Posted by Eric Solis on June 22, 2011 under National Debt, Public Policy, Saving & Investing, Uncategorized | 
This will shock many and I am sure cause a reaction in some, but the cure to the economic woos facing our nation is not the national debt in isolation, as the national debt is an unsolvable problem under the current tax schema. Bottom line…America has a structural deficit and the problem can’t be fixed without first converting from a consumer based society to a nation of savers. The problem with our national debt is that we are not “self funded”. As you know the US relies heavily on external capital from nations that do not share our values and/or interests. This so called “hot money” can be expatriate back to its home country without warning.
What is the solution? We MUST generate enough domestic savings to absorb the delta between tax receipts and government deficit spending. In other words, private sector savings can offset government spending on the cash flow statement of USA Inc. The debt will still rise, but if Americans hold the debt, then it is like borrowing money from ourselves. In the absence of addressing the private savings rate, spending cuts alone will not solve the problem as the debt bucket has a hole that no amount of duct tape can fix. In the absence of a complete overhaul of the tax system, which is out dated and built on a industrial era platform of American consumerism, the USA will collapse from the weight of its debt and will make Greece look like a wealthy nation in comparison, and NO amount of tax cuts can change this course if left uncorrected.
On the other hand; an increased savings rate will have an inverted multiplier effect on public debt reduction. Meaning that for every dollar saved, the net effect will be an equivalent reduction of government debt. Savings is to de-leveraging, as leverage is to consumption. We MUST also let go of Keynesian dogma that asserts that savings hurts the economy. We need to think about becoming healthy financially so we can sell best of breed products into a global economy which has the potential to explode in the years to come. If America gets serious about causing China to play by the rules (i.e. re-valuing the Yuan) then America will once again be in position to compete for high paying manufacturing jobs.
Re-valuation will also reverse the tide of our massive trade deficit and move us toward a balanced current account, furthering the reduction of aggregate US liabilities.
Posted by Eric Solis on December 29, 2010 under Banking, Financial Crisis, General, Global/International, U.S. Treasury Markets, Uncategorized |
Oil Prices-Surrogate Interest Rate; Low rates are the problem not the solution.
Oil is priced more like a bond than a commodity. As interest rates go down, prices of oil rise and as interest rates go up, oil prices fall. Why is this important? Because the Federal Reserve is choosing to leave interest rates at or near zero to keep oil prices artificially high. The result of this is that money that is being funneled to OPEC could be going to the American people by way of lower gas prices at the pump, heating oil and lower consumer prices. The distribution of freed up capital as a result of lower oil prices is far reaching when prices drop. The economic benefit hits the economy immediately and is spread far and wide across all socio economic classes. Low interest rates on the other hand, unevenly distribute relief to those persons owning assets which require financing in particular BANKS. The problem is that in an economic climate where savings not debt is the required behavior; lower interest rates are a bastardized strategy towards stimulating economic growth.
Even more disconcerting is that low interest rates are essentially a vehicle for funneling money to OPEC by way of artificially high interest rates. What do I mean by this? Think about it this way. If interest rates were to increase to 5% which is the historical average for 100 years, then oil would drop back to 1990 levels. Think about a world today with $1 gas prices at the pump and natural gas bills for heating your home cut by 65%.
This would distribute 100’s of billions of dollars immediately and tangibly right into the pockets of the American people. Instead what the government is doing is keeping rates at zero; so that oil prices remain high and thereby American consumers are channeling these hundreds of billions of dollars to Saudi Arabia instead. The other benefactor to this strategy is the BANKS. Since they borrow at 0%, they are basically getting free money at the direct expense to the consumer. The consumer is getting hoodwinked into thinking that low interest rates are stimulative to the economy. But you need not be an economist to determine that the supposed tsunami of capital that the government has injected through fiscal and monetary policy, is NOT finding its way into the hands of consumers. In fact it is being sucked out of the pockets of consumers by way of an artificially high oil price. This tax on consumers is then monetized by way of printing more dollars and then loaned to banks at zero percent.
IMHO
Posted by Eric Solis on December 20, 2010 under Global/International, Uncategorized |
December 20th, 2010
Paper Tigers
By: Eric Solis
America has imported low inflation and in exchange exported its wealth for the past half century. This Began with the Japanese following World War II and has continued with the Chinese for the past two decades. The similarities between these two paper tigers are astounding.
Prior to World War II, the Yen Dollar exchange rate was 3 to 1 and Japan was a vibrant economy with a strong currency. After The United States defeated Japan in 1945, General Mac Arthur was charged with revaluing the Yen. He looked at the Japanese flag and saw the red sphere representing a 360 degree angle; hence he pegged the Yen Dollar exchange rate at 360 to 1. Overnight, Japan went from being an industrial nation to a third world country with a weak currency. This currency devaluation guaranteed two things 1) Americans would be able trade dollars for cheap Japanese products and 2) America would provide the capital for Japan to rebuild after having two of its largest and most strategic industrialized cities demolished.
The Japanese finally de-peg the Yen from the USD after the US abandoned the gold standard in 1971. But, by then the forces of an artificially weak currency were already in motion. Japanese exports had become too cheap in the international markets, they had a huge trade surplus and inflation was escalating because of exploding money supply.
By the mid 1980’s Japan was buying assets at a blistering pace…everything from government bonds, landmark real estate, US equities and prestigious county clubs and golf courses and they ran a burgeoning trade surplus with America. Fear was mounting that Japan would soon own America.
But, the political and economic reality was that the Japanese had won their massive wealth through a planned and unsustainable competitive advantage that was built into the trade relationship with the United States following the war. As the Yen began to strengthen, causing prices to rise in the international markets, the Japanese became less competitive and by the end of the decade, their products were priced in line with American made products. After 40 years of being on the receiving end of American consumerism, Japan had become a wealthy juggernaut and America’s mission of rebuilding had been completed. Next up…American’s point there consumption across the bay towards China.
Japanese were a case study for the Chinese… a practice test, the beta, the crash dummy so to speak. Like Japan, the Chinese have also benefitted from an artificially suppressed currency value which has gained them an unfair and unsustainable competitive advantage against trading partners including the USA. But America has a goal just like it did with Japan; to open up the huge Chinese market and abolish communism.
This plan has been in the works for over 150 years reaching back in time to the Opium War of 1839-42. As a result of the Treaty of Nanking in 1842, the Treaty of Beijing in 1860, and The Convention for the Extension of Hong Kong Territory in 1898, the Chinese entered into a 99 year lease placing Hong Kong under British rule. The lease expired on July 1st, 1997 and the United Kingdom returned Hong Kong back to China. They received a world class society with a western style economy, free markets, vast technological and business infrastructure and a multi-party political system.
However, mainland China had made little progress during that time period economically, politically or socially. But the West now had a foothold into China that would give it the access it needed to begin breaking loose communisms chock hold on China, beginning with its currency. The Yuan-Renminbi has been pegged to the USD for decades which has played a pivotal role in China’s ability to dominate in international trade and become what it is today. But there oughtn’t to be an utterance of China amongst bona-fide world leaders until China proves that it can compete in the world of business and trade with a currency that trades freely and unabated and without being controlled or manipulated and whereby their society is protected by human and property rights.
To create a visual, imagine pushing a beach ball under water…keep pushing…keep pushing down…down…down…down further and deeper, keep going and then BOOM!!! Eventually the ball is going to rush to the surface with a vengeance. In economic and societal terms, this is what is happening within China as their wealth is being unevenly distributed and their massive trade imbalance is being hoarded by the government to control the value of the Yuan. These macro forces are giving the Chinese government indigestion as both tempers and inflation rise.
Having a large trade surplus is no better than having an equally large trade deficit. The goal is to balance the current accounts and bring equilibrium between imports and exports. This balance in trade is a sign of a healthy economy which indicates that investments are moving in both directions and there is not an excess of savings or spending.
The question is who has the easier problem to solve, America or China? China creates sweat shops and abuses its citizens to distribute cheap products around the globe and they care little about establishing a vibrant middle class or legal framework with defendable human and property rights. They have hoarded trillions of USD to manipulate the Yuan and now there is a crack in the levy.
On the other hand, the US has the lowest savings rates in the industrialized world and a thirteen trillion dollar national debt, a bad combination to be sure. But it has one of the most advanced economies in the world and is able to mass produce goods and services with global reach and distribution capabilities. The USA is home the most efficiently run companies and it has a robust middle class and it marks its markets to the market each and every day without interference.
As of this writing, the Chinese are feeling the pressure of an undervalued currency. The Chinese current accounts currently hold over $1.5 trillion USD which was an intentional transfer of wealth to open their market. But now, as China flexes its steroid built economic muscles, the United States will take away the needle. China is the proverbial “bull in a China shop” (pun intended) and they stand to wreak havoc on the tentative global economy if left unchecked.
Watch and listen as the United States power structure begins turn the screws on China and their currency. As baseball was to Barry Bonds, the markets will be to China as it imputes punishment on the Chinese for its ill gotten wealth. While the USA has its work cut out as it goes through the painful process of revaluation and deleveraging, it will fare far better than the Chinese who still must learn the basic fundamentals of how to operate within a free market economy.
It is true that the Chinese are a new, huge and profitable market and a major source of global growth, but will this translate into sustainable economic and political power? Not until they choose to recognize and enforce and embrace free markets, human rights, property rights and free speech; which are all pre-requisites to leading in the twenty first century.
As China runs its course, who will be next…India?
Posted by Eric Solis on November 17, 2010 under Public Policy, Technology & Innovation |
More times than not, “protection” equates to diminished access as rules and regulations almost without exception carry a cost of compliance and they usually focus on the wrong problem.
The propensity of law makers is to focus on short run, non systemic risks, such as cost, volatility, disclosure, etc. when the real problem lies within how the core operating systems of our financial infrastructure are or are not being utilized properly. When a company holds itself out to be something it is not (technologically) and then something goes awry, public trust in technology at large is damaged and innovation suffers the consequences.
One solution might be to create a governmental agency which certifies the soundness, reliability, scale and security of technology based systems. Few, if any financial company’s today operate in a silo; they are interconnected and rely upon each other for vital process flow within the links of their transaction chain. But as the old adage goes, “you are only as strong as the weakest link in the chain” and this bares a profound truth when it comes to technology.
It is indisputable that innovation and technology can break down long standing barriers to entry for the underserved mass consumer with regard to how one achieves access to financial services and products that heretofore have been out of reach. But the problem is that the end users do not know who or what to trust and with good reason. This is where the breakdown occurs and where the focus of law makers needs to be.
If there were a “certification” that vetted new technological applications on the basis of system architecture and failure points, then entrepreneurs could develop innovative solutions that could provide high quality, unprecedented and trusted access to the public. This would hold non traditional financial companies accountable to knowledgeable industry experts employed by the government in order to maintain their participation in certificate program.
Successful examples of this methodology include:
- Verisign-SSL certificates
- Better Business Bureau-A-F ranking
- Moody’s and S&P-AAA rating
- FDA-Approved by the FDA
- FINRA-Member FINRA SIPC
- FDIC-Member FDIC.
Innovation flows through the disruptive unknown and Trust Certifications of this type would spawn a bewildering array of ACCESS to the heretofore underbanked. IMHO
Posted by Eric Solis on December 15, 2009 under Public Policy |
Debt Elimination Credit Vouchers (“DECV) Under DECV the government would issue vouchers to every man woman and child for purposes of eliminating debt. These credit vouchers would be in the form of a government loan and would be used as cash for the exclusive purpose of paying off debt. DECV vouchers are an actual dollar amount equal to the average amount of consumer debt owed per US household. Under this plan the DECV voucher can only be used to pay off consumer debt, college loans or a mortgage etc. If one does not have consumer debt, then the DECV can be used to fund an IRA, HSA or other long term savings need. DECV is structured as a government loan paid back over 10, 20, 30 or 40 years.DECV infuses cash into banks through the repayment of all consumer debt. But it will go through the hands of the tax payers who under any rescue plan will be footing the bill. DECV kills two birds with one stone as DECV vouchers will use tax payer money for their direct benefit by way of substantially reducing or eliminating Americans consumer debt. Banks will become a scaled down version of their former self, because the usury rates charged on consumer loans by banks will be paid off and no longer produce outsized revenue to the banking industry. The problem with infusing banks on the back end is that it keeps this massive consumer debt overhang in tact, which is at the core of the financial crisis.
By refinancing consumer debt, which can be as high as 36%, with long term government debt of 2%, we would free up as much as $150 billion net (est.) per year for every trillion of DECV issued. Under DECV the vacuum of wealth created by consumer debt would be eliminated and the aggregate interest charge to our country would be reduced in proportion to the net spread between consumer debt and government debt. Under the current plan all this money goes into the banking industry’s coffers.
This plan will relieve (not eliminate) pressure on the housing market and unclog the credit markets and derivatives tied to it (i.e. CDS, CDO, CMO etc.) because consumers will be more credit worthy at large. More consumers will be able to make their house payment since they will not be burden with consumer debt. Banks will get the much needed cash infusion and people who carried no debt will have a lump sum to sock away for retirement rewarding good financial management. DECV democratizes the bailout to inure to the benefit of all Americans as apposed to consolidating the benefit to a few.The Treasury and the Government will know exactly how much DECV will cost upfront in contrast to the open ended liability of the planned RTC2. According to the Federal Reserve Statistics Release on Consumer Credit dated July, 2008 revolving consumer debt is 3.5 trillion dollars. The demand for government securities is at an all time high while the securities backed by consumer debt are toxic.
DECV takes the toxic assets off the balance sheet of the banks, as prescribed by Treasury, the Fed and the Administration, but it does so through the hands of those footing the bill…the American tax payer.
Posted by Eric Solis on August 24, 2009 under Healthcare |
PUBLIC HEALTHCARE
I am compelled to write this with regard to the healthcare debate that our country is in. First, let me be clear that I am a fiscal, monetary and social conservative with moderate economic views. I consider myself an independent and am registered accordingly. I do not agree with Obama on 99% of the issues and like many am skeptical of his capacity to serve as President of our nation. With that said, I am just as skeptical of the insurance and pharmaceutical companies that control the choking points of the health care industry. Consider the following:
- What would it cost to get a piece of mail from LA to NY if it were left up to Federal Express?
- What would it cost to air condition your home if the Public Utilities Commission did not exist?
- What would private industry charge you to pump water into your home if not for the PUC?
- What would Elementary school cost if it were priced like private Universities?
- What would law enforcement cost if a public option did not exist?
- What would fire services cost if a public option did not exist?
I am a strong advocate of capitalism, but when it comes to “utility” type needs of society; it is not uncommon and indeed makes sense to have the “government” provide a foundational service to support availability and fair pricing. Remember government is supposed to be “we the people”. And while I get the mistrust of our government, at the core, the idea of eliminating the profit motive from healthcare makes sense and this point I would assert is long over due.
The healthcare industry is a monopoly. For example you do not have to have a computer, or Microsoft windows or the internet or a car. But we all have to have healthcare. We do not have to have coverage, but to live we have to have healthcare. So price fixing and corruption are part and parcel with this monopolistic industry. It is analogous to giving a group of for profit companies the right to price and sell us the oxygen we breathe. How many of us would want that? How many of us believe that business today would sell us oxygen at a fair price? Just look at the cell phone industry as an example; what they sell us the right to use the air waves and we all know they are gouging consumers. Remember that corporate America is every bit as corrupt as the Government.
Have you ever wondered why we get water so cheap? It is life sustaining and we can’t live without it. In my view healthcare falls in the same camp. To have only companies that want to profit off delivering healthcare is a PROBLEM and a BIG one at that. I am of the belief that the insurance industry is causing fear and confusion with regard to what a public option would look like. Think about this for a minute. The insurance industry earns upwards of 50 billion in net profits year in and year out. If you were to add back all of the executive pay, marketing, commissions and fees adding up to hundreds of billions of dollars that is paid out year after year, you would discover enough money to insure millions of people. Double goes for the Pharmaceutical industry (have you asked yourself why there is a drug store on every corner these days even out in the middle of nowhere? BIG MONEY!). The fact is that the number is as large as the stimulus package that was paid out in 2008, but in this case it would be every year and it would go directly towards creating a solution for our nation’s dire healthcare problem. Put another way, if this money were absorbed for the benefit of society as a dividend to keep healthcare costs down, it would equate to a huge savings for society over time and each American would be a benefactor of this freed up capital that is currently going into the coffers of the healthcare monopoly, year after year after year, equating to trillions of dollars over time.
Personally I think a public utilities sort of arrangement makes the most sense. Pharmaceutical and health insurance companies should be treated like utility companies whereby they are given rate increase approvals to reach target ROI. This would create private industry solution to a public “utility” need (i.e. healthcare) with a rate of return that mirrors that of a public utility company (i.e. 10%) that is given an implied guarantee and could even be subsidized by the government. This is a model that Americans are familiar with and use every day when we flip the light switch on in their homes or when we run the bath.
Oh, and BTW…you are not forced to use and pay your utility company. It is your right to sit in the dark. So, do not confuse my comments with agreeing with Obamacare or Romneycare. This sort of plan would still protect the freedoms afforded us under the constitution of the United Staes of America.
Posted by Eric Solis on August 10, 2009 under Financial Crisis, Investment Strategies, Public Policy, Saving & Investing, Stock Market |
With all of the chaos in the world of finance, I was recently asked to appear on Fox News kttv_s2521, to discuss financial principals that would work for the average American in today’s uncertain world.
I spoke on issues regarding the impact that the global financial crisis and economic meltdown can have on you, your family and your wallet. I postulate a strong belief that now is the time to reclaim our country; together we can “buy America back one dollar at a time, one day at a time, and one person at a time” through an increased National savings rate and personal stewardship.
I am an unwavering champion of the “little guy”. My goal is to create sustainable financial solutions for all of man kind by thinking differently and being willing to do the hard work of breaking down barriers (and believe me it is not easy).
This interview demonstrates how a highly complex financial breakdown can be utilized as an opportunity to improve on your personal vision and financial goals.
Now watch the interview kttv_s2521 and pass it along to family and friends. Also, remember to post a comment when you are done as your feedback is important to me.
God bless,
Eric
Posted by Eric Solis on under Public Policy, Stewardship/Spiritual/Finance |
“For they that are after the flesh do mind the things of the flesh; but they that are after the Spirit of things of the Spirit.” Romans 8:5
There was a time when the things of God were important to America and its people. The American Dream was not synonymous with consumerism and having more stuff. The balance of life style and concern for our fellow man was imbedded in our culture. But today, even (or especially) our churches are filled with people that are distracted with the things of this world and immediate self gratification and not the will or work of God.
Most people do not connect their finances to the existence of God, even though our currency reminds us that “In God We Trust”. Especially in the media, few are courageous enough to connect the word of God to the world of good, by speaking out with regard to how these realities co-exist. But unless we as a people (not the government) begin to acknowledge this connection and thus leave enough resources to care for our pressing social needs, then our personal and national finances will continue to suffer and our liberty will continue to erode from the inside out.
The American Dream is part and parcel to being a self governing people under God, with liberty and justice for all. This means that we must give of ourselves by way of time and resources to His will and be willing to sacrifice along these lines.
Starting with our families and churches, extending to our communities, expanding to our nation and reaching across the globe with the love of God is the cure for the consumer driven malady gripping the finances of our world today.
As we eliminate the distractions of life, driven by our own passions and desires, we will become able to look outside of ourselves to see the lost and hurting people all around us and become willing to help. And as we shift towards seeing people as the purpose rather than the problem, we will see the glorious fruit of our Nation blessed once again by God.
”For if ye live after the flesh, ye shall die. But if ye through the Spirit do mortify the deeds of the body, ye shall live.” Romans 8:13
