce
capital formation thus reducing investment in new businesses or business
expansion and hampering job growth.
- Increasing
payroll taxes would cause companies to downsize resulting in job losses
and would have a chilling effect on hiring.
- A
Value Added Tax (VAT) is impractical in the United States because
countless special taxes already exist at all levels of the supply chain.
To prevent unpredictable, disruptive consequences, implementing a VAT
would require years of study and comprehensive tax reform.
- A
national sales tax is undesirable because it would overlap and interfere
with already existing state sales taxes, which are highly inconsistent
across states.
- Carbon
taxes remain possible but they would encumber businesses and result in
job losses or reduce hiring.
Chief among the remaining
possibilities is the income tax but, according to the Tax Policy center at
the Urban Institute, Brookings Institution, 46%
of American households will pay no federal income tax in 2011. The
reasons include income tax exemptions for subsistence level income,
dependents and nontaxable tax expenditures for senior citizens and low-income
working families with children.
Assuming that big banks,
multinational corporations and the wealthiest 1% of Americans remain off
limits in terms of tax policy, the range of income taxed is likely to widen
from the current tax on households earning more than $250,000 per year to
progressively lower income levels. In fact, the government's intended revenue
source is precisely what remains of the once much larger middle class:
professionals, small business owners and dual income families in urban areas,
etc. These are the households that have managed to stay ahead of inflation,
declining real wages and falling household incomes.
Among other things, U.S. tax
policies will erode capital formation within the remnants of the middle
class, which is the engine of small business creation and the source of most
American jobs. The eventual result will be a three-tier socioeconomic
structure consisting of a super rich wealthy class, a much poorer working
class and a massive, politically and financially disenfranchised underclass,
similar to that of a 3rd world country.
Via
Dolorosa
The United States increasingly
resembles a 3rd world country in terms of unemployment, lack of economic
opportunity, falling wages, growing poverty and concentration of wealth,
government debt, corporate influence over government and weakening rule of
law. Federal Reserve monetary policies and federal government economic,
regulatory and tax policies seem to favor the largest banks and corporations
over the interests of small businesses or of the general population. The
potential elimination of the middle class could reshape the socioeconomic
strata of American society in the image of a 3rd world country. It seems only
a matter of time before the devolution of the United States becomes more
visible. As the U.S. economy continues to decline, public health, nutrition
and education, as well as the country's infrastructure, will visibly
deteriorate. There is little evidence of political will or leadership for
fundamental reforms. All other things being equal, the U.S. will become a
post industrial neo-3rd-world country by 2032.