Redesign the Paradigm

There are four major economic sectors that are critical for the survival of a modern information age society. These sectors include: Monetary & banking system, energy production, healthcare, and food production /water distribution. It is also necessary to have a stable and reliable government to ensure appropriate legislation and regulation.

There are growing problems in these sectors and it is spilling into other sectors. If left unresolved these problems could have serious long-term consequences to the U.S. economy. Hindrances to their resolution consist of a growing lack of political will to deal with them and a significant resistance to change from those who seek to maintain the status quo and the profits and wealth it generates for them. These influential individuals and special interest groups constitute many of our nations largest Multi National Corporations (MNC’s) and wealthiest investors.

These large MNC’s and investor groups believe they have the expertise, resources, and global exposure necessary to ride out any scenario
and with their resources they could very well be right – but what about the other 99% of Americans?

Problems in our critical sectors will have to be dealt with sooner or later. If handled proactively, it will be possible to make the changes less painful. If continually postponed, they will have to be dealt with reactively and in a state of crisis. It is unfortunate that in our society critical issues are generally not addressed until they approach a crisis mode. The population is easily distracted by the various media outlets with the issues that are of lesser relevance but has more emotional impact.

Monetary & Banking Sector -  Problems in this sector begin with the U.S. centralized banking system and way it increases the money supply through government bonds and fractional reserve banking. Debt is inherent in the very nature centralized banking  and the accumulating interest is contributing in an exponential manner to the nation’s rising debt, which is currently $15.0 trillion, and 100% of GDP. What is significant here is that our rising debt means our international debtors, if they lose confidence in the U.S. ability to manage its debt & pay interest – they will purchase less of our debt instruments i.e. treasuries. The Federal Reserve or FED will then be forced to print more dollars to cover government spending – which will lower debtor confidence even more – thus creating a cycle.

The threat here is that this loss of confidence extends to the dollar – resulting in a devaluation of the dollar and consequently our treasury bills. This scenario can also give rise to inflation. Our international debtors hold approx 28% of the U.S. debt – purchasing has already slowed or stopped altogether in China, Russia, and some of the oil bearing countries.

What does this mean for the U.S. citizen – If the dollar becomes devalued the $1.5 T worth of goods the U.S. imports each year become more expensive. More expensive goods means inflation.

In addition to rising national debt is U.S. financial markets preference towards financialization, which primarily involves derivatives investing – derivatives tie up money which could be better spent in the real economy. There is $600T worth of derivatives worldwide, $433T are interest rate contracts and swaps ($223T in U.S.). Most of this amount is notional meaning thankfully it will never come due. The scenario here starts with the devaluation of the dollar and treasuries occurring from a loss in confidence; this then requires the FED to raise interest rates / treasury yields in order to continue attracting investors and results in interest rates going up as well. Consider what will happen if interest rates, which currently are being held low artificially by the FED, raise faster than expected and just a fraction of these interest rate contracts get called due.

The FED is using something called quantitative easing to keep interest rates low. Explained simply, the FED establishes very low short term interest rates, then prints more money. It uses that money (created from nothing) to buy government and corporate bonds from banks and other financial institutions so they have more money to invest. The problem here is that it can cause inflation if too much money gets flooded into the system and printing more dollars also devalues the dollar. This risk is compounded if the FED has to raise rates to attract investors. Note – There is also the assumption the banks and financial institutions will invest in main street (small and medium size business loans ) as opposed strictly to Wall Street financial investments, this has not and is not occurring at expected rates.

Think of interest rate contracts / swaps as hedges or as insurance policies against unexpected interest rate adjustments. Now consider our four main banks, they have over $188T of interest rate contracts on their books, any significant movement in interest rates could mean another “too big to fail” scenario. Requiring even more money be printed, once again lowering debtor confidence.

Energy –  Energy sector problems involve a combination of diminishing access to natural resources (i.e. fossil fuels), production capacities reaching their limits, costs of production increasing as diminishing resources become more difficult to extract, and
increasing global demand rapidly outpacing supply. Using oil as an example, production levels appear to have plateau at around 84,500,000 barrels per day which may be indicating a potential global peak oil scenario, while demand from developing countries in Asia is rapidly increasing to support their growing middle classes. These are only a few areas remaining in the world with untapped easy to access surface oil fields, the remaining untapped fields will require greater production costs and increasing amounts of energy (oil) for extraction and processing. Consider the difficulties and energy requirements for deep water drilling and oil sands / shale production.

As production capacities peaks and demand outpaces supply oil prices will rise. Oil price increases equate to inflation since all consumables have to travel hundreds of miles to get to their final destinations. Oil is also used extensively in manufacturing processes – which also contributes to higher prices at the base component level.

Renewable Energy as yet represents only a fraction of our supply(8%), and will require heavy infrastructure costs and better efficiencies to become a viable alternative. Biofuels that could be used to ease some the oil demand as yet represent only 3% of consumption. I’m a big fan of renewable energy – but it can at best supplement oil over the next decade. There is also a lack of political will to seriously push alternative fuels like cellulosic ethanol, algae based bio diesel, or high efficient batteries or capacitors for electric cars. All of which require significantly more research and infrastructure development costs, something we will have difficulty affording in the future.

Resistance is very strong and well organized in the fossil fuel energy sector driven multifaceted lobbying efforts and campaign contribution. These corporations stand to profit greatly from higher prices regardless if demand is met, but this attitude and the subsequent higher costs in gasoline and electrical bills is not going to help the rest of the economy or the American people.

Healthcare – Escalating healthcare costs in the Unites States are at $2.5 T and rising, that’s over $8000 per person. $2950 is the global average among the developed countries. Cost drivers include expensive advances in medical technology and associated new equipment, cumbersome administrative expenses, new generations of patented prescription drugs, and of course profit taking in every sector. The biggest expectation of future costs increases will come from aging baby boomers accompanied with growing rates of obesity and chronic disease.

Possibly the greatest costs driver is the pharmaceutical industry’s ongoing concentration on expensive patented long term drug treatments as opposed to actually providing cures, and the lack of any real interest in preventative care. In addition, almost all drugs have some level of toxicity which means that long term exposure generally results in another round of future disease requiring additional treatments. While this may represent a lucrative profit model for pharmaceutical companies it is the principle driver behind the rising healthcare costs of U.S. and if left on its current trajectory could potentially bankrupt the country. Powerful lobbying pressures ensure that there is little if any political will to address these rising costs.

Do U.S. citizens benefit from these rising costs? Consider that the U.S. ranks near the bottom of the 19 developed countries in Healthy life expectancy (HALE), The U.S. is dead last in the age-adjusted amenable mortality rate before age 75 category, which is a strong indicator of the effectiveness of treating disease. To make matters worse, the US appears to be slipping even further behind the other countries despite its increasing spending and being the most medicated of developed countries.

Food Production – Food production represents problems on a number of fronts.   The U.S. is better able to provide its population with readily available low cost food supply than at any time in history. This is possible due to very efficient large scale farming and the U.S. Farm bill which subsidizes the country’s primary crops – corn, soy, wheat, and rice. These crops can then be sold to food producers for less than costs of production. Food production companies then utilizes these four crops and a variety of cheap chemicals to create the majority of the food we enjoy today.  Unfortunately, in order to achieve the mass production efficiencies necessary to keep costs as low as possible these types of  food  are heavily refined and processed, thus loosing their original nutritional value. They are also laden with addictive levels of fats, salts, sugars and numerous chemically based additives.

Long term consumption of these food products is causing an obesity epidemic and contributing to chronic diseases.  Chronic disease such as heart disease, stroke, and cancer and obesity related diseases like diabetes have no real cures and currently require expensive and often long term treatment. This in turn contributes to rising health care costs.

Food production in the U.S. is becoming increasingly dependent on genetically modified crops (GMO). These crops usually consist of only one strain lacking the genetic diversity necessary for crop resiliency against disease. There are benefits to GMO’s which include pesticide resistance (GMO companies are generally chemical companies), rapid growth, drought resistance, and large visually attractive produce. However, they  have inferior nutritional value and there are growing concerns over long term health consequences. This has resulted in GMO crops being banned in a number of countries due to inadequate testing.  Over reliance on GMO crops and the foods produced from them could be another driver towards increasing healthcare costs. Over reliance on GMO crops and the foods produced from them could turn out to be another major factor raising  healthcare costs.

GMO crops also do not produce seeds that can be replanted, thus forcing farmers to purchase seeds yearly instead of saving their own. Farmers who do not purchase GMO seeds or do not use GMO crops are subject to lawsuits if there farms contain any GMO plants. A virtual certainty when considering that plants reproduce by their seeds traveling through the air via wind currents. In addition, if there is a disease that attacks and decimates the GMO crops there simply is not enough backup seed or diversity available to quickly recover. This could spell famine for many regions in the world dependent on U.S. GMO crops since indigenous farmers stopped producing since they cannot compete against cheap GMO imports.

Modern farming has also become heavily dependent on oil. Heavy machinery is used prolifically on all large scale farms. Mass production requires petroleum based fertilizers since it degrades the soil to the point crops will not grow otherwise.  Produce and food products travel hundreds of miles to grocery stores, so when oil prices go up, food prices do as well which increases inflation.

Freshwater scarcity represents another concern.  Our glaciers are diminishing, aquifer and lakes water tables and dropping. Our largest aquifers are not even replenishable by rain water. This will threaten farm productivity and limiting urban growth in many regions. It is being expedited world wide by increasing populations and may represent one of our most significant long term threats.

Government – The final area of concern is our lack of responsible government or what some would argue is legalized government corruption. This has resulted in an ongoing decline of moral values among our leadership. The process begins with well financed special interests led primarily by large banks / financial institutions, and MNC’s all of which are using lobbying to acquire and even write favorable legislation. It also includes campaign contributions that get officials elected who are beholden to their interests, especially those who sit in key subcommittee positions, the decision makers. The return these institutions receive is substantial, for every $1 of campaign contributions and / or investment in lobbying there is a yield of $1000 in favorable legislation, tax breaks, and subsidies.

This environment also creates a lack of fiscal responsibility regardless of which political party is in office as politicians become increasingly beholden to special interests. This is one of the principle reasons for the rampant deficit spending that is increasing the U.S. national debt. These actions further decrease global investor confidence in theU.S. ability to manage its debt.

There was large scale disapproval from our international debtors when 2011 budgetary projections went from $900B to $1.5T, the bulk of this increase went to extend the tax cuts. This occurred while Europe was and is currently taking on austerity measures to address its own debt. Without fiscal responsibility, an end of extensions for the Bush era tax cuts, and a cessation of combat duties in Iraq, Afghanistan, and now Libya, CBO projections expect a debt level surpassing $20T by the end of the decade.

The abuses in lobbying combined with no limits on corporate campaign contributions are two of the primary reasons corrective actions to our problems are also so difficult.

All of these problems can be addressed effectively with the possible exception of water scarcity, which is very dependent on rising populations and changing weather patterns.

These factors also are interconnected and each contributes to the others. These issues need to be addressed as a whole in addition to their individual components.

In the next blog we will take a long honest look at the underlying cause of what is driving the scenarios in these critical sectors. Sectors essential for U.S. economic growth and maintaining the standard of life so many Americans have grown accustomed too. In a nut shell, these sectors are evolving into arenas concerned with only short term profit maximization, wealth generation, and ensuring that power and control of these systems remain in place regardless of the consequences. This emphasis is now disproportionately benefiting a small percentage of the population and it is happening at the expense of the overall country.