Life Question #1:

If you were determining who could immigrate here, would you let in those you thought would contribute the most to our country or those most in need of refuge?

*Note:  This is the first of many posts I will be making entitled "Life Questions".  Generally, these posts will be shorter than my regular posts.  These questions come from a book I have entitled The Book of Questions.  See it here.  The sole purpose of this book and my blog is to stimulate conversation.  Please feel free to write your comments in the section below, however short or long you'd like!  

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The best solution would be to have some of both – immigrants who could bolster our economy and those in serious need of refuge.  Because our immigration laws are so convoluted and dysfunctional, our system that doesn’t allow many people from either category in.  Ideally, I’d like to see all immigrants who study at an U.S. college or university and who have earned a graduate degree the opportunity to remain in America.  Too often we educate immigrants in our finest institutions, simply to turn them away after graduation.  They return to their home country (often in Asia) to start a new business, innovate or invent.  It’s wonderful that the U.S. still has the finest institutions of higher education in the world, but I’m afraid that won’t last long if we continue to send the best and brightest immigrants back home. If this trend continues, precocious Chinese students will decide to stay in China rather than coming to the U.S.  This would be terrible for the United States. 

With regard to the issue of refuge, I believe that the United States has a responsibility to provide refuge for those in need.  It’s easy to say that the U.S. should accept all refugees, but this isn’t realistic.  It’s probably impossible to make any comprehensive and objective requirements for the conditions that the refugees must be escaping from in order to enter our country.  Therefore, it must be treated on a subjective basis.  This is quite frustrating because it will make enforcement difficult.  Regardless, the bottom line is that some refugees will not be allowed into our country legally.  

Simply put, the issue of immigration shouldn’t be ignored.  Not only has it literally built our nation, but it continues to be one of the most important drivers of the economy.  Without it, we would have very modest population growth – like most European countries.  I think the Obama Administration would have tried to tackle the immigration issue after health care if it hadn’t inherited such a terrible economy and been impeded by Congress.  In the end, there is no easy solution.  If one existed, we’d have already found it.  

Occupy Our Homes

Throughout the past few weeks cities throughout the country have removed Occupy protesters from their encampments.  What are they going to do now?

Occupy has responded to these ejections by changing its focus from public spaces toward private property: foreclosed homes.  Recently, CNN.com published an op-ed by Sonia K Katyal and Eduardo M. Penalver.  Read it here.  They recently co-authored a book called Property Outlaws: How Squatters, Pirates and Protesters Improve the Law of Ownership.  In their article on CNN.com they argue that Occupy’s change in tactics – from occupying parks and streets to occupying foreclosed homes – might very well work to their advantage. 

One reason that this might be a successful endeavor is because it could remedy the movement’s most cited shortcoming: a lack of political agenda. Moreover, it can help connect current members of the movement to working-class Americans.  If the Occupy movement is going to be successful (it’s already changed the framework of political discussion) then it will need to have closer ties to unions and working class Americans.  Aligning their causes with foreclosed homes can help the Occupy movement to do just that. 

Possessing physical spaces has had success throughout American history.  Katyal and Penalyer argue that “a straight line runs from the 1930s sit-down strikes in Flint, Michigan, to the 1960 lunch-counter sit-ins to the occupation of Alcatraz by Native American activists in 1969 to Occupy Wall Street”.  They argue that the sit-down strikes arguably laid the groundwork for the enforcement of federal labor laws; the lunch counter sit-ins led to the enactment of Title II of the Civil Rights Act of 1964; and the Alcatraz occupation paved the way for a milestone reversal in Federal Indian policy, leading President Nixon to support tribal self-determination.  For the sake of my country and world, I hope that the Occupy movement has these sorts of success.  We’re in desperate need of them.

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The Takeaway: In the end, occupying foreclosed homes might strengthen the Occupy movement by presenting a tangible political demand and forging closer ties to working-class Americans. 

Back to Work

How has the America’s anti-government ethos evolved over the past four years?  

I got Bill Clinton’s new book Back to Work for Christmas and have just now been able to pop it open.  The opening section in his first chapter is wonderful.  He outlines how America’s growing opposition to the role of its own government doesn’t jive with reality.  Clinton writes that the 2010 midterm elections – which were the manifestation of such anti-government sentiments – “seemed to occur in a parallel universe of inflated rhetoric and ferocious but often inaccurate attacks that shed more heat than light”.  Republicans, or at least those that turned out for the elections, argued that the financial crash and the recession that followed, as well as the failure of the U.S. to fully recover from it less than eighteen months after the economy bottomed out, were caused by too much government taxing, spending and regulating, and that life would be restored if the government got out of our way.  As Clinton argues, these attacks were effective, but not all together accurate.  Here are three reasons why:

First, the financial meltdown happened because banks were overleveraged.  In other words, banks had too many risky investments, especially in terrible mortgages called “subprime” mortgages.  There simply wasn’t enough government oversight to prevent the banks from being too risky. If you want to understand the concept of leverage in the banking industry in two minutes click here. 

Second, the meltdown didn’t become a full-scale depression because the government acted to save the financial system from collapse.  The Federal Reserve made massive investments of about $1.2 trillion to stop the financial collapse.  Many people criticize the bailout, known as the Troubled Asset Relief Program (TARP), because of its cost.  In reality it didn’t cost much at all.  It was originally authorized to spend up to $700 billion.  In the end it only spent about $400 billion.  That’s still quite a bit you say?  As it turns out all of it has been paid back!  In fact, we’ve actually made a profit.  How many people walking down “main street” know this?  See Treasury article here.  Criticizing TARP for its cost just doesn’t match with reality. 

Third, according to most economic studies, the stimulus and the rescue of the auto industry succeeded in keeping unemployment 1.5 to 2 percent lower than it would have without it.  Most people inaccurately think that the stimulus was designed to restore the economy to normal levels.  This is partially the Obama Administration’s failure to effectively communicate with the America people. The stimulus wasn’t designed to do this. After the financial meltdown and damage that ensued, the total net loss was several trillion dollars.  The stimulus was $800 billion.  Once again, it wouldn’t make sense for a stimulus to return the economy to normal levels if it is less than half the size of the “hole” it’s trying to fill.  Rather, the stimulus was designed to put a floor under the collapse and begin the recovery. 

It’s an old argument now so I’ll keep it short, but it’s important to remember that those who are “anti-government” now, were painfully silent during the Bush Administration’s tenure in Washington.  They cut taxes and increased spending at roughly twice the rate that it had increased during Clinton’s eight years (thought I know these eight years were marked by unusually high economic growth for some reasons that might have been out of political control).    Also, by the end of Bush’s eight years we had doubled the national debt.  This all occurred before the financial meltdown.  I’m not writing this to blame President Bush.  I am simply asking where the anti-government enthusiasts were for those eight years.

The Takeaway:  While this is probably old news to a lot of you reading this, I bring it up because it is impossible to get out of the economic conundrum we’re in if we don’t understand how we got into it. 

2011: Trends and Observations

What will historians write about 2011?

In the U.S. and Europe the merger of globalization and the Information Technology revolution are putting a crunch on the middle-class while in the Middle East and Africa it’s reversing centuries of authoritarian rule. 

That’s a bit of an oversimplification, but it’s the best I could do to put it into one sentence.  

What’s Happened This Year?

1.  Activists protest and burn sections of London.

2. The Arab Spring produces popular rebellions against dictators across the Arab world. To varying degrees Tunisia, Egypt, Libya, Syria, Yemen, Bahrain, Algeria, Iraq, Israel, Jordan, Kuwait, Morocco, Oman and Saudi Arabia have all experienced unusual amounts of protest.  Former Egyptian President Honsi Mubarak, former Libyan President Muammar Gaddafi and former President Zine El Abidine Ben Ali of Tunisia were all driven out of power.  Combined they had had ruled their countries for 96 years.

3.  The Israeli Summer brings 250,000 Israelis into the streets, protesting the lack of affordable housing and the way their country is now dominated by an oligopoly of crony capitalists.

4.  Cities in Greece, Italy, Spain, Ireland and Latvia are overrun by young people protesting against unemployment and increasing economic inequality.   

5.  The Tea Party continues to control the dynamic of American politics by using leverage on the debt ceiling debate, resulting in an unprecedented S&P downgrade of U.S. credit.   
The Eurozone nearly collapses amid worries that Greece and Italy will default.  There are talks of Germany bailing these countries out, but only if a significant fiscal union can be established to ensure this doesn’t happen again. 

That’s enough isn’t it?  I didn’t even mention all the drama with Lindsay Lohan…  Just kidding.

Clearly, it’s been a busy year.  After all, Time Magazine’s Person of the Year was the “Protestor”.  That’s rather unusual.  So, how has the merger of globalization and the Information Technology revolution created the context for these events to occur?  Consider the recent advances in communications technology:  cloud computing, robotics, 4G wireless connectivity, Skype, Facebook, Google, LinkedIn, Twitter, the iPad, and cheap Internet-enabled smartphones.  Together these technologies have allowed more people around the world to get their hands on a piece of the pie. Therefore, to get into the middle class now, you have to study harder, work smarter and adapt quicker than ever before. All this technology and globalization are eliminating more and more “routine” work — the sort of work that once sustained a lot of middle-class lifestyles. This includes the famed manufacturing jobs that were once abundant in America.  Decades ago, you could secure one of these jobs with a high school diploma and they’d provide the means for the American Dream:  a house, wife that stayed home, a couple of kids, a dog, money to pay for your children’s education and a decent retirement.  Not the case anymore.  Even if these sorts of jobs did come back to our country, they wouldn’t pay enough to attain these desirables

Tom Friedman writes that the merger of globalization and I.T. is producing gargantuan profits, which is a bit ironic since we did just escape “The Great Recession” (have we really escaped though?) . He writes that “employers are finding it easier, cheaper and more necessary than ever to replace labor with machines, computers, robots and talented foreign workers. It used to be that only cheap foreign manual labor was easily available; now cheap foreign genius is easily available. This explains why corporations are getting richer and middle-skilled workers poorer. Good jobs do exist, but they require more education or technical skills. Unemployment today still remains relatively low for people with college degrees. But to get one of those degrees and to leverage it for a good job requires everyone to raise their game. It’s hard.”  He’s entirely correct.  The stakes have been raised. 

Take Grinnell College, a rural Iowa college with 1,600 students.  New York Times columnist Jacques Steinber writes that at little Grinnell College in rural Iowa, “nearly one of every 10 applicants being considered for the class of 2015 is from China.” The article noted that dozens of other American colleges and universities are seeing a similar surge as well. And the article added this fact: Half the “applicants from China this year have perfect scores of 800 on the math portion of the SAT.”  Read the full article here.

That’s remarkable. 

Friedman sums up this trend quite nicely:  “We are increasingly taking easy credit, routine work and government jobs and entitlements away from the middle class — at a time when it takes more skill to get and hold a decent job, at a time when citizens have more access to media to organize, protest and challenge authority and at a time when this same merger of globalization and I.T. is creating huge wages for people with global skills (or for those who learn to game the system and get access to money, monopolies or government contracts by being close to those in power) — thus widening income gaps and fueling resentments even more.”

I can’t wait to see what “2012: A Year in Review” will look like.

On a personal note, I’d like to thank anyone who’s reading this post.  Writing this blog has been intellectually and even emotionally satisfying. It’s allowed to me put to paper (wait, that phrase probably won’t exist in 50 years…) what’s been running through my head.  Or should I say “going on in my little grey cells”.   Thanks-

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The Takeaway: There’s no arguing that 2011 wasn’t a historically significant year.  I’m fascinated to see what next year will bring. 

"America Will End in 2011"

Screen shot of video "End of America 2011"

A video widely advertized on TV and circulated on the internet claims the biggest economic crisis in American history will hit within a year, drastically altering American life as we know it. Is there any truth to this?

This video, titled “End of America” was created by Porter Stansberry the founder of Stansberry & Associates Investment Research and editor of Porter Stansberry's Investment Advisory.  You can watch the full video 77 minute video here.  First, I’ll explain his credibility, and then deconstruct a few of his reasons for the “looming economic” disaster. 

Credibility: 

Porter Stansberry begins the video by building his credibility.  He claims that – to his knowledge – he was the only financial advisor to correctly predict the 2008 financial crises.  That “prediction” includes the bankruptcy of Fannie & Freddie and General Motors.  If this is true, he certainly sounds like some sort of guru. However, he did fail to mention that in 2007, he and his investment firm, then called "Pirate Investor," were ordered by a US District Court to pay $1.5 million in restitution and civil penalties, the court stating "Stansberry's conduct undoubtedly involved deliberate fraud, making statements that he knew to be false."  So, it seems that Stansberry has a history of deliberately misleading people, presumably to turn a profit.  Not that this completely discounts any credibility he might have, but it is worth noting.

Stanberry’s Claim:

Stansberry essentially cites one significant catalyst for the inevitable economic disaster: The United States losing its hold on the reserve currency of the world. 

Most people don’t know what the “reserve currency” means, so I’ll give a quick explanation.  Since global commodities like oil and gold are sold throughout the world, it makes since to price them in one currency.  This is just for simplicity’s sake.  After World War II, the U.S. dollar became the currency that was used to price all of these global commodities. 

Therefore, when a country other than the U.S. wants to buy a global good like oil, they must first exchange their particular currency for dollars.  Then, with those newly exchanged dollars they can buy oil.   Stansberry gives an example of this in his video about Germany. If Germany wants to buy oil from Saudi Arabia, it can’t go directly to Saudi Arabia and purchase the oil with Euros, it first must exchange it for dollars.  Then, once it has the newly exchanged dollars it can purchase the oil.

Here’s the rub: When countries exchange their currency for dollars there is a transaction fee.  Most of the time, this fee is insignificant, but over time for many countries (especially smaller ones) this cost can accrue.  Conversely, the U.S. never has to pay this transaction fee.  Therefore, the U.S. can by these global commodities – most notably oil – at a relatively cheaper price than other countries.  No transaction fees for us!  Also, it allows the U.S. to borrow money (which we do a lot…) at a better rate, because there are more dollars hanging around in the world than any other kind of currency.  These are the reasons that the dollar is known as the world’s “reserve currency”.  It’s kind of a difficult concept to understand, so don’t feel bad if you don’t have your head 100% wrapped around it.  I’m not quite there yet either.

Stanberry’s Claim Revisited:

So, now that we know what it means to have the world’s reserve currency is (or at least sort of know) we can look at Stanberry’s claim that the world will give up the dollar as the reserve currency.  As with many doomsday predictors, Stanberry takes a piece of information or a possibility and extrapolates it to point that people are rioting in the streets and children starving. 

The truth is that the dollar could be renounced as the world’s reserve currency – but not in the near future.  The types of fallout that Stanberry describes in his video could happen to the United States and the rest of the world if the reserve currency was changed from the dollar.  But the world won’t get rid of the dollar any time soon for this very reason.  There are no good alternatives right now for a reserve currency.  The Euro is failing, the English pound is too closely tied to the Euro, and the Japanese Yen probably wouldn’t work.  The only other possibility would be the Chinese Yuan.  There have been rumblings in China throughout the past several years about trying to replace the dollar with the Yuan, but it seems unlikely.  China currently has $2 trillion worth of American dollar assets (that’s called a trade deficit ladies and gentlemen!), and if the dollar were to be replaced as the world’s reserve currency it would significantly hurt the U.S. economy and devalue the dollar.  The Chinese don’t want the dollar to be devalued because then their $2 trillion of American dollar assets would lose value. 

I suppose this is one positive aspect of the world economy being as connected as it is. For better or worse!

In other words, there’s no plausible situation where the U.S dollar will be replaced as the world’s reserve currency in the short term or even the medium term.  Seventy-five years from now? Perhaps.  No can know for sure.  Let’s go back seventy-five years.  In 1936, would people have been able to predict what the world would be like in 2011?  Not a chance! It’d be another three years until Poland was invaded for goodness sakes.  If you asked the most brilliant and forward thinking economists at the time what a subprime mortgage, credit swap or – gasp! – The European Union was they wouldn’t have a clue.  Today we’re in the same situation for predicting the future.  We can be sure, however, that the dollar won’t lose its status as reserve currency anytime soon.  Stansberry’s claim that this will happen by next August is hyperbole. 

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The Takeaway:  All of Stansberry’s doomsday predictions are predicated on the dollar losing its status as the world’s reserve currency.  That may happen someday, but not in the short term or medium term.  Take deep breath and let’s start investing in education, infrastructure, and research, reforming our immigration policies, and creating better rules to encourage capital investment.  This will allow the U.S. economy to thrive once again.