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To Be Truly Dominant, America Must Regain Its Values

Politics / UK Politics Dec 09, 2011 - 10:58 AM GMT

By: Barry_Elias


Best Financial Markets Analysis ArticleLast week’s column described the dynamics of our lost half century in America.

The decline was principally due to a devastating deterioration of values. For America to regain in pre-eminent status, its values deficit needs to be rebalanced.

The previous column focused on the insatiable demand for debt to accommodate myopic, materialistic consumption. This demand was based primarily on self-centric, immediate gratification at the expense of future generations. As a result, long-term investment in real value added products and services were sacrificed.

In this column, I describe the dynamics that promulgated the supply of funds and credit that enabled this massive debt accumulation.

The supply of credit was based on the demand for passive, unearned income.

In lieu of education, knowledge, and wisdom, our society valued income generated without direct work involvement. This demand for unearned income led to a massive supply of loanable funds, anticipating sizable returns on investment (ROI).

This high degree of anticipation led the managers of this money to increase ROI in ways that were unsustainable.

Financial engineering permitted product development that camouflaged the real long-term risk. While it provided sizable income for some over short periods of time, the result was a massive transfer of liabilities to future generations.

This massive demand for unearned income and debt-driven consumption increased demand for financial services to extraordinary levels. During the previous half century, average annual expenditures for the financial services sector rose 8.7 percent according to Bureau of Economic Analysis (U.S Commerce Department).

To reiterate: spending for financial services rose 8.7 percent each year for 50 years.

According to a recent Flow of Funds report by the Federal Reserve Bank, financial services only added 1 percent to GDP, while its profits were nearly 25 percent of the total. The profits do not include the exorbitant compensations, benefits, and bonuses that have been all too prevalent in recent decades.

At best, this suggests financial services have not added an appropriate value to society for many decades. In fact, given the state of the global economy since 2008, one could accurately conclude that financial services have severely eroded global value and equity.

Bloomberg News recently interviewed William Gross, co-founder of PIMCO (over $1 trillion under management) and Larry Fink, co-founder of Blackrock (over $3 trillion under management). Their assessment of the previous three decades is well aligned with mine.

Larry Fink informed the audience that financial services became much too large during this period, and he let down the American people. He wishes the political cognoscenti would recognize their cataclysmic shortfall as well. William Gross indicated that the return on capital greatly exceeded that for labor during this time period.

Despite these rhetorical sentiments, the two demonstrated an unfortunate behavior that seemed external and removed from the events they helped orchestrate to large degree.

Clearly, the financial community profited handsomely at the expense of the average worker.

This conclusion is a reflection the values deficit: society did not adequately value productive labor and investment.

The financial industry functions best when it leverages and enables entrepreneurial activity to flourish: providing real engineering of real products for real people.

Instead, the financial community financially engineered its own products that created little value for society.

In fact, over the long run, the financial industry has had a detrimental on society. The industry modus operandi permitted an inordinate, unjust transference of societal wealth that will reverberate for decades to come.

According to The New York Times, the leader of a religious service that I recently attended poignantly stated: “The 13 years I’ve been here, I’ve never seen people go from a regular life to rags. I’ve seen that up-front and personal.”

These dire economic circumstances have motivated this individual to focus intensely on charitable giving within the community.

This is a poignant backdrop to congressional testimony provided this week by Jon Corzine, former CEO of MF Global and Goldman Sachs and former New Jersey Governor and Senator. During his testimony to the U.S. House Agriculture Committee, he declared $1.2 billion of MF Global clients funds are missing.

At best, this comment suggests a high degree of incompetence.

To place this in perspective, $1.2 billion is:

1. Three times what Jon Corzine received ($400 million) in 1999 when Goldman Sachs issued an Initial Public Offering (IPO).

2. 24,000 times the median annual family income (approximately $50,000 per family).

By Barry Elias,

Barry Elias provides economic analysis to Dick Morris, a former political adviser to President Clinton.

He was cited and acknowledged in two recent best-sellers co-authored by Mr. Morris: “Catastrophe” and “2010: Take Back America - a Battle Plan.” Mr. Elias graduated Phi Beta Kappa from Binghamton University with a degree in economics.

He has consulted with various high-profile financial institutions in New York City.

© 2011 Copyright Barry Elias - All Rights Reserved
Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors.

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