A Crisis Without Exit

For several months now we have heard or read statements to the effect that the recession is over. There is so far very little evidence, if any, that this is indeed the case. At this point it would be useful to take stock and review what has happened to date and what the future may hold.

The recession started as a financial crisis that transferred to the real economy, in the process generating massive unemployment. As the downturn became more severe unprecedented measures were taken to stop and reverse the downward slide.

These measures were inspired by the analysis of the Great Depression. The main conclusion reached by the Federal Reserve was that in the 1930's the government had not provided sufficient liquidity to the banking system. Had this been done, the reasoning went, financial activity would have returned to normal, providing enough credit for economic growth to resume.

The prescribed cure for the current crisis was thus to insure that abundant liquidity was provided to the banking system. This was done through the printing of money, zero interest rates coupled with deficit spending, and a variety of programs and devices that provided abundant and cheap funding to the financial sector.

The expected result of these measures was to be a rise in the availability of credit, which in turn would lead to increased borrowing, spending, investment and other business activity.

To-date this has not happened. While the financial sector is awash in money, credit to the general economy has in fact significantly contracted. Except when temporary government subsidies have been available, economic activity is still at a very low level, with no sign of a significant improvement.

The above analysis of the Great Depression might have been correct as far as the nineteen thirties went, but in applying it to current circumstances a critical point was overlooked. Whereas the 1929 economy was national, the present one is integrated within a globalized financial system.

The key characteristic of this system is that capital can freely and instantaneously circulate around the globe. Under such conditions it will naturally move to where it will generate the highest return. U.S. authorities have injected trillions into the system, on the presumption that these funds would be mainly put to work in the United States, as they would have been in the thirties.

Conditions in the U.S., however, are not favorable to high returns on capital: interest rates are near zero, the economy is depressed, and growth is sluggish at best. Assets offering far better returns, be they foreign stocks, commodities, or currencies, are to be found all over the planet. That is where the money naturally flows.

The immense funds disbursed by the U.S. government and central bank have essentially leaked out of the country, leaving the national economy struggling, unemployment at high levels and prospects poor. But that is not all. Another pernicious effect is building up.

Budget and trade deficits, liquidity enhancements and the massive creation of money depreciate the currency, while all assets offering the best returns inevitably rise in value. Because of the sheer size of the U.S. economy and monetary mass, the outward flow of money generates dollar inflation wherever it finds something to acquire.

If the U.S. economy were strictly national, the wholesale increase in liquidity would produce internal inflation. The global financial system sees to it that this inflation instead occurs wherever our dollars end up: in foreign stock markets and property values, for instance, or in the dollar price of commodities such as oil and metals.

Since the U.S. imports far more than it exports, this outside inflation will eventually be imported as well. As the dollar depreciates and imports rise in price, domestic consumption will be choked off just at the time it begins to grow again. The U.S. consumer, being and feeling poorer, will further reduce spending, and the economy will remain stalled.

The entire anti-recession effort would have been for nothing. In fact that very effort will have ensured that the recession will continue into the foreseeable future. The only tangible results will be a much higher national debt, a devalued currency, and a financial industry even more addicted to short-term speculation.

What the country needs to recover is a strong emphasis on domestic investment, which alone will create employment. This is perfectly attainable, but requires a radical departure from the current policies.

Jacek Popiel was born in Poland and educated in Africa, Canada, and the US. His career spanned military service and international business development. He is currently a writer and his first book Viable Energy Now is available on Amazon and Barnes and Noble. For more articles and information: http://www.viableenergynow.com

Anomaly - The True Architects of the Economic Crisis?

Those of you who followed Nouriel Roubini during the Asian Currency crisis over a decade ago* should have already recognized the similarity between that crisis and this one. Roubini was recently interviewed and gave his opinion: "The U.S. has been living in a situation of excesses for too long. Consumers were out spending more than their income and the country was spending more than its income, running up large current-account deficits. Now we have to tighten our belts and save more. The trouble is that higher savings in the medium term are positive, but in the short run a consumer cutback on consumption makes the economic contraction more severe."

That's the paradox of thrift. But we need to save more as a country, and we have to channel more resources to parts of the economy that are more productive. And when you have too many financial engineers and not as many computer engineers, you have a problem......I think this country needs more people who are going to be entrepreneurs, more people in manufacturing, more people going into sectors that are going to lead to long-run economic growth. When the best minds of the country are all going to Wall Street, there is a distortion in the allocation of human capital to some activities that become excessive and eventually inefficient." However, Nobel laureate Robert Merton of the Harvard Business School has a different perspective:

we need more financial engineers, not fewer risk and innovation, including derivatives, are not going away, and we need senior managements, boards, and regulators of financial institutions who understand them." Who are the Financial Engineers? And What the Hell Are They Talking About? I received my Master of Science in Financial Engineering degree back in 2002 and still to this day no one knows what the hell that means. Ok, Financial Engineers are often "rocket scientists" (literally) that are hired by large banks and multinational corporations to build sophisticated mathematical models with the intention to predict the likelihood of risky events, to provide valuations for instruments that are traditionally hard to price, and to create synthetic securities for the hedging risk (and sometimes for speculating).

"As LBO specialist Ted Stolberg once told Inc. Magazine, 'Financial engineering is a lot like building a bridge. You can build it anyway you like as long as it doesn't collapse when heavy trucks run over it and you can add additional lanes when you want more traffic to go over it. And when it's all done, it should be a thing of beauty, like the Golden Gate'" (Warsh, 1993, p. 296). These "quants", as they are lovingly called, are often lured from poor paying academic jobs by Wall Street to high paying jobs in London, New York, Chicago, or California. The corporate executives that hire these Quants often like to remind their investors that everything will be alright because of the brilliant minds they now have on the payroll. Unfortunately, there are two large problems in financial engineering that have emerged in hindsight. First, finance is ultimately about human beings and their relationships to each other.

Real finance bears little resemblance to the logical order of math and physics. Most models in finance begin with the basic assumption of "Homo Economus", the assumption that man is a rational being. This has largely been proven to be a faulty assumption thanks to the recent research of cognitive neuroscience. Second, the output from the financial models is misinterpreted by the decision makers in senior level management. As Alfred Korzybski said, "The map is not the territory". Much too much decision making has been based upon these models, giving them far too much weight. Senior executives seem all to eager to confirm their successes and deny their failures, it is human nature after all. Financial Models: Stock Market Rationality or Irrationality? "It is more than a metaphor to describe the price system as a kind of machinery, or a system of telecommunications which enables individual producers to watch merely the movement of a few pointers, as an engineer might watch the hands of a few dials, in order to adjust their activities to changes of which they may never know more than is reflected in the price movement." - F.A. Hayek The efficient market hypothesis is quite appealing conceptually and empirically, which accounts for its enduring popularity.

In a nutshell, efficient stock markets are generally thought of as equilibrium markets in which security prices fully reflect all relevant information that is available about the "fundamental" value of the securities (Tangentially, Benjamin Graham, famous for co-authoring the fundamentalist treatise Security Analysis with David L. Dodd, was quoted as saying shortly before his death, "I am no longer an advocate of elaborate techniques of security analysis in order to find superior value opportunities... I doubt whether such extensive efforts will generate sufficiently superior selections to justify their costs... I'm on the side of the 'efficient market' school of thought..." [Malkiel, 1996, p. 191]). Despite its popularity, efficient capital markets theory has weathered some very appropriate criticisms. Since a theory is a model of reality and not "reality" itself, anomalies arise where theory does not mirror reality and the theory of efficient capital markets is no exception.

Ray Ball's article The Theory of Stock Market Efficiency: Accomplishments and Limitations (Ball, 1994, p. 40) presents a mostly balanced perspective and illuminates some interesting anomalies: 1) A study by French and Roll suggests that prices overreact to new information which is then followed by a correction, allowing contrarian investors to take profits. 2) Excess volatility of prices due to the "extraordinary delusions and madness of crowds". 3) Prices underreact to quarterly earnings reports, which in itself seems an anomaly in the tendency of prices to overreact to new information. 4) A recent study by Fama and French provides evidence that there is no relationship between historical betas and historical returns which has lead many to believe the equilibrium-based CAPM, developed greatly due to the enormous amount of empirical data on efficiency, has failed. (Not included in Ball's article, but told in Malkiel's A Random Walk Down Wall Street is the story of how Fama and French also determined that buying a stock that has performed poorly for the past two years will often give you above average returns during the next two years (Malkiel, p. 198), thereby allowing contrarians to take a profit once more.) 5) There are seasonal patterns to be found in the data on stock returns or small firms, such as the "January effect", where stock prices are unusually higher during the first few days of January or the "weekend effect" where average stock returns negatively correlated from closing on Friday to closing on Monday.

Anomalies missing from Ball's article include: 1. the evidence that firms with low price-earnings ratios outperform those with higher P/E ratios. 2. the evidence that stocks that sell with low book-value ratios tend to provide higher returns. 3. the evidence that stocks with high initial dividends tend to provide higher returns (Malkiel, pp. 204 -207). Where Ball's article differentiates itself from most other summaries of the trials and tribulations of the theory of efficient capital markets is in a section titled "Defects in 'Efficiency' as a Model of Stock Markets" (Ball, p. 41 - 46) where he discusses the general neglect within the theoretical and empirical research on stock market efficiency of the processing and acquisition costs of information. This neglect could be the reason for the anomalies, such as the "small firm effect", the tendency of small cap stocks to provide higher returns. He also criticizes the assumption in the efficient markets hypothesis of investor "homogeneity" and suggests the need for a new research program. Ball also considers the role of both transactions costs in the efficient markets theory literature "largely unresolved" and the effect of the actual market mechanism on transacted prices, also known as "market microstructure effects".

He defends efficient markets theory from Robert Shiller's argument (that the historical variance of stock prices has been much more volatile than can be justified by historical variance in actual dividends) by challenging Shiller's use of a constant market expected return in nominal terms. Since CAPM assumes a constant risk free rate of return and a constant market risk premium it is impossible to determine a "correct" amount of variance in the market index. Ball also defends market efficiency from Shiller and other behavioralists in maintaining that the mean-reversion in stock returns does not necessarily imply market irrationality. CAPM does not claim to dismiss the trend for periods of relatively high returns to be followed by periods of relatively low returns. In fact, such cyclical patterns may be the result of rational responses by investors to political/economic conditions and corporations to changes in investor demand for stocks.

Ball then grants more space to Shiller and the behavioralists by ending his piece with the rhetorical question "Is 'behavioral' finance the answer?" He very quickly answers, "I don't think so" (Ball, p. 47). I would rephrase the question so it reads "Does 'behavioral' finance yield useful answers?" and my answer would be "yes." Whether or not investors behave rationally, that is, whether or not investors accurately maximize expected utility is an important assumption of the efficient market hypothesis and if it is not true, it may explain why the anomalies exist. Work in prospect theory by Allias, Kahneman and Tversky provides important evidence that the standard assumption of expected utility maximization assumed by most financial economists may not furnish accurate representations of human behavior (prospect theory states that individuals are better represented as maximizing a weighted sum of "utilities," determined by a function of true probabilities which gives zero weight to extremely low probabilities and a weight of one to extremely high probabilities). While such evidence is not damning, it is troubling to say the least (Shiller, 1997).

Interestingly enough, Ball's article omits the common practice of financial economists to categorize the theory of the stock market efficiency into three types which, from least to most orthodox, are as follows: 1. The weak form states that the history of stock price movements contains no useful information enabling investors to consistently outperform a buy-and-hold portfolio management theory. 2. The semi-strong form maintains that no available published information will help security analysts select "undervalued" securities. 3. The strong Form holds that everything known or even knowable about a company is reflected in the price of the stock. Statistical evidence lends credibility to the weak and semi-strong forms, and discounts the strong form revealing that corporate insiders have earned excess profits trading on inside information. In support of the weak and semi-strong forms, the results of Ball and Brown's mid-1960's study (Ball, p. 35) of how the stock market actually responds to announcements of annual earnings suggests that the market anticipates approximately 80% of the new information found in annual earnings before the earnings were actually announced.

In other words, investors were mostly deprived of future opportunities to profit from the new information since stock prices had already processed the information released in the annual earnings reports. It seems to me investors and "Quants" alike would do well to not to swallow any one approach whole, warts and all, but to carefully weigh the evidence of all the different approaches. In scientific experimentation, where Quants feel at home, there are no success and failures, only outcomes or results. All that emerge are data points that tell you if you hypothesis is correct or not. Unfortunately, in capital markets, if an "experiment" is leveraged enough, you can bankrupt entire countries, and now, perhaps even the world. In capital markets, the real risk of experimentation like this can result in people not eating. What is Risk and Where Does Financial Engineering Come In? Well, we can intuitively say there seems to be a positive relationship between risk and uncertainty. The more certain we can be of a particular outcome, the less risky it is. However, in a dynamic world such as ours where we can barely (and usually inaccurately) predict the weather five days from now, how can a financial manager, farmer, or any interested party expect to predict, say, the price of tea in China weeks, months, or even years from now?

This is where the beautiful asymmetric nature of a financial instrument called an "option" comes in: "A call option is the right to buy a specified quantity of some underlying asset by paying a specified exercise price, on or before an expiration date. A put option is the right to sell a specified quantity of some underlying asset for a specified exercise price, on or before an expiration date" (Figlewski and Silber, 1990, p. 4). An investor's potential loss is limited to the premium, while the potential profit is unlimited. So while it may be impossible to predict the future price of tea in China, it is possible to set a floor for the amount of loss allowed to occur without setting a ceiling on the profits reaped. Options belong to a class of financial instruments called derivatives, aptly named because they derive their value from something else. Options, for example, derive their value from an underlying asset. Other derivatives include interest rate and exchange rate futures and swaps, whose values depend on interest and exchange rate levels (some parties exchange cash payment obligations because they may prefer someone else's payment stream), commodity futures, whose value depend on commodity prices, and forward contracts, which are similar to future contracts except that the commodity under contract is actually delivered upon a specified future date. But how can we use these instruments to minimize our exposure to risk?

"Financial engineering is the use of financial instruments to restructure an existing financial profile into one having more desirable properties" (Galitz, 1995, p. 5). In other words, it is the province of the financial engineer to design "synthetic" securities to achieve desired risk-return results. You take combinations of option, futures, swaps, etc. and create new securities to mitigate unforeseen risks. Assuming that the cash flows between the straight security and the synthetic portfolio are equivalent, then any difference in the present market values of the two is an arbitrage opportunity. An arbitrage is trade in which one buys something at one price and simultaneously sells essentially the same thing at a higher price, in order to make a riskless profit (In an efficient market such opportunities should be rare, and when the wily investor took advantage of it the very process should drive the price of what they are buying up and the price of what they are selling down).

A Simple Example of How Financial Engineering Actually Works In his article, The Arithmetic of Financial Engineering (Smith, 1999, p. 534) Donald J. Smith uses simple arithmetic and algebra to illustrate the relationships of a variety of different security combinations (synthetic securities) used by financial engineers to create these unique risk-return trade-offs. His basic explanatory formula looks like this; A + B = C where, A + B comprise the synthetic portfolio C is the straight security + sign denotes a long position, or a lending posture - sign denotes a short position, or a borrowing posture Using the arithmetic outlined above, Smith can illustrate the relational structure of such synthetic securities as; Interest rate swaps + Interest Rate Swap = + Unrestricted Fixed Rate Note - Floating Rate Note The coupon for most bonds is fixed ahead of time, hence the name fixed-income securities, but many issues have coupons that are reset on a regular basis and therefore float, these are called floating rate notes.

Collars + Collar = + Cap - Floor "Caps" and "Floors" are option contracts that guarantee the maximum [cap] and minimum [floor] rate that can be reached. Caps and floors are essentially interest rate insurance contracts that insure against losses from the interest rates rising above or falling below determined levels. Mini-Max Floater + Mini-Max Floating Rate Note = + Typical Floating Rate Note - Cap Inverse Floaters - Inverse Floater = - Two Fixed Rate Notes + Unrestricted Floating Rate Note -Cap Inverse floaters appeal to those investors who are bullish on bond prices and expect interest rates to drop. This is the synthetic security that Robert Citron used wrongly and ended up bankrupting Orange County, California when the Federal Reserve sharply raised interest rates in 1994. This folly ended up costing Orange County $1.7 billion in 1994 dollars! Participation Agreements + Participation Agreement = + Cap - Floor This simple arithmetic formula wields great explanatory power for those who seek to an easy understanding of the complexities of financial engineering.

However, the financial engineer must be cautious with the double edged sword of derivative instruments. When used to hedge, derivatives can be invaluable guards against risk, however if used to speculate, they can invite unnecessary risks. Also, hubris can be devastating as sometimes the payoffs can be too complex to fully understand. Unintended consequences can be a bitch (see credit default swaps) The United States Government = The Paleo-Financial Engineers "Blessed are the young, for they shall inherit the national debt" -Herbert Hoover Let's look at one of the most complicated financial engineering schemes of all time, the relationship between the United States Treasury and the Federal Reserve system. The Federal Reserve is a privately owned corporation. In other words as the popular phrase goes, "The Federal Reserve is as 'federal' as Federal Express". The largest stock holders of the Federal Reserve bank are the 17 largest banks on the planet. As a matter of record, for the United States the last century has been one of deficits and debt.

Simply put, a deficit occurs whenever you spend more than you have. Every time the government spends more than it has it must issue a debt instrument or I.O.U., usually a U.S. Treasury bond, to cover the expenses. The Federal Reserve banking cartel buy these bonds (with paper currency literally created out of thin-air) on the promise that the government will pay the Federal Reserve back both the principal and a fixed rate of interest. In exchange for this interest payment, the Federal Reserve literally creates money (mostly electronically and completely out of thin air) through manipulated ledger accounts. What most people fail to recognize is that the main way Treasury generates the revenue to pay off it's debt to the Federal Reserve is through taxation. Simply put, our income taxes goes directly to bankers. A more sobering fact is this, to get an idea of how much the U.S. owes to bondholders (i.e., the Federal Reserve banking cartel) just take a look at the National Debt. It towers at over $11 trillion (remember a trillion is a thousand billion, and a billion is a thousand million, and million is a thousand thousand.

With an estimated population of the United States of 305,367,770, that means that each United States citizen's share of the outstanding public debt is nearly $40K at this writing. The tricky part is this, if the growth of the debt is constant and greater than the rate of growth of average real income, then what should we expect the government to do when tax revenues are no longer sufficient to pay the interest on the debt? Then once the money (again, which was created out of thin-air) trickles down back into the economy as the government spends it, and finds its way back into the private banks. Once there, the real inflation begins through the magic of fractional reserve banking. This is all documented in the Federal Reserves' own manual entitled "Modern Money Mechanics". In a nutshell, since they only maintain a fraction of the actual reserves on-hand (while their ledgers falsely say they have the whole amount) the currency is inflated and the risk of bank runs are ever present.

There are only three basic courses of action the government can take; repudiate, hyperinflate, or liquidate. I favor the liquidation of governmental assets (non-essential governmental properties like the FDA, FCC, or the IRS) over repudiation or hyperinflation simply because liquidation of governmental assets is the surest way to end big government as we know it. Repudiation would shock the economy, interest rates would skyrocket, and bond prices would plummet; too much risk involved. Hyperinflation would only devalue the currency and impoverish everyone concerned. In Conclusion All this brings me back full circle to Nouriel Roubini's quote again: "The U.S. has been living in a situation of excesses for too long. Consumers were out spending more than their income and the country was spending more than its income, running up large current-account deficits. Now we have to tighten our belts and save more. The trouble is that higher savings in the medium term are positive, but in the short run a consumer cutback on consumption makes the economic contraction more severe.

That's the paradox of thrift. But we need to save more as a country, and we have to channel more resources to parts of the economy that are more productive. And when you have too many financial engineers and not as many computer engineers, you have a problem......I think this country needs more people who are going to be entrepreneurs, more people in manufacturing, more people going into sectors that are going to lead to long-run economic growth. When the best minds of the country are all going to Wall Street, there is a distortion in the allocation of human capital to some activities that become excessive and eventually inefficient." I wholeheartedly agree that the solution lies in entrepreneurship. However, the quote is bookended by the concept of "excess" and associates it with our economic crisis. This begs the question though, who are the true architects of this excess, the Financial Engineers alone or are the Federal Reserve and the U.S. Treasury complicit as well?

REFERENCES

Hayek, F. A. (September, 1948). The Use of Knowledge in Society.

The American Economic Review, XXXV, No. 4. Malkiel, B. G. (1996).

A random walk down wall street. New York, N.Y. Ball, R. (1994).

The theory of stock market efficiency: accomplishments and limitations. In D. H. Chew, Jr. (Ed.),

The new corporate finance; where theory meets practice (pp. 35 - 48). Boston, MA. Shiller, R. J. (1997). Human Behavior and the Efficiency of the Financial System. [online]. Available: [http://www.econ.yale.edu/~shiller/handbook.html].

Warsh, D. (January 17, 1988). After the Crash (financial engineering). economic principals.

New York, N. Y. Figlewski, S. and Silber, W. L. (1990).

financial options: from theory to practice. New York, N. Y. Galitz, L.C. (1995).

financial engineering: tools and techniques to manage financial risk. Burr Ridge, Illinois. Smith, D. J. (1999). The Arithmetic of Financial Engineering. In D. H. Chew, Jr. (Ed.), The new corporate finance; where theory meets practice (pp. 535 - 543). Boston, MA. (June 20, 1999).

*The Lessons of the Yen (I wrote this back in 1998 for the Golden Gate University student newspaper, if you substitute "Japan" for "America" it could be true today) As little as ten years ago it was thought that America's unemployment and growth rates would never be more appealing than those of Japan's. Such thinking has proven wrong, and the sting is being felt around the world. What effect, if any, do problems in one part of the world have on the others? Well, the sinking Japanese economy, the latest of the Asian Tigers to be struck by the Asian currency crisis iceberg is cause for concern for some Golden Gate University students in San Francisco. International students receiving funds from Japan are the most immediately affected. Erina Ishikawa (MBA, entrepreneurship) and Dongil Yun (masters, computer information systems), have both felt the effects of an unfavorable exchange rate since the decline of the Yen.

"When I came (to America) ten years ago, things were much cheaper for us in Japan, now the opposite is true," said Yun. Anticipating economic problems in Japan and noticing higher interest rates in the US, Misa Aoki (MA, Public Relations) changed her Yen savings to dollars over a year ago. While not impacted by the threat of waning purchasing power due to her foresight, she still worries about finding a job after graduating and returning to Japan. Such fears are not unfounded. The rising unemployment rate of 4.1% is the highest in Japan since World War II. Fortunately, none of those interviewed knew of anyone who has had to drop out of school and return to Japan because of the crisis. They all said that they were concerned for the future of Japan's economy, but that they ultimately do not think that the current crisis is that big of a deal. Jiro Ushio, chairman of the powerful Japan Association of Corporate Executives echoes the same sentiment, "[t]he realities of Japan's economy are not as bad as the world thinks." The president of the American Chamber of Commerce in Japan, Glenn S. Fukushima, said, "[f]undamentally it comes down to the fact that people in Japan generally don't think that things are so bad that they need to have fundamental change." Even some in Japan feel that the US expects its own bubble economy to pop soon and is merely looking for a scapegoat.

Obviously, there were problems enough for Secretary of the Treasury, Robert Rubin, to intervene to prop up the falling Yen in mid-June. His multi-billion dollar gamble paid off in the short run, reversing the Yen's slide by 8% within one day. Critics of Japan's government maintain that the under guidance by the Ministry of Finance, Japanese banks made bad loans to weak companies instead of letting the market work. The bad loans account for more than $600 billion, an amount larger than the entire economy of China, the world's most populated country. Surprisingly however, the Japanese people overwhelmingly re-elected the current government. Prescriptions for recovery are everywhere, MIT's Paul Krugman suggests that Japan's central bank should inflate the money supply and lower interest rates to stimulate domestic demand, while others say that Japan's April deregulatory "Big Bang" liberalization program will ultimately pay off in the long run. Whether the "big bang" or a more Schumpeterian "evolutionary" course is taken, with last week's resignation of Prime Minister Hashimoto, the future is uncertain.

Read more in the highly anticipated new book 'Anomaly: Revolutionary Knowledge In Everyday Life' and join the 'Anomaly Newsletter' at [http://anomalynow.com/].

What Is Causing the Euro Crisis: A Financial Mess, Cultural Diversity or Globalization?

We all know how the Euro crisis began: with Greece and lies about its public deficit. Then over the next two and a half years, the drama expanded to include Portugal, Ireland, Italy and Spain. Now the Spanish banking system threatens to collapse and take with it the Euro. But what is really causing the Euro crisis?

Is it "just" a problem of sovereign debt and speculative attacks fed by the bond markets conviction that the Euro is not defended by credible institutions and financial power the way the US dollar is? Or are other factors at work here, in particular cultural divergences and globalization?

Let's take them in turn.

1. Financial Factors

On June 2nd 2012, Soros, in a memorable and much-discussed speech in Trento (Italy) has made the point that Angela Merkel is responsible for the way the crisis has unfolded: she put a stop to Germany in its traditional role as the engine of a federated Europe. How did she do this? It seems that after the fall of Lehman Brothers in 2008 she declared that "the virtual guarantee extended to other financial institutions should come from each country acting separately, not by Europe acting jointly. (italics added)"

Bizarre as it may seem, if you read Soros' speech as presented now on his website you won't find this particular reference to Ms. Merkel's declaration - undoubtedly taken down under diplomatic pressure. Mr. Soros may have cleaned up his speech to please the Germans but the fact remains that if Ms. Merkel and Germany had moved immediately to quell the speculative attacks on Greece, we would not have a Euro crisis now.

Mr. Soros made two further important points: we have just three months to stem the Euro crisis before it destroys the European Union and only the Germans can do it. This three month's window is a consequence of the next government election in Greece (June 17): one may expect the Greeks to be ready to accept the bailout agreement but unable to meet the conditions. So the crisis will come to a climax in the fall just when the German economy will be weakening as its major exports markets slow down. Under the circumstances, "Chancellor Merkel will find it even more difficult than today to persuade the German public to accept any additional European responsibilities."

How did we get into this situation? Because the Maastricht Treaty created a common currency without prior political union: it took a step that was too big to be sustainable. As long the economic winds were favorable, the instability was not perceived. The common currency threw together countries at very different levels of development: for Germany, i.e. "the center" that includes other northern European countries like Finland or the Netherlands, the Euro was an opportunity to expand exports. The Euro was cheaper than the national currencies had been and all the necessary measures to improve competitiveness were taken, chief among them restraint on salary increases. For Southern European economies, i.e. "the periphery", the Euro became a source of cheap credit feeding a dangerous consumption and housing boom. Commercial banks, allowed to accumulate government bonds without having to set aside equity capital, gobbled up bonds of the weaker euro members to make an extra profit.

When the 2008 Wall Street crash came, European governments engaged in massive deficit spending and the "periphery" found itself in the position of a third world country that has become heavily indebted in a currency that it does not control. Financial markets discovered that such government debt was no longer sovereign. Banks loaded with these bonds found themselves insolvent. Result: a closely interlinked banking and sovereign debt crisis.

In the spring of 2012 the Bundesbank, with claims of some 660 billion euros against the central banks of the Eurozone periphery, began to shed them off, in order to limit the losses it would sustain in case of a Eurozone breakup. Furthermore, it has always been against expanding the money supply or adopting any financial fix, most notably Euro-bonds, even though they would be an instant solution. Why? Because since the Bundesbank is in the driver seat, it would find itself having to guarantee them.

This is a self-fulfilling prophecy: once the Bundesbank does it, all banks do it. They are reordering their exposure along national lines: the "center" is shedding bonds from the "periphery" and conversely there's a capital flight from the periphery towards the stronger Euro countries. Towards Germany in primis - indeed German bond yields are near zero! As a result, credit to enterprises, especially the medium and small ones that are a major source of employment, becomes less available and unemployment soars in the periphery.

Hence a deeper crisis. A wider divergence between Germany and the rest of the Eurozone. Moreover, an orderly break-up is not in the cards because the current re-ordering of Euro financial exposure within national boundaries is not completed (it would take several years).

Yet those who would suffer the most from the break-up would be the Germans themselves. They've benefited the most from the Euro so far - a cheap Euro has been the source of Germany's success in exports - but a restoration of the Deutschmark would be very painful since it would be valued much higher than the Euro ever was.

By end June, a European Summit should come up with proposals to avoid a Euro break up. So far, it appears that the following financial measures are under discussion:

a form of European banking union, with perhaps as a first step a European Bank Deposit Insurance scheme to stem capital flight;

a functioning bailout fund, strengthening the already approved European Stability Mechanism so that it is capable of providing sufficient financial support to the eurozone banking system;

Eurozone-wide supervision and regulation.

It is probable that Germany will do whatever is needed to preserve the Euro but no more, allowing the internal divergences between the center and periphery to grow, thus preventing the European Union of ever achieving a federal union like the United States.

What is needed is to convince the Germans to do more? For a real political change, Ms. Merkel will need to leave and that won't happen before 2013. Only then, and assuming a more pro-Europe party emerges, might Germany be more amenable to sustain the Euro and solve the euro management problems.

Problem solved? Not if some other negative factors are at work in Europe, in particular on the social/cultural front.

2. Cultural Factors

Cultural divergences could well be the forces that will overturn the boat.

Some researchers and most recently NYT columnist David Brooks (see his excellent article here ) have argued that the European union project makes no historical sense in the face of deep-set cultural divergences. Brooks reminds us how the world, after the disasters of World War II, yearned for peace and harmony: it was in this favorable setting that multicultural and supranational entities like the United Nations were created and with it all the international organizations still with us, chief among them the World Bank and the IMF. Those were also the years of the birth of the European Union project that began with the creation of the Coal and Steel Community, an optimistic effort by Germany and France to bridge their differences and "never" go to war against each other again.

Now, the pendulum has swung the other way: cultural divergences are increasing, not diminishing. There is a "failure of convergence" not just between countries but also within countries.

Consider the United States: a single country with a single currency, but as Brooks points out: "the country has become more polarized, not less. The country has become more difficult to govern, not less." This is why the 21st century will be, as he puts it, "the segmentation century". With the rise of modern communication technologies and Internet, "people's tastes have become more parochial, not less."

Brooks argues convincingly that the failure of convergence is most striking in Europe. While "a tiny sliver of European society", as he puts it, is becoming more transnational, only "only 2 percent of Europeans live in a different European nation than their country of citizenship." Habits, values and opinions differ from country to country. For example, 40% of Danes believe that work is a "very important" part of their lives, compared with roughly 65 percent of the French. According to Pew Research surveys, 73 percent of Germans think that economic conditions are good right now. In France, 19 percent think that, and in Spain only 6 percent. Europe means different things to different people. There is not even an understanding that Germans are closer to Greeks than they are to Chinese or Iranians.

Add to that the fact that there's been a resurgence of local regionalism: the Basques in Spain, the Flemish-Walloon rift in Belgium, the Lombards' Northern League in Italy etc. Not to mention the remarkable success of nationalistic, anti-immigrant parties like Marine Le Pen's Front National in France, a veritable throwback to 19th century chauvinism.

In this environment, it should come as no surprise that the European Union project has a hard time surviving...

To make matters worse, there is another negative factor at work here, the one which underlies the other two: globalization.

3. The Impact of Globalization

Over the past decade, globalization has progressively impacted developed countries, and in particular the Eurozone, in the following ways:

governments are progressively losing control over their tax revenues: it becomes ever easier for big, global corporations and the ultra-rich to escape taxation. To illustrate, two examples will suffice: the Greek shipping industry is not taxed by the government, the theory being that if shipping magnates were taxed, they'd move elsewhere, hence it's useless to even attempt to tax them. General Electric, the American corporate giant, has over one thousand staff dedicated to exploiting tax loopholes with the result that GE pays one of the lowest corporate taxes in America: last year, despite $14.2 billion in worldwide profits including more than $5 billion from U.S. operations, GE did not owe the US Government any taxes in 2010;


competitiveness in the industrial sector is threatened by emerging economies (the BRICS) and outsourcing is eliminating jobs, particularly in manufacturing, causing increasing unemployment;


the IT sector and other advanced technologies such a green energy have not so far created enough jobs to cover the losses in industry; as a result, unemployment is not only sticky, it has grown especially large for new entrants in the labor market, in particular the young.

Conclusion: Quo Vadis Europe, Can you Reform?

This is the general backdrop against which the Euro drama is unfolding: a financial mess, cultural diversity and globalization. Which means that even if a "financial fix" is found to shore up the Euro, the long term downward economic trends due to globalization will continue as Eurozone governments find it hard to raise adequate revenues; as European industry finds it hard to compete with cheap imports produced in the BRICS; as the loss of jobs in manufacturing is not compensated by gains in other newer sectors.

Over time, this means the Eurozone as a whole is growing poorer (even if the Germans still feel rich!) And obviously less able to afford its expensive welfare system. Austerity is the catchword. Cuts into pensions and health care benefits appear inevitable. The alternative is to make the management of the welfare system more efficient. But that implies reforming the state bureaucracy, cutting out red tape and unnecessary duplicative jobs, streamlining management processes, suppressing clientelism etc. This concerns in particular the euro "periphery" though even the "center" is not immune to the need for administrative reform.

Are Europeans even capable of reform? The Germans demand it. But will the cultural divergences stop reform in its tracks? Very possibly. People in the periphery are already rebelling against austerity: from there it's but a small step to rebel against any kind of reform, however much needed.

The only way to move forward would be to believe once again in something BIGGER: the "fantastic project" of the European Union, as Mr. Soros calls it. You need dreams to overcome the grim reality of chauvinistic retrenchment, each country behind its own borders.

Is the European dream dead? Can it be revived? What is surely lacking in Europe is a leader with a European vision. Ms. Merkel often talks about wanting "more Europe" but she doesn't seem to be aware that time has run out on her. The Euro financial mess has to be fixed now and cannot wait the decades necessary to overcome cultural divergences and achieve reform, step by step the way Ms. Merkel wants to do it.

What is needed is a European leader with the courage to push for European federation now. Someone charismatic.

Can Mr. Hollande, the new French President do it? Can he be considered charismatic? I doubt it. Certainly his heart is in the right place: he talks about the need for growth and that is a step in the right direction. But it doesn't address the fundamental issue, which is a lack of European cooperation.

Europeans need to understand that they are in this together because they've adopted a single currency. Now they need to take that final step and complete the process to sustain the Euro.

If not, the Euro will drop dead, and Europe with it. The tsunami will be enormous, the shock waves will hit the American continent as well as the BRICS. It is in everyone's interest to see Europe solve its Euro problem.

Claude Nougat is an economist (Columbia U. graduate) and United Nations veteran (25 years in FAO; ended careeras Regional Representative for Europe and Central Asia). She has been regularly writing about the Euro crisis on her blog at http://claudenougat.blogspot.com

Take a Bite Out of the Food Crisis

Now is the right time for countries to develop long term plans and goals about the current food crisis, to make sure it does not happen again.

Right now the world is in a panic, governments are trying to come up with solutions, and if they do it will be for the short term at best. A senior agriculture official from Brazil predicts the crisis and high food prices will last for at least another six years, which is all the more for governments to act now!

A well organized plan would not only insure order instead of chaos, but would stabilize food prices. The current crisis is only one of many that have happened in the past but it is the only one that has had a direct impact on the western nations.

Food crisis can be traced back to the early 1960's and even further. According to the executive intelligence, "food and self sufficiency has been declining since 1963 world wide". There has been an overall drop in production and output of at least 20 to 30 percent in cereals, pulses, oils and milk, with the African and Asian nations being hit the hardest.

Biofuel has been credited with causing the current crisis, but it is not the sole contributor. Many things caused this meltdown.

o Increased world population

o Increased demand for more food

o Development

o Droughts

o Subsidies and Tariffs

o More competition and higher prices on the commodities that are produced.

o Waste.

o High oil prices

In the past few months we have heard a lot of talk and rhetoric from government officials from the pledging of more money, and promising to do more, but this is not enough we have to put systems and fail safes into place to compensate for the growing population and our efforts to find alternative energy solutions to decrease our dependency on oil.

And how do we put systems into place? Through proper planning, goal setting, and training

Proper Planning: Is the task of making strategies that take you from point A to point B. If you don't have a plan you don't know where you are headed.

Goal Setting: This sounds like a simple thing to do, and if it was we all would have accomplished our goals by now. But setting and achieving goals requires commitment and follow-up and being flexible enough to change as the conditions change.

Training: All you need to do is look around at your own organization, and what you might see is significant changes that have occurred during the last year. Change has accelerated to the point where some governments and organizations are in chaos, and most are at least staggered. If our work worlds were stable, and un-changing, we might not need to worry, but since nothing stays the same, new skills knowledge and concepts are needed to achieve our goals.

Simplistic solutions about the food crisis have been written in news papers from the Financial Times to the Wall Street Journal. One purported for us to stockpile our pantries. How long can you eat Captain Crunch cereal? It just doesn't make sense.

Martin Luther King once said, "Rarely do we find men who willingly engage in hard, solid thinking. There is an almost universal quest for easy answers and half baked solutions. Nothing pains some people more than having to think."

The food crisis of 2008 will take more than just talk and gimmicks; it will require the world to be courageous in its thinking and fearless in its actions.

The concepts that I have been teaching in my seminars for the past twenty years have used these two principles.

Courageous in thinking, you want to develop new ideas to problems no matter how radical they seem and then finite the solution to where it is a manageable and workable concept.

Fearless in action, most alternative concepts and solutions that are outside the norm will draw doubters like "a moth to a flame" But you have to be willing to put yourself out there on a limb and be committed to your ideas. Edward Deming the father of Japanese management was ridiculed and told his style of management would never work is a good example of this.

Dr. W. Edwards Deming's name is legendary in Japan for the role he played in reinvigorating their industries after World War II. His revolutionary 14 Points for Management or Deming Method are the basis of the seven criteria of the U. S. Department of Commerce Malcolm Baldrige National Quality Award and Japan's Highest Industrial Award for Excellence or Deming Prize.

Barnes Grand Blanc School

As you can see from the above statement it was just the opposite of the doubters. He was confident in his ideas and himself. You could say he was "fearless in his actions"

No matter how much we turn our heads to it or pretend it is not happening, it won't go away. Ethanol can be made out of other commodities that wouldn't put a strain on our basic foods for example sugar cane, in which Brazil is doing. They are also the world's largest sugar producer and exporter and sugar doesn't compete with food.

We have to get courageous in our thinking and fearless in our action and "take a bite out of the food crisis".

Anthony J Jackson is a management consultant and can be reached at: ajackson@officeliveusers.com

Website: [http://www.waterhouseconsulting.web.officelive.com]

Another Way Around the Credit Crisis - Minnesota Bill Authorizing Banks to "Monetize" Public Works

In August 2007, the nation was stunned by the collapse of a major Minneapolis bridge, killing nine. The bridge had been rated structurally deficient by the U.S. government as far back as 1990, and it was only one of more than 70,000 bridges across the country with that rating. The American Society of Civil Engineers estimated that it would take nearly $190 billion to fix the country's failing bridges over the next two decades. Minnesota and other states have the manpower and the materials to rebuild. What they lack is only the money to do it. Municipal governments have to borrow money by issuing bonds, and the interest they must pay on these bonds is going up.

On March 13, 2008, Erik Sirri, director of the SEC's division of trading and markets, told Congress that the credit crisis has spread to municipal bond auctions. "There is no question that the recent dislocations in the municipal bond markets have created unanticipated hardships for municipal issuers and in some cases dramatically increased their borrowing costs," Sirri said. The inability of cities and states to sell municipal bonds to investors at reasonable interest rates seriously threatens plans to build new roads, schools, airports and other public works projects.1

Although the cost of borrowing is going up for municipal governments, this is not because they are bad credit risks. In fact, they are extremely good credit risks. Creditors know where to find them, and local governments have the power to tax to pay their bills. The problem lies with the bond insurers called "monolines," which have ventured into the very risky mortgage-backed securities market. This has put the insurers' triple-A ratings in jeopardy, along with the ratings of the municipal bonds they insure.

While borrowing costs for municipal governments are skyrocketing, the interest rate the Federal Reserve charges to banks has been going down, even though banks are proving to be much riskier investments than local governments. The Federal Reserve is a private banking corporation that is owned by other banks. It was established in 1913 to prevent bank runs and otherwise keep the banks from getting into trouble for over-leveraging (lending out many times their assets), and that remains its principal function today. The Federal Reserve recently extended $200 billion in financing to 20 top investment banks at wholesale rates, but these low rates are not being passed on to municipal governments or home buyers. The Federal Reserve is evidently working for the banks more than for taxpayers or local governments.Thinking Outside the Box: The Minnesota Transportation Act

Many people are getting tired of waiting for the Federal Reserve and the federal government to act, and one of them is a Minnesota resident named Byron Dale. Dale has drafted a bill called "the Minnesota Transportation Act" (MTA), which is scheduled for hearing before the Minnesota Senate Transportation Committee on March 25, 2008. If adopted, the bill could represent a major innovation in the way state and local projects are funded. It would mandate Minnesota's Transportation Department and State-chartered banks to enter into an agreement providing that the banks would advance funds for legislatively-approved transportation projects in the same way that banks make commercial loans - simply by "monetizing" the projects themselves. Banks routinely monetize the promissory notes of borrowers just by making book entries to a checking account and saying "you have a new deposit with us." (More on this below.)

Under the MTA, the state-chartered banks would create a pass-through account titled an Asset Monetization Account (AMA), monetizing the bid value of projects. This would be done in the same way that banks monetize collateral, except that the deposit would go on the bank's books as an asset rather than a liability, turning the bid value of the project into "money" without debt. This money would be debited electronically out of the AMA and credited to the State's Transportation Account (STA), from which it would then be debited out and credited in to the contractor's bank account in a state bank, according to the terms of the contract. The contractor would spend this money to complete the project. The money would flow into Minnesota's economy, where it would provide for better, safer, more durable roads and bridges. It would be used to purchase goods and services, benefiting business. It would go to pay taxes, helping the State balance its budget. And it would flow back into the state-chartered banks as interest on outstanding loans, reducing the number of loan defaults and improving the profits of the state-chartered banks. In this way, says Dale, the MTA would benefit every segment of society.Too Radical? Maybe Not . . .

Dale says he has been proposing this sort of state funding alternative for years; but only now, with the looming liquidity crisis, have legislators begun to take him seriously. His plan may not be such a radical departure from existing practice as it sounds. Commercial banks are already in the business of creating money. Except for coins, our entire money supply is now created by banks in the form of loans.2 Indeed, banks create all the money they lend. This was confirmed by the Chicago Federal Reserve in a booklet called "Modern Money Mechanics," which states:

"Of course, [banks] do not really pay out loans from the money they receive as deposits. If they did this, no additional money would be created. What they do when they make loans is to accept promissory notes in exchange for credits to the borrowers' transaction accounts. Loans (assets) and deposits (liabilities) both rise [by the same amount]."3

Many other authorities have confirmed this money-creating mechanism of commercial banks.4 State-chartered banks get their authority to create money from the State, and the State has the authority to determine the purpose for which banks create money. State banks are now permitted to create money to monetize a mortgage or other promise to repay. They could as easily be authorized to "monetize" the promise of contractors to deliver labor and materials to the State in the form of road and bridge repair and construction.

The argument against this creative approach is that it would be inflationary, but would it? Inflation results when "demand" (money) increases faster than "supply" (goods and services); and in this case goods and services would be increasing along with the money available to spend, keeping the money supply in balance and prices stable. In fact, it is the lending of money created out of thin air that is inflationary, because banks create the principal but not the interest necessary to pay back their loans. Additional loans must therefore continually be taken out just to service the "money" (or debt) that is already in the money supply; and this newly-created money goes into the pockets of middlemen rather than contributing to the productivity of the community. "Demand" (money) thus goes up without a corresponding increase in "supply," creating price inflation.

The solution to this conundrum is to authorize banks to monetize the production of real goods and services, creating supply and demand at the same time. There is substantial precedent for this approach, stretching as far back as the early American colonies:

* In the early eighteenth century, the colony of Pennsylvania issued money that was both lent and spent by the local government into the economy, producing an unprecedented period of prosperity. This was done not only without producing price inflation but without taxing the people.

* When Abraham Lincoln needed money to fund the American Civil War, rather than paying 25 to 36 percent interest charges, he avoided going into debt by printing Greenback dollars that were "legal tender" in themselves. Again, historians of the period attest that this issue of Greenbacks was not responsible for price inflation.

* A successful infrastructure program funded with interest-free "national credit" was instituted in New Zealand after it elected its first Labor government in the 1930s. Credit issued by its nationalized central bank allowed New Zealand to thrive at a time when the rest of the world was struggling with poverty and lack of productivity.

* The island state of Guernsey, located in the British Channel Islands, has been funding infrastructure with government-issued money for over 200 years, without creating price inflation and without government debt.5 But Is It Constitutional?

These governments could create the money they needed because they were sovereign entities, but what about individual States governed by a federal Constitution? In the United States, the U.S. Constitution controls. But that august document says very little about the creation of money - so little that banks have stepped in and taken over the business by default. Here are the sole Constitutional provisions directly addressing the creation of money:

Article I, Section 8, Clause 5

: The Congress shall have Power...To coin Money, regulate the Value thereof, and of foreign Coin, and fix the Standard of Weights and Measures.

Article I, Section 10, Clause 1

: No State shall...coin Money; emit Bills of Credit; make any Thing but gold and silver Coin a Tender in Payment of Debt.

Congress has been given the power to coin money, but minting coins is not the same thing as issuing paper money, checkbook money, accounting-entry money, or electronic money - the forms of money used most often today. Arguably, "to coin" money was an archaic way of saying "to create" money, but then what is to be made of the clause stating, "No state shall . . . make any Thing but gold and silver Coin a Tender in Payment of Debt"? "Coin" here clearly means precious metal coins, period.

That clause is interesting for another reason: when was the last time you heard of a State paying its debts in gold or silver coin? States routinely pay their debts with the bank-created accounting-entry money that now composes over 97 percent of the U.S. money supply (M3), and that form of money is omitted from the Constitution altogether. The States therefore violate the Constitution every day, something they must do if they are to pay their debts at all, since gold and silver coins are no longer in general circulation. The Constitution obviously needs to be amended to suit the times. Meanwhile, the Tenth Amendment to the Constitution (part of the Bill of Rights) provides:

X - Rights of the States under Constitution

: The powers not delegated to the United States by the Constitution, nor prohibited by it to the States, are reserved to the States respectively, or to the people.

Creating checkbook money is not specifically delegated to the United States, so it must be delegated to the States, unless it is specifically prohibited to them. What about the provision that "No State shall . . . emit Bills of Credit"? According to "the 'Lectric Law Library," "bills of credit are declared to mean promissory notes . . . . Bills of credit may be defined to be paper issued and intended to circulate through the community for its ordinary purposes as money redeemable at a future day." Bills of credit are promises to pay later rather than what is being discussed here: checkbook money issued as "legal tender" - the sort of dollars banks issue every day when they make commercial loans. The Constitution does not say who is authorized to issue this sort of money - whether in paper, electronic or accounting-entry form - so under the Tenth Amendment, this right is reserved to the States and to the People.

As the credit crisis deepens and exposes the inability of the existing banking structure to meet the public's needs, creative funding plans similar to the proposed MTA could be popping up in communities around the country. If the U.S. Congress and the privately-owned Federal Reserve will not issue the funds necessary for bridge and road repair and other urgent public projects, we can encourage our State legislators to fill the breach; and if they won't do it, we the people can get together, apply for a bank charter, and create the funding ourselves. (See E. Brown, "How to Start Your Own Bank," webofdebt.wordpress.com, February 23, 2008.)

Ellen Brown, J.D., developed her research skills as an attorney practicing civil litigation in Los Angeles. In "Web of Debt," her latest book, she turns those skills to an analysis of the Federal Reserve and "the money trust." She shows how this private cartel has usurped the power to create money from the people themselves, and how we the people can get it back. The website is http://www.webofdebt.com/

Her eleven books include the bestselling "Nature's Pharmacy," co-authored with Dr. Lynne Walker, which has sold 285,000 copies.

The Economnic Crisis: Let's Go to Market

This essay has been written out of three fears: We are experiencing an economic crisis rather than a financial crisis in that the underlying problem is resource depletion; the crisis is world-wide rather than just an European one; And the crisis is much more serious than is generally admitted.

The ups and downs of economic activity have been a concern for a couple of centuries if not for several millenia This essay will try to use the formula from the quantity theory of money to evaluate where the economy is currently at, and then look at how money is created and propose an alternative way of creating money to facilitate the exchange of goods and services. This proposal is to extend local exchange trading systems into a national exchange trading system. It is also suggested we should move our economic structure closer to the perfect competition model.

The quantity theory of money suggests money supply has a direct, proportional relationship with the price level. I prefer to think of it as the connectivity formula because it connects the real economy and the financial economy. The connectivity formula states

MV=PQ

...where M is the quantity of money in circulation, V is the velocity or rate at which money circulates, P is the price level and Q is the quantity of goods and services produced and exchanged. I think it is important to note there are four variables and one should look at the factors which cause all four of them to move.

Generally we want P to remain stable. Inflation or deflation cause undesirable upsets in our lives and prices need to remain stable so that we can have faith in our money.. Changes in individual prices should be signals to change the mixture or quantities of goods and services we produce.

When I took my first economics course I remember the professor talking about scarce resources. However, since then many people appear to assume that the resource base is unlimited and that our economy will be able to continue to grow forever or at least the foreseeable future. I have not noticed much interest in the Q part of this formula.

Through most of the recorded history with which we are familiar there has been a long-term trend for Q to go up. This does not mean that it will continue or that the increase has been steady. It is quite likely there has been a fractal pattern to this trend and that these ups and downs have impacted the economy and our lives.

There are a number of things which could and probably have impacted on Q. Through the ages the most important has been improvements in agricultural productivity which has supported a larger population and released people for work in other fields. Technology has also played a major part in increasing Q through the years.

It is likely the discovery of resources and commodities and their depletion have also been fractal over short and long terms. This too would have impacted the formula.

Wars may also have had an impact. The demand for war materials would cause Q to go up during a war and may cause it to go down afterward as economies recover. Another possibility is a pent-up demand as was the case in North America following the second world war. While the Americans put a lot into the war, they still had tremendous commodity resources at the end of it. They also had the desire and developed the technology to exploit these resources.

Another possibility is changing values such as the work ethic.

Turmoil and volatility in the other side of the equation could cause production to decline. Ian Morris in his book Why the West Rules - for Now (McClelland & Stewart, 2010) identifies what he calls the five horsemen of the apocalypse - famine, epidemic, uncontrolled migration, state failure and climate change which "can turn into disastrous, centuries-long collapses and dark ages." (p 29) Any of these would also show up as declines of the Q in the formula.

All this is further complicated by the existence of seven billion people on this planet most of whom want a modern standard of living, good health care and families.

So what is currently happening to Q?

Too many of the headlines one sees on news articles are compatible with the fear that Q is on a major downturn. Here are three other major pieces of evidence.

Angus Maddison in his book Contours of the World Economy, 1-2030 (Oxford University Press, 2007) identifies five phases of growth since 1820 (Page 69) of which the years 1950 to 1973 he labels the golden age of prosperity. The years from 1973 until the time of publication (2007) were the second most prosperous of that time period. One would have to guess the down trend has continued since 2007.

The second piece of evidence comes from the World Wildlife fund which published the Living Planet Report late in 2010. The report claims we are using resources at a rate 150 percent of that which would be sustainable for the planet. If this is correct then there has to be economic turmoil. Even if the figure is exaggerated we should be taking it seriously. In the last year I have seen no discussion of the possible economic consequences.

The third piece of evidence is a United Nations report published in December, 2011 which claims 25 percent of the world's land is "highly degraded" and 44 percent is "moderately degraded," while only 10 percent was classified as "improving".

Even if these figures are an exaggeration we should treat this report with concern. No matter how many technical gadgets we have and no matter how much of our economy is based on services, if we can not produce enough food for everyone there will be serious economic and social problems. The less we consider this report and how to deal with its implications the more human suffering there will be.

Considering the number of factors which can influence the quantity of goods and services being produced both up and down, to maintain price stability it is important that the money supply can easily be varied.

These points along with most of the headlines I read every day lead me to think the world economy is into a major downturn. The horsemen of the Apocalypse are possibly riding again. Problems in the physical side of the economy are showing up as a financial crisis. This presents us with a policy dilemma. Austerity as is proposed by some people will inflict uneven suffering on too many people and stimulus as proposed by other people will consume even more resources and bring forward a major crash. If a chunk of the money supply should be lost as a result of a financial crisis, then the downturn will be even worse.

Now lets look at the financial side of the formula.

The study of anthropology shows humans do not need money in order to exchange goods and services and that relationships are important in exchanges where there is no money.. Money allows us to exchange with strangers and on a much larger scale. Therefore we should look upon money as a tool, or maybe even a lubricant, which makes it easier to exchange goods and services.. We probably should not be treating it as a commodity.

I want to look at three ways in which money can be created - the gold standard, fractional reserve money and LETS (local exchange trading system).

Through the years many commodities have been used to facilitate the exchange of goods and services. Being rare, beautiful and mostly useless gold has been a favorite. The metal itself can be used or receipts representing gold in storage can be used. The use of gold (or some other commodity) was probably an early step in the transition from an economy based on relationships.

The advantages of money based on gold are that it is easy to establish and it is easy for people to believe in it and have faith that they will continue to have something of value although even gold can change its value relative to things it can be used to purchase.

But gold has some serious disadvantages as money..The biggest is that the amount of gold is limited by what can be dug up or imported or stolen. Thus if there is too much gold in circulation there will be inflation which happened after the Spaniards started importing gold (and silver) from South America. On the other hand if there is not enough gold there will be deflation as happened when the Americans went back onto the gold standard following their civil war.

To some extent the quantity limitation of gold can be overcome by the use of fractional reserve money on top of gold base. The total money supply can be varied with changes in reserve requirements or in what else besides gold can be accepted as high-powered money. But on the gold standard people tend to be emotionally attached to the idea their money is backed by gold.

If there is anything that deserves to be called funny money, it is fractional reserve money. A couple of times I have asked loans officers how it feels to be able to create money, and they cannot believe that they are doing that. Money creation in our economy is just a little complex and it takes a little effort to understand how it works.

Money is created when banks make loans and uncreated when the loan is repaid.

Here is the classic explanation. Suppose $1,000 of money from outside is deposited in a bank in a closed economy of three or four banks where all transactions are by cheque (or these days bank card). This bank is required to hold reserves of 10 per cent (to make the arithmetic easy) and the bank manager now has $900 to loan to his customers. The customers spend the money and it ends up in another bank in this community. The second bank manager can now make a loan of $810. By the time the $1,000 of new money has worked through the system there has been $10,000 added to the money supply of this community. Isn't that incredible? No wonder loans officers won't believe they are creating money.

I've been trying to think up some advantages to creating money this way and the only thing I can think of is that it is what we are used to. Money is such an emotional thing that to suggest something else is seen as treasonous. Change can be threatening.

However, there are at least three disadvantages to fractional reserve money.

The first is that it gives tremendous power to bankers who get to determine which projects go ahead and by whom. They also have opportunities to take cuts for themselves and they get to charge interest on the money they have created. It is no wonder that the economic frustrations of people through the years have surfaced as protests against bankers.

The second problem is that the above model does not take into account that interest is charged on all those loans. Suppose the loans were all for a one year term at 10 per cent interest. On the one year anniversary the $10,000 of new money must be repaid with $11,000 even though no additional new money has been created. In the real world through most of the years fractional reserve money has been used the economy, the high-powered money and the money supply have all been growing so that interest has not been seen as a problem. This is beginning to sound like a variation on a Ponzi scheme.

A third problem is that this model does not look at what happens if something happens to the high-powered money upon which the $10,000 is based. The original $1,000 could be suddenly withdrawn or one of the banks could have to write off $1,000. Either way for the banks to maintain their 10 per cent reserve requirements they are going to have to reduce their loans by $10,000 and that will be $10,000 less money to facilitate the exchange of goods and services in the community. Unless the velocity of the remaining money can be increased either prices will come down or the economy will be forced into a recession as Q drops. The writing off of large amounts of debt and a reduction in high-powered money may be a part of what happened during the financial crisis of 2008. The current Euro crisis could be even worse.

Another problem with fractional reserve money is that the total money supply cannot easily be varied especially downward and deflation is probably more of a problem than inflation.

Through the years, as we saw earlier, there have been ups and downs in the quantity of goods and services the economy can produce. On top of that there are instabilities from the way in which we create money. There's a saying that complex systems fail in complex ways. If we really are going into an extended period of economic decline these financial instabilities and complexities are likely to make things much worse.

Sometimes the promoters of local exchange trading systems (LETS) try to sell it as a form of barter. However, I believe they are just using another form of money.

Rather than talking about creating money it might be more appropriate to talk about assigning credits and debits. Maybe this will help us get used to the idea that money should be considered a tool or lubricant rather than a commodity.

A group of people in a local area agree to trade among themselves. When two parties have agreed to a transaction they record the transaction with the organization. The seller gets a credit and the buyer gets a debit. They then go on to make further deals with others in the organization and over time everything works out. The exchange part of this is really not much different from using bank accounts to facilitate exchanges.

But doing it this way the problems with fractional reserve banking become positives. No interest is charged or received; therefore there is no need for the money supply to be continually increasing and there should be no inflation or deflation.

As money is assigned with each exchange the total amount varies automatically. If the members increase their economic activity the assigned money supply goes up and if some problems force a decline in their exchanges the assigned money supply automatically goes down without impacting prices.

A third advantage is that the velocity of money is variable. Once some money is assigned it can sit in the account until the owner is ready to use it. As money is a tool it can be used when needed. As there is no interest to be earned there is no pressure to do something with it.

There are two disadvantages to a LETS.

The first is that every transaction is recorded. On a national scale this would make social control much easier. One the other hand most of us have embraced debit cards with enthusiasm and give little thought that each transaction is recorded.

The second problem with LETS is that its usefulness is somewhat limited because people have to join and it is local. Most of us want to exchange goods and services on a much larger and wider scale.

Therefore I propose we expand the concept into a national exchange trading system (NETS).

Such a radical change in the way of assigning money would require a radical revision of our whole economic organization. It would also go against a lot of vested interests.

Here are some guidelines for establishing a new economic order.

First, I suggest the goal would be to get as close as possible to the perfect competition or market model.

Because many economists are close to big business or seen as being close a lot of people won't listen to anything from economics. Some of these people go on to propose an economy based on small business. What a shame they don't listen as the first requirement for perfect competition is that no participant in a market is so large as to be able to influence prices through purchasing or selling decisions. A lot of thought has gone into the economics of small business but it appears some people want to reinvent the wheel.

What I like most about the perfect competition model is its equality feature. As the competition is perfect there can be no profits other than wages, a return on investment and maybe something to compensate for risk. The challenge of the future is to organize our economy so that most people will be able to share the available resources. The closer we are to perfect competition the closer we will be to meeting this challenge. However, one has to recognize that not everyone is committed to equality.

As growth is not a part of this model, it is ideal for a steady or declining economy.

As it is important for economic efficiency that prices reflect the true costs of production, subsidies should be given to consumers rather than producers and there should be no protection from international trade. A country making this change should declare unilateral free trade. If other countries want to subsidize our living standards that is up to them.

We should try to limit political influence on economic issues as politicians tend to have goals that interfere with an efficient economy.

A second guiding principle should be that the money supply must be variable. However, we must also ensure there is neither too much or too little. We must take care that no individual or group allows the money supply to increase for their own profit. Prices in general need to remain stable although allowing individual prices to change will provide signals for changes in production activity. Probably the way to deal with controlling moneys supply would be to tie it to a general price index. If the index goes up then the money supply should go down and if the index goes down then money supply should go up.

For some time most of our money has been entries in the books or computers of the banking system. However many people still think of money as having its own value as in gold and it should therefore earn interest. To adopt a NETS system we are going to have to complete the psychological transition to thinking of money as a tool or lubricant that gets its usefulness from facilitating the exchange of goods and services.

NETS money would be based on debits and credits created when people exchange goods and services. Its backing would be the goods and services produced. As no interest is charged on this money velocity should be more variable and this should balance small fluctuations in the value of Q..

There would probably be a need for some currency for small transactions to preserve privacy and to keep police employed. (If there were no currency a lot of crime would be difficult or easily tracked.)

Currently a lot of money goes through government coffers in the form of transfer payments to individuals and subsidies to producers. I believe subsidies should go to consumers rather than producers therefore I propose that these be combined into some sort of universal income scheme to ensure that everyone has a minimum standard of living. This would involve making payments directly into the accounts of individuals probably on a monthly basis. It may be necessary to have some taxation to keep the money circulating.

A major effect of giving out universal subsistence payments would be to transfer power to individuals who would vote with what they chose to do with their money. The power to assign money would be with individuals rather than bankers.

Universal subsistence payments will be needed for the same reasons pensions, unemployment insurance and social assistance are needed - to help people get through those times in their lives when they are not capable of earning a living wage. It would also allow people to choose what they wanted to do with their time and their lives as current technology does not require everyone to work their whole lives. And when there is a probability of an economic downturn this program would ease the suffering from economic turmoil.

Most of the money supply would be assigned in the day-to-day transactions. However, some person or group of people would have to determine the amount of the universal subsistence payments. This amount should be determined so as to keep a price index steady. It would probably be best to keep politicians out of it although I can see giving presidents and prime ministers the right to make a limited special payment on the day before elections. We won't be able to stop this type of bribery so we might as well keep it controlled.

In trying to implement such radical changes it would probably be wise to reevaluate all government functions especially those related to economics.

Currently governments use their powers to pass legislation that restricts the operation of the market so that some people can make profits they would not make if full competition were allowed. This includes patent and copyright, licensing, trade restrictions and regulations. I would like to see governments reverse this role and support the basics of perfect competition. One thing they should definitely be doing is to require the publication of all knowledge relevant to the production and pricing of all goods and services. Producers need to have the knowledge to easily get into an industry and customers should have access to all the information they need to make decisions according to their values.

Another function of government should be to evaluate and publicize what is happening to the Q in the formula - the quantity of goods and services being produced.

Governments should also ensure the production of infrastructure, justice (rather than the rule of law) and education. Please note the word ensure. Governments could ensure the education of all children via a voucher system rather than through public schools.

People in government appear to enjoy spending money. Under NETS there are several ways in which government could be financed. The person or group responsible for managing the money supply could allocate funds to governments in the same way they would give out a universal subsistence allowance. Governments could impose taxes as they do now. Or there could some combination of the two. The more governments have to get money directly from their people the more accountability there will be. Governments should not be allowed to borrow.

The important thing is that the money supply be kept in balance with the other functions in the formula.

There would still be a need for financial inter-mediation to raise sums of capital for projects. In our economy this has been sold as savings and investment with a certain return. As returns have proven to be somewhat less than certain it might be more honest to encourage the industry to focus on risk equity.

As we are trying to focus on the perfect competition model firms would be allowed to fail. Their employees would be protected by the universal subsistence payments.

Foreign exchange would continue to happen as countries exchange goods and services with each other. Capital transfers should match physical transfers of goods and services for projects. Exchange rates would probably be closer to purchasing power parity.

Changes in exchange rates would reflect changes within individual economies and structural changes.

I believe economies are examples of fractals in that their graphs show a series of up and down trends and that within each trend there are trends within trends of ups and downs. One can calculate fractal dimension (2 - the Hurst exponent) and sometime the result can be used to identify turning points. But the ups and downs are so complex nothing can be certain.

Looking at the world economy we cannot be certain but there is a lot of evidence we have been through a major turning point and the major trend is likely to be down for some time to come. The return to growth which would be our salvation may be a long way off. To minimize human suffering we need to make some radical changes. In this essay we have looked at the connectivity formula from the quantity theory of money and noted the current economic crisis is probably a reflection of our unsustainable use of resources. We have also identified some problems with the way in which we create money and proposed extending the local exchange trading system into a national exchange trading system.

Changing the way we create/assign money and the structure of our economy won't stop economic decline but it might focus on the problems, slow the decline and make it easier to resolve the conflict between environmental concerns and employment concerns. The problem is that the changes required will be difficult because they will conflict strongly with some very powerful short-term interests.

Art Powell, the author of this article has a web log on economics at https://economics102.wordpress.com/. You are invited to look at it.

Who is Responsible For the Health Crisis in America?

A baby born in the U.S. in 2004 will live an average of 77.9 years. That life expectancy ranks 42d in the world, down from 11th twenty years earlier.

- Source: Census Bureau and National Center for Health Statistics

BLAME-STORMING THE HEALTH CRISIS

Who is responsible for the health crisis in America? Is it the government? The state of the economy? Parents? Schools? What about you and me? Restaurants? Grocery stores? Or is it our busy schedules? How about those get-togethers and parties you attend? Maybe the presented food choices are to blame. Yes! "Blame." That is the word I was looking for! We are looking for someone or some institution to blame for our health crisis.

IS THERE A GOVERNMENT CONSPIRACY?

Is there a government conspiracy? If so, just who are the conspirators? Let us get one thing straight. You and I do not need anyone's help in creating a health crisis. There is a reason for this. You and I are the greatest conspirators of our own lives. We have received more than enough information to let us know what to do to enhance our health and yet we, in many cases, do not act and make the changes. I think that clarifies the conspiracy theory in a nutshell. When I speak of this health crisis, I am not talking about medical insurance or medical costs or treatment. True, this is an important issue. However, this issue only touches on the surface of the problem. How we think, eat and live is the real cause. So who or what is responsible? Do you have an idea? Who is the villain or culprit?

YOU ARE RESPONSIBLE FOR YOUR HEALTH

You are personally responsible for all the decisions you make. Do not blame any institution or anyone else for your poor choices that lead to disease, illness and poor health.

WHY AMERICANS RANK LOW ON LONGEVITY

What has caused America to fall so far behind the statistics on longevity in the world? The ranking went from 11th to 42d. Americans do live longer, but not as long as 41 other countries, according to National Center on Health Statistics. Why is one of the richest countries in the world not able to keep up with other countries? Some say it is because the United States has no universal health care. I do not see that as the primary reason since we have never had universal health care. Here is what I think are some of the primary reasons for this trend:

Adults in the United States have one of the highest obesity rates in the world. One third of U.S. adults 20 years and older are obese and about two thirds are overweight, according to the National Center for Health Statistics.
Americans are extremely sedentary in their lifestyles.
Americans do not exercise at all or very little.
Americans eat too much and they eat too much processed foods, sugar and fat.
As long as the health care debate is limited to insurance, the health of Americans will not improve.

SAM MADE ME DO IT

Kids sometimes will do the craziest things. Once upon a time, there were two brothers. We will call them Sam and Jake. As school-aged brothers, Sam challenged Jake to climb a tree, and so he does. Then Jake is challenged, on a dare, to go farther out on a long, thin branch of the tree. He gets about half way out before the limb breaks, and he comes falling to the earth with a thump. Jake broke his nose and got some cuts and bruises. Both kids report to their mother and of course Mom asks Jake, "How did this happen?" Jake responds, "Sam made me do it!"

There are many complaints I hear about all that enticing processed food in the grocery stores. There are remarks about the special challenge of eating out: The portion sizes are too big, and there are all those irresistible, unhealthy "choices" available. I see no difference between Jake's response and these complaining adults' reactions to their plight - or, should I say, dilemma. Jake said, "Sam made me do it." Translation: Sam is responsible for Jake's poor decision to go out on a limb. That is nonsense. Jake is responsible for his own decision to go out on a limb. We adults are too frequently "going out on a limb" with our health by making poor choices while laying the blame on external circumstances or institutions -- whether commercial, social, or governmental. Cease fire with such thoughts of blaming external circumstances or other people. Take charge. Be accountable for your own actions.

INSTITUTIONAL RESPONSIBILITY

Are our institutions off the hook when it becomes to responsibility? No, they are not. I use the term "institution" in a broad sense, to include the following:

Federal, state and local governments
Political parties and politicians
Teachers and school boards
Physicians, dentists, nurses
Journalists, press and media
CEO's and corporate shareholders
Restaurateurs, marketers
School cafeterias
Workplace cafeterias
Clergy, little league coaches
Parents and caregivers
Law enforcement officers, parole officers
Military leaders (from the squad leader upward)

INSTITUTIONS ARE RESPONSIBLE TO LEAD BY EXAMPLE

What kind of leadership responsibility do institutions have when it comes to healthy eating and exercise? Institutions, as well as all leaders, have a heightened level of responsibility beyond rules and regulations of the organization. Our institutions have the special responsibility to "walk the talk," clarify the goals of health and fitness, and assume a more visionary role to set and implement standards for a solution to our health crisis. Our institutions are morally obligated to set the example by living by the higher standard required of them as leaders. This can be accomplished through legislation, executive orders and both internal and public policy making. Our institutions need to deal with the problem directly and use their special influence to save lives and prevent suffering.

HEALTH INSURANCE DOES NOT EQUATE TO A HEALTHY LIFESTYLE

Health insurance will not accomplish this. Are you looking for true medical insurance? Make your premium payments in the form of living a healthy lifestyle void of dependence on a home pharmacy of medications. Most of our medications are prescribed because of our lifestyles, not because we simply got sick. I am talking about the overwhelming rule and not the exception.

There are exceptional cases where, despite a healthy lifestyle, serious disease or illness happens. Would you cease to drive a car simply because someone had an automobile accident? In addition, you certainly should not cease to lead a healthy lifestyle just because someone you know lived to be 100 years old as a smoker. That would be a fatal error in thinking. It is just this type of thinking that is killing and maiming Americans. Ban this type of thinking from your mind.

Take the educational institutions for America's young people. Schools are primarily focused on delivering on educating our youth with an approved curriculum. Schools need to go beyond mere curriculum, to consider the whole child, setting improved fitness and healthy eating as a priority. Fitness and healthy eating should be a part of the curriculum, as they play a major role in the development of a child.

TEACHERS ARE ROLE MODELS

Teachers are role models and leaders when it comes to eating and exercise habits and how they portray their attitudes about fitness and health in school. John Maxwell defines leadership as "influence - nothing more, nothing less." Moving beyond the position of the teacher to assessing the ability of the teacher to influence others as a leader is essential. This refers to those who would consider themselves followers, and those outside that circle.

Leadership builds character, because without maintaining integrity and trustworthiness, the capability to positively influence will disappear. There are many other definitions of leadership. They all point to a leader having influence on others and providing to them the guidance and direction necessary to envision a long-term view of the future.

POINT OUR CHILDREN IN THE RIGHT DIRECTION

Policy is made from the top down through legislation, executive order, mission and policy statements. Where there is a void in such top-down leadership, the initiative must begin from the ground up. Educational institutions by virtue of their access to vast blocks of our children's time, have a unique responsibility to go beyond mere curriculum to consider the whole child. By offering and stressing healthier choices, they are setting precedent for the rest of that child's life.

Early in America's pioneer history, schoolteachers were expected to be morally beyond reproach in every detail of their own lifestyle. This reflected how those communities wanted to influence their children's future and the future of the country as a whole. Today's America likewise needs today's schoolteachers to be wholeheartedly health conscious for the same reason. Our future depends on it.

That is not to say that all schoolteachers should be fashion-model thin or good-looking or in any way shaped by the media's image. An overweight teacher who is working to improve her fitness would be preferable over the Size 4 who is proud to eat candy bars and drink sodas in front of her pupils. Institutions are role models in all that they say and do or do not say or do. Their policies and actions set the standards.

WE ARE KILLING OUR CHILDREN

Look at some statistics on childhood obesity in America. About 15 percent of children and adolescents ages 6-19 years are seriously overweight. The percentage of children and adolescents who are defined as overweight has nearly tripled since the early 1970s.

Over 10 percent of preschool children between ages of two and five are overweight.
Another 15 percent of children and teens ages 6-19 are considered at risk of becoming overweight.
Researchers found that lowered self-esteem was associated with being overweight in girls as young as five.
One in five children in the U.S. is overweight.
Children ages 10-13 who are obese are expected to have a 70% likelihood of suffering from obesity as adults.

Centers for Disease Control and Prevention's (CDC), 1999-2000

National Health and Nutrition Examination Survey (NHANES)

CHILDHOOD OBESITY ONLY AN INDICATOR AND NOT THE REAL PROBLEM

Childhood obesity is only the indicator of an underlying problem of a sedentary lifestyle and unhealthy eating habits. Address these underlying issues, and childhood obesity will be significantly reduced.

SCHOOLS, TEACHERS AND PARENTS HAVE A HEIGHTENED LEVEL OF RESPONSIBILITY

Our schools, teachers and parents have a heightened level of leadership responsibility to address the statistics that are just a few of many indicators of the direction of the state of health of our children. Once these children become adults, they, too, will pass on their lifestyles to their children and will in all likelihood perpetuate poor eating and exercise habits. The consequences will manifest themselves as learning disabilities, increased crime, and socioeconomic problems which our children's generation cannot afford to inherit.

THE MOTHER OF ALL INSTITUTIONAL EXCUSES

What is the number one excuse institutions use for not doing more to fight the poor state of health of Americans?

Answer: It is each individual's own decision as to how he or she wants to live, how he or she wants to eat and exercise or not. This is the mother of all institutional excuses. An institution using this excuse relinquishes its leadership responsibility as a visionary to lead and guide by example and exercise that institutional influence it possesses. The institutions need to ask the visionary question of what can they do to influence, guide and inspire each individual to make healthy lifestyle choices.

WHY PYRAMIDS AND DIETARY GUIDELINES DON'T WORK

Dietary guidelines, pyramids and charts have all failed to make Americans healthier. Why are they not working? Institutions are made up of individuals who are a cross-section of society who are therefore personally dealing with the same lifestyle issues about eating and exercise, as are all consumers.

Dietary guidelines do not work, because the vast majority of the food and beverage industry does not incorporate them into food choices and portion sizes we see on the shelves. Remember, this is from the perspective of the institution and its responsibility and in no way diminishes the personal responsibility of every individual to take charge of their own lifestyle and choices. Our children need special guidance to learn what personal responsibility means. That guidance must come from adults.

GOVERNMENT SETS THE STANDARD AS A LEADER

Emission controls in the automobile industry have resulted in smaller, cleaner, and more fuel-efficient cars; though more work remains to be done. These successes were accomplished through government regulation through the Clean Air Act and similar initiatives. We have another just as pressing form of pollution going on in America: health pollution.

HEALTH POLLUTION

We have a health pollution crisis on our hands in America, and - as with automobile emission regulations - the food and beverage industry needs to be regulated to meet improved standards for healthy eating through strict labeling, reduced portion sizes, and regulation and disclosure of unhealthy ingredients in our country's food supply.

The free market society needs some governmental fine-tuning in order to save American lives and prevent suffering. The cost of not doing so is enormous. Heart disease, cancer, stroke, and diabetes (the four leading causes of death in the U.S.), and obesity, hypertension, and osteoporosis are all linked to diet and exercise. Americans and their children are the most over-fed and under-nourished group of people in the world.

One out of two Americans is overweight. One-third of Americans are obese. Being overweight is the second leading cause of preventable death in the U.S.

ILLNESS AND DISEASE IS COSTING AMERICA BIG BUCKS

The total cost of stroke to the United States is estimated at about $43 billion per year.
$28 billion per year direct costs for medical care and therapy.
$15,000 is the average cost of care for a patient for up to 90 days after a stroke.
$35,000 for 10% of patients, the cost of care for the first 90 days after a stroke.

*Statistics compiled from the Pennsylvania Health Care Cost Containment Council "Hospital Performance Report: 28 Common Medical Procedures and Treatments" (December 2002)

FOOD AND BEVERAGE INDUSTRY

The food and beverage industry as well as the health and wellness industry have a leadership responsibility to clean up their marketing. Misinformation and misleading claims are rampant. Observe carefully and you will detect the emotion-laden words, which are associated with poor choices and portion sizes:

Convenient (over-processed)
All natural (so is lard and corn syrup)
Lite or light (lots of added sugar)
Quick and easy (huge amounts of sodium)
Simple (check the label; not so simple, unpronounceable ingredients.)

In addition, the list goes on:

Fun, exciting, easy, time saver, feels great, low-carb, no sugar, no fat, healthy, look great.

Will the food and beverage industry have an economic price to pay for such changes? Yes, the transitional period will have some associated costs, in the short term. In the end, the food and beverage industry as well as consumers and our country as a whole will all benefit from a healthier America with healthier food choices. In fact, this will result in innovation and new areas of revenue for the food and beverage industry, all while actively contributing to making Americans and America healthier and stronger.

THE PUBLIC'S BASIC RIGHT TO KNOW

Disclosure is the law for government in Florida and many other states and federal entities. The Sunshine Law of Florida establishes a basic right of access to most meetings of boards, commissions and other governing bodies of state and local governmental agencies or authorities. It has led to not only a more informed public, but also actually better government.

Full disclosure on food labels would likewise inform the public and result in healthier foods being produced and marketed. True full disclosure for the average consumer must be in the form of a simple "level of healthiness" and "level of nutrients" grade. The factors determining the simple, easy-to-understand grade must be clearly defined in easily understandable language.

HEALTH POLLUTION A NATIONAL SECURITY ISSUE

The present health pollution of America is a national security issue because the consequences go much farther into sociological issues, such as increased crime and poor learning ability. An unhealthy America cannot perform or think as well.

LOOKING FORWARD

Whatever challenges our country faces will be better met if we are healthier in mind and body. Sick and unhealthy Americans are living longer and living with meds. These Americans need to be weaned back to health and off the meds, where possible. In most cases, lifestyle changes will result in improved health, independent of meals. Our physicians are challenged with a special institutional leadership role in strategizing to prescribe lifestyle-based changes and not just medication so that they and not just medication so that they truly can take on the role of healers, not only for the patient but also for the nation. Keep America strong. The medication mindset without healthy eating and exercise is killing Americans.

We have what it takes to change our culture for the betterment of all by taking personal responsibility for our lifestyles we lead. Our institutions have an equally important role model responsibility to set the tone and standard necessary to keep America healthy. Regardless of political affiliation, there should be complete agreement about personal and institutional responsibilities.

By Lt. Col. Bob Weinstein, USAR-Ret., author of Weight Loss - Twenty Pounds in Ten Weeks - Move It to Lose It

Lt. Col. Weinstein, nationally known as the Health Colonel, has been featured on the History Channel and specializes in a military-style workout for all fitness levels on Fort Lauderdale Beach in South Florida. He is the author of Boot Camp Fitness for All Shapes and Sizes, Weight Loss - Twenty Pounds in Ten Weeks - Move It to Lose It, Discover Your Inner Strength (co-author), Change Made Easy and Quotes to Live By.

His website: http://www.BeachBootCamp.net
Office 954-636-5351
Email TheHealthColonel@BeachBootCamp.net