Tuesday, November 12, 2013

602 Thatcher Postindustrialism and "Shareholder Value" Management ruined Anglo-American economies - Forbes writers

Thatcher Postindustrialism and "Shareholder Value" Management ruined
Anglo-American economies - Forbes writers

Newsletter published on 18 July 2013

(1) Ralph Gomory challenges the view that a CEO’s job is to maximize
“shareholder value”
(2) "Shareholder Value" management originated with Milton Friedman -
Steve Denning
(3) Robert Mundell: outsourcing has gone too far; America losing its
ability to manufacture
(4) Thatcher hollowed out UK Industry, handed lead to Germany & Asia -
Eamonn Fingleton
(5) Dethroning The Dollar: The Yuan, The Bitcoin, And Other 'Usurpers'
(6) Apocalypse Soon: The U.S. Dollar's Grim Future - Eamonn Fingleton

(1) Ralph Gomory challenges the view that a CEO’s job is to maximize
“shareholder value”


What's An Economy For? Top Economist's Novel Answer: For You!

Eamonn Fingleton

Forbes,  7/14/2013 @ 11:44AM

For nearly two generations now American economists have been trying to
remake human nature to fit economic theory. Ralph Gomory has a different
idea: remake economic theory to fit human nature.

Gomory  challenges the now almost universally held view that a CEO’s job
is simply to maximize “shareholder value.” He believes that if American
capitalism is to remain healthy and successful, corporations need to
move beyond a myopic concern with short-term profits. Other
stakeholders, not least workers, consumers, suppliers, and the nation as
a whole, also have skin in the game and their interests too should be
served. He has been particularly critical of the way that, in the name
of free trade, the U.S. economy has been bled dry of manufacturing jobs.
He even suggests that tariffs may be necessary to counter the
deleterious effect of China’s rise on American prosperity.

To the latter-day American intellectual establishment, such thoughts
are, of course, heretical. But Gomory is a hard man to ignore. A
world-class mathematician, he is fearless in challenging the armory of
advanced calculus behind which the American economics profession hides.
He has an answer to every counter-argument and often can reach into his
own unusually extensive real-world experience to rebut his opponents.

Take the idea that a corporation’s sole responsibility is to serve its
shareholders. Not only is there nothing in American law to support this,
he points out, but the notion is actually of remarkably recent vintage,
having come to the fore as recently as the mid-1980s.

A former director of research at IBM and now aged 84, Gomory well
remembers a time when major corporations consciously and proactively
looked out for the interests of several different stakeholders beyond
simply shareholders. He quotes a statement by the U.S. Business
Roundtable, a group of top corporate executives, in 1981. In part, this
read: “Corporations have a responsibility, first of all, to make
available to the public quality goods and services at fair prices,
thereby earning a profit that attracts investment to continue and
enhance the enterprise, provide jobs, and build the
economy…..Responsibility to all these constituents in toto constitutes
responsibility to society….. Business and society have a symbiotic
relationship: the long-term viability of the corporation depends upon
its responsibility to the society of which it is a part.”

In 2000 he partnered the noted economist William Baumol in Global Trade
and Conflicting National Interests, a book that explodes the myth that
nations always benefit from free trade. In a debate where most
anti-trade arguments don’t pass even elementary tests of economic
literacy, Gomory marshaled higher mathematics to confound economic
orthodoxy. His calculations suggested that though in the early stages of
China’s growth, free trade with China may have benefited the United
States, the balance between advantages and disadvantages  probably
quickly turned negative as China became richer. In a tribute to the
rigor of his methods, he has been dubbed the Luther of the economists’

The book was originally ignored by the economics profession but is now
considered by many to represent the biggest advance in trade theory
since David Ricardo enunciated his theory of comparative advantage — the
classic case for free trade — two centuries ago. The former top Reagan
administration economic policymaker Paul Craig Roberts has even stated
that Gomory and Baumol have demonstrated that Ricardo was incorrect from
the beginning.

Perhaps his most politically significant contribution is his suggestion
that under conditions of “one-way free trade” (my term, not his), the
United States is subject to a catastrophic drain abroad of its most
advanced production technologies. Meanwhile Americans have been lulled
into a false sense of security with fatuous talk about how the United
States enjoys a unique edge in innovation.

Here is how he couched the argument in a Huffington Post commentary a
few days ago:

“Day in and day out, innovation is everybody’s favorite. We hear over
and over that America must innovate to survive, America must innovate to
compete in the global economy, and that Americans can do it because
Americans are inherently innovative.

This discussion of innovation has things fundamentally backwards. It
does not make sense to talk about innovation as if innovation was an end
in itself. We could innovate until the cows come home and if we can’t
translate that innovation into something substantial that adds to the
economic output of the United States, it does little for America. If our
strategy is to generate new ideas that other countries acquire, either
as the foundation of a new industry or to gain an advantage in an old
one, we will have the expense and glory of being innovators, and they
will have the resulting industries and the economic benefits.

But in this era of globalization, and of worldwide profit seeking, our
global corporations are strongly motivated to move their manufacturing
abroad, not only in response to the availability of cheap labor, but
also in areas of high technology where cheap labor is not the attraction
but foreign subsidies are. And manufacturing innovation goes abroad with

What is the solution? Gomory believes the U.S. government could go a
long way towards stemming the production technology outflow if it
favored U.S. added value in calibrating corporate taxes. Profits of
those corporations that created most of their added value at home would
be subjected to low taxes. Meanwhile taxes on  corporations that created
most of their added value abroad would rise to their pain threshold (my
words, not Gomory’s!).

He has not yet fleshed out the details but believes a workable system
can be constructed in which corporate mindsets would undergo a sea
change.If his concept flies, the implications are hard to exaggerate.
Just the most obvious victims would appear to be companies like Apple,
Dell, and Nike, which are not only major exponents of offshoring
manufacturing but rely particularly heavily on foreign tax havens.

(2) "Shareholder Value" management originated with Milton Friedman -
Steve Denning


The Origin Of 'The World's Dumbest Idea': Milton Friedman

by Steve Denning

LEADERSHIP  |  6/26/2013 @ 11:37AM

No popular idea ever has a single origin. But the idea that the sole
purpose of a firm is to make money for its shareholders got going in a
major way with an article by Milton Friedman in the New York Times on
September 13, 1970.

As the leader of the Chicago school of economics, and the winner of
Nobel Prize in Economics in 1976, Friedman has been described by The
Economist as “the most influential economist of the second half of the
20th century…possibly of all of it”. The impact of the NYT article
contributed to George Will calling him “the most consequential public
intellectual of the 20th century.”

Friedman’s article was ferocious. Any business executives who pursued a
goal other than making money were, he said, “unwitting puppets of the
intellectual forces that have been undermining the basis of a free
society these past decades.” They were guilty of “analytical looseness
and lack of rigor.” They had even turned themselves into “unelected
government officials” who were illegally taxing employers and customers.

How did the Nobel-prize winner arrive at these conclusions? It’s curious
that a paper which accuses others of “analytical looseness and lack of
rigor” assumes its conclusion before it begins. “In a free-enterprise,
private-property system,” the article states flatly at the outset as an
obvious truth requiring no justification or proof, “a corporate
executive is an employee of the owners of the business,” namely the

Come again?

If anyone familiar with even the rudiments of the law were to be asked
whether a corporate executive is an employee of the shareholders, the
answer would be: clearly not. The executive is an employee of the

An organization is a mere legal fiction

But in the magical world conjured up in this article, an organization is
a mere “legal fiction”, which the article simply ignores in order to
prove the pre-determined conclusion. The executive “has direct
responsibility to his employers.” i.e. the shareholders. “That
responsibility is to conduct the business in accordance with their
desires, which generally will be to make as much money as possible while
conforming to the basic rules of the society, both those embodied in law
and those embodied in ethical custom.“

What’s interesting is that while the article jettisons one legal
reality—the corporation—as a mere legal fiction, it rests its entire
argument on another legal reality—the law of agency—as the foundation
for the conclusions. The article thus picks and chooses which parts of
legal reality are mere “legal fictions” to be ignored and which parts
are “rock-solid foundations” for public policy. The choice depends on
the predetermined conclusion that is sought to be proved.

A corporate executive who devotes any money for any general social
interest would, the article argues, “be spending someone else’s money…
Insofar as his actions in accord with his ‘social responsibility’ reduce
returns to stockholders, he is spending their money.”

How did the corporation’s money somehow become the shareholder’s money?
Simple. That is the article’s starting assumption. By assuming away the
existence of the corporation as a mere “legal fiction”, hey presto! the
corporation’s money magically becomes the stockholders’ money.

But the conceptual sleight of hand doesn’t stop there. The article goes
on: “Insofar as his actions raise the price to customers, he is spending
the customers’ money.” One moment ago, the organization’s money was the
stockholder’s money. But suddenly in this phantasmagorical world, the
organization’s money has become the customer’s money. With another wave
of Professor Friedman’s conceptual wand, the customers have acquired a
notional “right” to a product at a certain price and any money over and
above that price has magically become “theirs”.

But even then the intellectual fantasy isn’t finished. The article
continued: “Insofar as [the executives’] actions lower the wages of some
employees, he is spending their money.” Now suddenly, the organization’s
money has become, not the stockholder’s money or the customers’ money,
but the employees’ money.

Is the money the stockholders’, the customers’ or the employees’?
Apparently, it can be any of those possibilities, depending on which
argument the article is trying to make. In Professor Friedman’s wondrous
world, the money is anyone’s except that of the real legal owner of the
money: the organization.

One might think that intellectual nonsense of this sort would have been
quickly spotted and denounced as absurd. And perhaps if the article had
been written by someone other than the leader of the Chicago school of
economics and a front-runner for the Nobel Prize in Economics that was
to come in 1976, that would have been the article’s fate. But instead
this wild fantasy obtained widespread support as the new gospel of business.

People just wanted to believe…

The success of the article was not because the arguments were sound or
powerful, but rather because people desperately wanted to believe. At
the time, private sector firms were starting to feel the first pressures
of global competition and executives were looking around for ways to
increase their returns. The idea of focusing totally on making money,
and forgetting about any concerns for employees, customers or society
seemed like a promising avenue worth exploring, regardless of the

In fact, the argument was so attractive that, six years later, it was
dressed up in fancy mathematics to become one of the most famous and
widely cited academic business articles of all time. In 1976, Finance
professor Michael Jensen and Dean William Meckling of the Simon School
of Business at the University of Rochester published their paper in the
Journal of Financial Economics entitled “Theory of the Firm: Managerial
Behavior, Agency Costs and Ownership Structure.”

Underneath impenetrable jargon and abstruse mathematics is the reality
that whole intellectual edifice of the famous article rests on the same
false assumption as Professor Friedman’s article, namely, that an
organization is a legal fiction which doesn’t exist and that the
organization’s money is owned by the stockholders.

Even better for executives, the article proposed that, to ensure that
the firms would focus solely on making money for the shareholders, firms
should turn the executives into major shareholders, by affording them
generous compensation in the form of stock. In this way, the alleged
tendency of executives to feather their own nests would be mobilized in
the interests of the shareholders.

The money took over…

Sadly, as often happens with bad ideas that make some people a lot of
money, shareholder value caught on and became the conventional wisdom.
Not surprisingly, executives were only too happy to accept the generous
stock compensation being offered. In due course, they even came to view
it as an entitlement, independent of performance.

Politics also lent support. Ronald Reagan was elected in the US in 1980
with his message that government is “the problem”. In the UK, Margaret
Thatcher became Prime Minister in 1979. These leaders preached “economic
freedom” and urged a focus on making money as “the solution”. As the
Michael Douglas character in the 1987 movie, Wall Street, pithily
summarized the philosophy, greed was now good.

Moreover an apparent exemplar of the shareholder value theory emerged:
Jack Welch. During his tenure as CEO of General Electric from 1981 to
2001, Jack Welch came to be seen–rightly or wrongly–as the outstanding
implementer of the theory, as a result of his capacity to grow
shareholder value and hit his numbers almost exactly. When Jack Welch
retired, the company had gone from a market value of $14 billion to $484
billion at the time of his retirement, making it, according to the stock
market, the most valuable and largest company in the world. In 1999 he
was named “Manager of the Century” by Fortune magazine.

The disastrous consequences…

So for a time, it looked as though the magic of shareholder value was
working. But once the financial tricks that were used to support it were
uncovered, the underlying reality became apparent. The decline that
Friedman and other sensed in 1970 turned out to be real and persistent.
The rate of return on assets and on invested capital of US firms
declined from 1965 to 2009 by three-quarters, as shown by the Shift
Index, a study of 20,000 US firms.

The shareholder value theory thus failed even on its own narrow terms:
making money. The proponents of shareholder value and stock-based
executive compensation hoped that their theories would focus executives
on improving the real performance of their companies and thus increasing
shareholder value over time. Yet, precisely the opposite occurred. In
the period of shareholder capitalism since 1976, executive compensation
has exploded while corporate performance declined.

Maximizing shareholder value thus turned out to be the disease of which
it purported to be the cure. As Roger Martin in his book, Fixing the
Game, noted, “between 1960 and 1980, CEO compensation per dollar of net
income earned for the 365 biggest publicly traded American companies
fell by 33 percent. CEOs earned more for their shareholders for steadily
less and less relative compensation. By contrast, in the decade from
1980 to 1990, CEO compensation per dollar of net earnings produced
doubled. From 1990 to 2000 it quadrupled.”

Even Jack Welch sees the light…

Moreover in the years since Jack Welch retired from GE in 2001, GE’s
stock price has not fared so well: in the decade following Welch’s
departure, GE lost around 60 percent of the market capitalization that
Welch “created”. It turned out that the fabulous returns of GE during
the Welch era were obtained in part by the risky financial leverage of
GE Capital, which would have collapsed in 2008 if it had not been for a
government bailout.

In due course, Jack Welch himself came to be one of the strongest
critics of shareholder value. On March 12, 2009, he gave an interview
with Francesco Guerrera of the Financial Times and said, “On the face of
it, shareholder value is the dumbest idea in the world. Shareholder
value is a result, not a strategy… your main constituencies are your
employees, your customers and your products. Managers and investors
should not set share price increases as their overarching goal…
Short-term profits should be allied with an increase in the long-term
value of a company.”

 From shareholder value to hardball…

The supposed management dynamic of maximizing shareholder value was to
make money, by whatever means are available.  Self-interest reigned
supreme. The logic was continued in the perversely enlightening book,
Hardball (2004), by George Stalk, Jr. and Rob Lachenauer. Firms should
pursue shareholder value to “win” in the marketplace. These firms should
be “willing to hurt their rivals”. They should be “ruthless” and “mean”.
Exponents of the approach “enjoy watching their competitors squirm”. In
an effort to win, they go up to the very edge of illegality or if they
go over the line, get off with civil penalties that appear large in
absolute terms but meager in relation to the illicit gains that are made.

In such a world, it is therefore hardly surprising, says Roger Martin in
his book, Fixing the Game, that the corporate world is plagued by
continuing scandals, such as the accounting scandals in 2001-2002 with
Enron, WorldCom, Tyco International, Global Crossing, and Adelphia, the
options backdating scandals of 2005-2006, and the subprime meltdown of
2007-2008. Banks and others have been gaming the system, both with
practices that were shady but not strictly illegal and then with
practices that were criminal. They include widespread insider trading,
price fixing of LIBOR, abuses in foreclosure, money laundering for drug
dealers and terrorists, assisting tax evasion and misleading clients
with worthless securities.

Martin writes: “It isn’t just about the money for shareholders, or even
the dubious CEO behavior that our theories encourage. It’s much bigger
than that. Our theories of shareholder value maximization and
stock-based compensation have the ability to destroy our economy and rot
out the core of American capitalism. These theories underpin regulatory
fixes instituted after each market bubble and crash. Because the fixes
begin from the wrong premise, they will be ineffectual; until we change
the theories, future crashes are inevitable.”

Peter Drucker got it right…

Not everyone agreed with the shareholder value theory, even in the early
years. In 1973, Peter Drucker made a sustained argument against
shareholder value in his classic book, Management. In his view, “There
is only one valid definition of business purpose: to create a customer.
. . . It is the customer who determines what a business is. It is the
customer alone whose willingness to pay for a good or for a service
converts economic resources into wealth, things into goods. . . . The
customer is the foundation of a business and keeps it in existence.”

Similarly in 1979, Quaker Oats president Kenneth Mason, writing in
Business Week, declared Friedman’s profits-are-everything philosophy “a
dreary and demeaning view of the role of business and business leaders
in our society… Making a profit is no more the purpose of a corporation
than getting enough to eat is the purpose of life. Getting enough to eat
is a requirement of life; life’s purpose, one would hope, is somewhat
broader and more challenging. Likewise with business and profit.”

The primacy of the customer…

Peter Drucker’s argument about the primacy of the customer didn’t have
much effect until globalization and the Internet changed everything.
Customers suddenly had real choices, access to instant reliable
information and the ability to communicate with each other. Power in the
marketplace shifted from seller to buyer. Customers started insisting on
“better, cheaper, quicker and smaller,” along with “more convenient,
reliable and personalized.” Continuous, even transformational,
innovation became requirements for survival.

A whole set of organizations responded by doing things differently and
focusing on delighting customers profitably, rather than a sole focus on
shareholder value. These firms include Whole Foods [WFM], Apple [AAPL],
Salesforce [CRM], Amazon [AMZN], Toyota [TM], Haier Group, Li & Fung and
Zara along with thousands of lesser-known firms. The transition is
happening not just in high tech, but also in manufacturing, books,
music, household appliances, automobiles, groceries and clothing. This
different way of managing turned out to be hugely profitable.

The common elements of what all these organizations are doing has now
emerged. It’s not merely the application of new technology or a set of
fixes or adjustments to hierarchical bureaucracy. It involves basic
change in the way people think, talk and act in the workplace. It
involves deep changes in attitudes, values, habits and beliefs.

The new management paradigm is capable of achieving both continuous
innovation and transformation, along with disciplined execution, while
also delighting those for whom the work is done and inspiring those
doing the work. Organizations implementing it are moving the production
frontier of what is possible.

The replacement for shareholder value is thus now identifiable. A set of
books have appeared that spell out the elements of this canon of
radically different management.

In effect, shareholder value is obsolete. What we are seeing is a
paradigm shift in management, in the strict sense laid down by Thomas
Kuhn: a different mental model of how the world works.

(3) Robert Mundell: outsourcing has gone too far; America losing its
ability to manufacture


Nobel Laureate: The U.S. Is The 'Naked Woman' Of The World Economy

Eamonn Fingleton

BUSINESS  |  5/26/2013 @ 11:22AM

America’s current account deficit—the widest and most meaningful measure
of its trade – exceeded 3 percent of GDP last year. Meanwhile
manufacturing was down to 11 percent. Given that services are weak
exporters (and are generally highly labor-intensive to boot), how can
the United States ever aspire to balance its trade again?

That was the question I put to Nobel Economics Laureate Robert Mundell
last week. In an interview on the fringes of the Astana Economic Forum
in Kazakhstan, Mundell did not pull his punches. One of the chief
architects of Reaganomics and a lifelong advocate of trade
liberalization, Mundell now raises a large question mark over the
continued viability of free trade. “The United States can’t keep a
completely open system if the rest of the world is less open,” he said.
“The United States may have to take a leaf out of the book of Japan,
China, and Germany, and have protectionism inside the system.”

He explained that though he opposes tariffs (because they would send the
wrong signal and thus invite retaliation), America may have to resort to
less overt protectionist measures. One such tactic would be to adopt Buy
American policies in government procurement (such covert protectionism
is virtually universal elsewhere among America’s most significant trade

Mundell  believes outsourcing has gone too far and that America’s
formerly world-beating industrial corporations are in danger of losing
their ability to manufacture. He commented: “It has been a mistake to
let U.S. manufacturing run down so low. While other nations have
industrial policies to maximize their trade benefits, the United States
leaves itself open like a naked woman. A big problem is with nations
that may prove to be future enemies.”

As if on cue, Dominic Gates of the Seattle Times yesterday published a
devastating account of how by pushing outsourcing too far, the Boeing
aircraft company is losing its ability to understand key manufacturing
processes. As Gates points out, Boeing outsourced much of the 787
Dreamliner’s electronics to Paris-based Thales . Thales in turn
subcontracted much of the work to GS Yuasa and other Japanese
corporations, as well as to a subsidiary of United Technologies . Then
when problems arose with dangerously overheating batteries, Boeing
engineers lacked the ability to respond quickly to crisis. Gates is
widely regarded in the aerospace industry as a leading authority on
Boeing and his article can be read here.

As I pointed out in an article in the American Prospect as far back as
2001, America’s Nobel Laureates were already then becoming increasingly
uneasy with the practical effects of America’s trade policies. That
article can be read here.

(4) Thatcher hollowed out UK Industry, handed lead to Germany & Asia -
Eamonn Fingleton


Thatcher's Last Wish: Another Clunker From The Iron Lady

Eamonn Fingleton

4/14/2013 @ 10:46AM [Updated with reader comments, 4/15]

The news today is that a group of supporters of Margaret Thatcher are
pushing a plan to build a museum and library as a memorial to her. It is
clear that the plan, which would establish a first in British politics,
has long been in the making and that it not only had Thatcher’s approval
but she herself largely instigated the idea. This is another clunker
from the Iron Lady – a final terrible idea from a woman who, pace all
current hagiography, will be remembered as one of the worst political
leaders in modern British history.

Let’s be clear first on the larger politics. As a Fleet Street columnist
in the late 1970s, I fully recognize that she made progress on some
issues, not least trade union dominance of the economy. But her
predecessor Jim Callaghan would undoubtedly have continued to focus on
these same issues had he been reelected and he would have dealt with
them in a perhaps more effective, and certainly less divisive, way.

The voters who elected Thatcher in 1979 were motivated powerfully by
humiliation at the UK economy’s constant loss of position in global
competition since the early 1950s. By the late 1970s, the labor unions
had come to be widely blamed as the fundamental problem. In reality,
however, in taking a meat cleaver to the unions, Thatcher was tackling
the symptoms not the disease. The unions were certainly far more
obstreperous than they had been in the 1950s but this reflected an
exogenous political reality, in that other nations, most notably Japan,
had taken over the UK’s former imperial markets. The pattern was
particularly obvious in the car industry: although the famous Austin
Mini of 1959 , for instance, was a far better car than the tinny little
Japanese three-wheelers of the day, the Tokyo government’s superior
trade diplomacy ensured that these latter enjoyed privileged access to
former British markets in East and South Asia, whereas Austin was
increasingly shut out. The resulting layoffs in British industry
poisoned labor relations for decades.

So how well did Thatcher do in reversing the trend and what in
particular did she do to improve the UK’s trade position? The eulogizers
are quiet on the subject. Advisedly so. The fact is that under
Thatcherism the UK’s trade position went from the merely weak to the
totally disastrous. The UK ran a current account surplus of 0.6 percent
of GDP in 1978, the last full year before Thatcher came to office. As of
1989, the last full year before she was ousted by her own party in May
of 1990, the current account DEFICIT had reached an appalling 3.9
percent of GDP. In the meantime Thatcher presided over a savage program
to destroy the UK’s core exporting industries and, with wholesale
financial deregulation, laid the groundwork for the catastrophic
financial bubbles of more recent times. She was smitten by the erroneous
notion that advanced nations should leave “rust bucket” industries
behind and move to a postindustrial model. Not a view shared by Germany,
which has now long eclipsed the UK as Europe’s premier economy. This
view is not shared either in any of the most successful East Asian
nations (though they are delighted if the English-speaking world
continues to believe in postindustrialism). For what it is worth, I have
consistently attacked the postindustrialist fallacy since the 1980s and
indeed I devoted a whole book to it in 1999 (In Praise of Hard
Industries: Why Manufacturing, Not the Information Economy, Is the Key
to Future Prosperity). The book’s main point is that an economy without
a strong export sector is like a car without an engine: services in
general do little or no exporting, so if you allow your manufacturing
industries to decline, you lose your ability to pay your way in the
world. My book has now been vindicated on its analysis of finance: my
message was summed up in the heading of the relevant chapter, “Finance:
A Cuckoo in the Economy’s Nest.” My point about manufacturing will take
longer to become generally obvious but in the end Thatcher’s true
believers will discover the hard way that there is no such thing as a
free lunch.

As for the Thatcher museum and library, this is a characteristically
egotistical Thatcherite project at odds with British tradition. The
British after all put a high value on modesty — or at least the
appearance of it — and even the most capable of them have traditionally
left it to others to sing their praises.

The fear now is that she has established a precedent that future British
political leaders will feel compelled to follow, and in so doing may
render politics in London as dysfunctionally money-ridden as politics in
Washington already is.

Thatcher apparently was much impressed with the Reagan Presidential
Library. But why? Such memorials typically involve pandering to wealthy
donors and transnational corporations — and the pandering typically
begins long before the honoree leaves office. Not the least of the
problems is that many of the corporations involved have at best no
loyalty to the nation and some are indeed foreign and almost by
definition have a clear conflict of interest.

What we know for sure is that the Reagan library was made possible in
large measure by General Electric . Although it is not yet apparent to
most Americans, General Electric has played a starring role in the
enfeeblement of the United States. A key charge is that GE has led
corporate America in the torching of America’s once peerless industrial
base on the funeral pyre of globalism. It has done this principally by
transferring many of America’s most advanced production technologies,
including aerospace technologies, to foreign production partners. These
partners, located mainly in East Asia, have undertaken to low-ball their
prices and have thereby boosted GE’s quarterly earnings, but at the cost
of hollowing out the American industrial base. You may not have seen
much written about this subject in recent years but the trend is acutely
apparent in U.S. trade figures. With its industrial base almost gone,
America has consistently in recent years run a current account deficit
of 4 to 6 percent of GDP – the weakest trade performance of any major
nation in history. The geopolitical consequences could hardly be more
disastrous as the United States has come increasingly to depend on
funding from such creditor nations as China and Japan. It is not an
exaggeration to say that America’s role now has been reduced to
borrowing from China to save the world from China.

The concept of presidential libraries is actually quite modern. The
first was built by Franklin Delano Roosevelt. To his credit, it was a
relatively modest affair and, more important, it was built with his own
money. In recent decades succeeding presidents have vied with one
another for the title of largest and most impressive library, with Bill
Clinton now leading the field.

As Winston Churchill once said, “The price of greatness is
responsibility.” Would Churchill be better regarded today had he run
around drumming up support for a memorial to himself? For that matter,
would George Washington?


As of this writing, this blog has already generated more than 170
comments, not all of them friendly. [...]

 From logic001 [9/4+ Member: logic001]
Submitted on 2013/04/14 at 3:10 pm

The article is correct on the major points.

Since the 1980?s I’ve witnessed up close and personally the paths taken
by two very different models for Western Civilization. One is the
Anglo-American model, with a migration from manufacturing to finance and
a big bet placed on unfettering private sector titans.

The second model has been the Northern European one (by which I include
Germany and Holland), with a big bet placed on the wisdom of massive
long term investments in human capital by government. And taxes high
enough to pay for that human capital bet.

It is looking like the Norse/Teutonic instincts were better. Both models
have their problems, but in terms of business competitiveness, health,
and most importantly in terms of measured human happiness and confidence
in tomorrow, the Thatcher model has brought only tidings of woe.

This is most apparent over the course of decades. In the 1980s, the life
and dreams of a young man in the U.K. were broadly on par with those of
a young man in West Germany or Sweden. Today, it is not even close.
Young Britons (and young Americans as well) have a lifetime of part time
hustling for low pay to look forward to. As one London fellow put it to
me, “being born next to the Baltic is like winning life’s lottery.”

That is Thatcher’s legacy. [...]


Below finally is a third opposing comment that merits wider attention.
This reader, whose earlier comment is above, makes the familiar case
that Britain’s loss of manufacturing jobs is down to low-wage foreign
competition, as well as to high taxes and excessive regulation at home.
I will permit myself a direct reply: nations like Germany, the
Netherlands, Sweden, and Austria are subject to the same drawbacks but
remain highly competitive in global competition. Other factors were
evidently responsible for the UK’s loss of competitiveness in the
Thatcher years.

Stephen Ford [2/2+ Member: stephenford4]
Submitted on 2013/04/16 at 1:46 pm

[...] And finally, you mentioned that Thatcher is responsible for the
hollowing out of the U.K.’s economy. ... As I mentioned before, Asia is
now taking its place on the world stage like never before. This
competition alone allows for problems for the long established
economies. And, as I mentioned in regards to the U.S., a hollowing out
is taking place simply because some Asian countries and many third world
countries that do not hold to U.S./European standards offer incredibly
low wage work, low taxes, and/or low regulations (as well as access to
previously untapped, cheap, and abundant resources). [...]

(5) Dethroning The Dollar: The Yuan, The Bitcoin, And Other 'Usurpers'


Eamonn Fingleton

6/30/2013 @ 11:54AM

“Fool me once, shame on you. Fool me twice, shame on me.” So says an
ancient Chinese proverb. It is worth bearing in mind in dealing with
present-day Beijing.

No matter how often Uncle Sam gets his clock cleaned in China, his
credulousness remains a gift that keeps on giving for the Beijing

The latest example is the current boomlet in Washington in talk about
China’s supposed efforts to internationalize its financial system and to
increase the role of the yuan in the global economy.

No doubt Beijing will make some token internationalizing moves but, in
the view of those of us who have followed East Asian finance long-term,
there is a lot more sizzle here than steak. Talk of financial
liberalization is good public relations because it diverts Washington’s
attention from much more pressing matters, such as unfair Chinese trade
tactics and theft of intellectual property.

Liberalization talk works particularly well on Wall Street, where it is
interpreted as signaling opportunities for American banks. The problem
is that China needs Wall Street like a fish needs a bicycle. Not for the
first time, Beijing is exploiting American wishful thinking. The current
talk is similar to an episode in 2005 when Chinese leaders trumpeted a
liberalization that allowed foreign banks to buy minority stakes in
several major Chinese banks. Among American banks that acted on the plan
were Morgan Stanley, Citigroup, Goldman Sachs, and Bank of America. So
did Royal Bank of Scotland and HSBC of the UK, as well UBS of
Switzerland. None of these arrangements worked out and less than a
decade later, the aforementioned foreign stakes have all been unwound!
As was clear to some of us at the time, Beijing never sincerely wanted
the foreigners at all but throwing them a few bones helped keep
Washington quiet for a while.

Clyde Prestowitz of the Washington-based Economic Strategy Institute is
among commentators who hold that Beijing actively hankers to dethrone
the dollar and replace it with the yuan as the world’s reserve currency.
This is music to Wall Street’s ears, of course, an internationalized
yuan would generate an explosion in currency trading.

In reality Beijing regards the role of reserve currency for the yuan as
a poisoned chalice and will drag its feet on internationalization for as
long as possible. A world currency after all is one whose movements
cannot be easily controlled by the home nation. Almost inevitably that
means it becomes increasingly overvalued. For a nation that wants to
increase its share of world exports – and wants to keep its workers
gainfully employed – the choice is obvious. Beijing has the history of
both Japan and West Germany to study: both nations built their export
economies on severely undervalued currencies. To this day Tokyo
continues to invent new tactics to keep the yen undervalued. Of course,
the Germans are less clear-cut in their strategy these days because they
have given up the deutschmark – but to say the least they have been in
no rush to get the euro back on its feet. The longer the euro remains in
the dumps the better it is for German exports.

All this said and irrespective of how much Beijing would like it to be
otherwise, the dollar-based world currency system is coming to an end.
America’s manufacturing base is too hollowed out and its current account
deficits are too high for the dollar to stage a turnaround and, without
major remedial measures, it will face total collapse.

So what comes next? Some people have been pushing the bitcoin. This can
be summarily dismissed. As Paul Krugman has pointed, demand for the
bitcoin comes almost entirely from speculators rather than commercial
users, which does not bode well for the stability of any bitcoin-based
system. There is also the fact that no serious government has any
interest in curtailing its currency-issuing monopoly to accommodate this
techie’s pipedream. (If I have $100 in dollar bills in my wallet, I am
giving the US government a free loan of $100. The US government probably
wants to keep it that way.)

What we are left with is this: well within the next ten years and
probably within five, America’s creditors – mainly China but also Japan,
Russia, Germany, Saudi Arabia, and Korea – will have to bite the bullet
and move to a new currency system. It will be as big a moment as the
Bretton Woods agreement of 1944. The betting is that the dollar will be
replaced by a basket of currencies. The dollar will retain a role but a
much shrunken one. It will be a similar story for that other perpetual
sick man of the currency markets, the British pound.

The key currencies in the new system will willy-nilly be those of the
surplus nations. How much of the burden of leadership Beijing will have
to shoulder will have to be thrashed out with other surplus nations. An
enfeebled America — the same America that threw away its manufacturing
base — will have virtually no say in the matter.

(6) Apocalypse Soon: The U.S. Dollar's Grim Future - Eamonn Fingleton


Apocalypse Soon: The U.S. Dollar's Grim Future -- And How To Prepare For It

Eamonn Fingleton

7/15/2013 @ 10:43AM

The U.S. dollar’s predicament can be summed up in three observations:

1.The U.S. balance of payments deficits have multiplied three-fold since
the 1980s, and now typically run between 2.5 and 5 percent of GDP.

2.Manufacturing’s share of GDP is down to 11 percent.

3. Services do little exporting.

Taken together, these facts spell doom for the U.S. dollar. Short of
attempting – highly unrealistically – to increase its manufactured
output by nearly 50 percent and to sell the increased output abroad,
America can’t dig itself out of the hole — at least not if it sticks
with free trade. The ultimate outcome will surely be a total collapse of
the dollar. And in that event, as the former top Reagan administration
economic policymaker Paul Craig Roberts has pointed out, shoppers in
Walmart will feel they are in Neiman Marcus.

The world’s kingpin currency for more than half a century, the dollar
has survived in recent years thanks only to the “charity” of strangers:
export-minded East Asian governments, principally those of Japan and
China, have bought ever larger amounts of U.S. Treasury bonds to keep
their own currencies low. For the East Asians, the attraction  is that
they can continue for a few more years to hollow out the American
manufacturing base. But elastic bands can be stretched only so far and
this one is near breaking point.

Of course, conventional wisdom holds that it is other currencies that
are in trouble. The current issue of the Economist magazine, for
instance, cites various superficial problems elsewhere in the world to
suggest that the dollar is headed higher. Entirely missing  is any
reference to international trade. In the long run the trade figures will
determine the dollar’s fate – and the Economist’s failure to allude to
them illustrates the sort of air-headed thinking that makes East Asians
question (discreetly, of course) Western sanity.

Let me fill in the gaps: in the latest twelve months America ran a
current account deficit of $426 billion. By contrast the Eurozone earned
a surplus of $208 billion. Even Japan has been showing surprising
strength, with a surplus of $56 billion (not bad in any circumstances
but particularly impressive given the continuing constraints and
adjustments consequent on the Tohoku earthquake).

The key question now is precisely when will the East Asians pull the rug
from under the dollar? Any Westerner who tells you he knows is either
delusional or mendacious. Not only have East Asian policymakers always
kept their monetary policy cards close to their chests, but they are
adept at acting out carefully choreographed little dramas intended to
throw everyone off the scent.

Nonetheless it is time to take a stand. My bet is that within five years
the dollar will have gone the way of the pound sterling, if not the
Weimar papiermark (that’s the one that people needed wheelbarrows to
take to the grocery store).

Some weeks ago I pointed out that my share recommendations of last year
had worked out well  and added that I would offer some new investment
suggestions in the not-too-distant future. Consider this is the
fulfillment of that promise. I suggest that investors diversify by
buying some yen and/or euros. Of course, the dollar may well continue to
defy the law of gravity for a while longer but let’s see how things have
shaped up  by, say, the end of 2014.

In the meantime if you can find a way to put some money on deposit in
euros or yen (the dollar buys 100.1 yen and 0.77 euro at today’s
exchange rate), that would be a good strategy. Otherwise you might
consider exchange-traded currency funds such as FXY and FXE.

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