may be much more effective as a tool for creating new jobs!

by

Thomas Schinkel

April 13, 2009

Part One of this series of articles about America’s New Deal with Capitalism estimated the size of the hit that the economy had taken as a result of converging forces in the realm of financial globalization. The article concluded that for 2008 alone, it would be in the range of $9 trillion. Now, don’t get me wrong, $9 trillion is a lot of money but it does not throw the entire country into bankruptcy. Yet, it is a big number and it did get the attention of the disproportionately hit middle class!

The second part of this series articulated a remedy to the crisis, in essence suggesting that the government should stop bailing out banks that are supposedly too big to fail, and intervene instead by making direct (once in a lifetime), interest-free loans to those families that had gotten into trouble.

The program would have a rigorous repayment schedule and participants would automatically agree to a higher tax bracket. This way all parties would maintain a stake in the positive outcome of such a program. In other words, no bailouts, but a solid agreement between tens of thousands, maybe even hundreds of thousands of families and their government to prevent an avalanche of problems in credit, real estate and job markets that could throw the entire system into disarray.

All along the position was that this is not just a single crisis; it is a series of embedded crises that are interconnected.  It is the aggregate result of long term failures in the realm of industrial, fiscal, monetary and foreign policy fueled by a strategy of exceedingly aggressive deregulation, a strategy fed by theories and mantras that would cause our forefathers to turn over in their graves.

The third part of this series takes a closer look at the present situation and it articulates some suggestions for beginning to fix our capitalist system, one step at a time.

Globalization 2009: A Witch’s Brew of Contradictions

Taking a candid look at our present day state of affairs in the realm of Globalization, one cannot escape the conclusion that the Global Economy A.D. 2009 is a Witch’s Brew of Contradictions. This witch’s brew consists of the following ingredients:

• Fiat Currencies: Ever since President Nixon nixed the gold standard, we have had a global system of Fiat currencies, IOU’s with nothing to back it up;
• Free Trade: We are continuing to preach and pursue that sacred cow of Free Trade among nations without any regard to the severe structural imbalances that have emerged among the largest;
• Interest Rates: We pursue artificially low interest rates to stimulate consumption sectors of an economy without regard to its ability to absorb such growth and pay for it with money that results from productivity improvements;
• Guns and Butter: We are embracing Guns AND Butter economics without any mechanisms in place whatsoever to fund either, except for drawing checks on future generations’ ability to pay down debt;
• Off-shoring: In business, for more than ten years now, we have pursued a mantra of Value-Chain Management that embraces off-shoring of domestic manufacturing activities as a quick, short-term way to achieve lower costs. While the overall economy has grown and grown, predominantly through consumption and expansion of the services sector, capital expenditures in surplus value creating activities have been sidelined from the economic equation.

Exhibit One shows capital expenditures, payroll and value added for the manufacturing sector from 1977 to 2006. These values are presented as a Pct of GDP.

And we know from previous research, that our services economy lacks the international prowess to earn sufficient foreign currency to feed our appetite for imported goods.

Nobody in America, or Europe, or among the leading international institutions such as the World Bank, the OECD or the WTO, seems to have a coherent fix on these contradictions with any level of forward vision at all. Everyone is fighting for the status quo, for protecting their turf, and defending mantras, theories and strategies that were appropriate for yesteryear.

Let me give you an example. The whole world know that America has a huge structural trade deficit and that there is no way we can continue this way without a severe price to pay. During the discussions about the Stimulus Program, the idea came up to say that all this money should be earmarked for products made in America.

This way we would kill two birds with one stone. The ink was not dry on the Program, or the international howling started. The Representative of the European Commission in Washington actually appeared on TV, uttering stern warnings that this was against WTO rules, and that this entire talking about “Buy American” had to stopped. “OK my friend, but how are we going to fix the U.S. trade imbalance that threatens to undermine not only our own economy, but that of the rest of the world? Will you, and the Chinese, and the Japanese and everyone else, continue to lend us our own money to keep the racket going?” Of course, there was no answer to this question.

Through the prism of an independent business adviser such as me, our present world increasingly comes to resemble that of a volcano, rapidly amassing huge amounts of negative energy. For those of you who are not inclined to think in terms of what this means, the following pictures may help stimulate the imagination:

Keeping with that analogy, here are some very short-term developments that may further increase the pressure on this not so imaginary economic volcano:

• Final year-end reports on mutual funds’ performance will be published shortly – the public will not be pleased;
• Batches of commercial (real estate) loans are ready to implode on bankers’ books (this may be the very reason why bankers are not lending. They want to hang on to the tax-payer funded reserves they got during the bailout to weather yet another storm they see on the horizon);
• Automotive sales continue to slump, with at least one major bankruptcy looming, taking down with it an entire infrastructure of suppliers;
• Real estate markets continue to slump, taking another hit of 5-10% before hitting bottom by the end of 2009;
• Unemployment continues to rise and may soon exceed 9.5%;
• Banks continue to tighten credit standards on even their best customers, despite having received billions in Federal aid;
• Major manufacturers tighten credit on marginal players in their distribution channels, setting off a silent contraction throughout the economy.

As the pressure builds up inside that volcano, a release can take place in one of two ways. One way is an organic, uncontrolled explosion that sets off the entire system. If the wrong medication is administered, or the right medication is administered to the wrong group in society, or at the wrong time, like in “too little too late”, or nothing is done at all, the volcano will go off, unleashing centrifugal forces that will make minced meat of the entire political, financial, industrial, trade, social, military and cultural infrastructure that emerged after the Fall of the Berlin Wall in 1989.

If this happens all bets are off. But there is some good news as well, that gets drowned out in the pervasive psychology of fear that permeates from the media:

• The Chinese Stimulus Plan is already showing signs that it is working, creating a new wave of demand for imports from all corners of the world;
• The American Stimulus Plan is getting into action very shortly; <li>U.S. Real estate markets that have shown the steepest decline are indicating that bargain hunters are returning to the market;
• The U.S. Savings Rate is shooting straight up into territory it has not seen in a long while; there is every reason to support the assumption that it will hit 10% of GDP by 2010.

So rather than join the herd of people who believe that the roof is caving in, I would like to develop a different scenario, one that is characterized by “a series of mini-explosions”, and economic earthquakes that each carry their own costs and benefits. In my next article we will discuss this at length.

For now, I want to conclude with comments on the actions taken by government during the last six months.

The Bailout Program of October 2008

In October of last year we had the Bailout Bill, to the tune of $800 billion. It is now clear that this program was and is an example of crass self-preservation, keeping the failing banking giants on their feet. An opportunity missed? And here is my question. For example, instead of propping up the top-tier banks with large amounts of taxpayer provided cash, the government could also have said: To prevent these problems from happening in the first place, we are going to break up the banking system into smaller, separate and distinct components. While it would definitely be “out-of-the-box”, such a way of thinking would have been nothing special. Years ago, the government broke up AT&T, the (very well functioning) telephone monopoly. Also, for years the government has been toying with the idea of breaking up Microsoft. So why not break up the top-tier banks? The Charter of the Federal Reserve Bank, stipulates that its commitment is to the preservation and protection of the top-tier of the American Financial Services Industry. Not to be irreverent or anything, but it is nothing but a cartel that – since its inception in 1913 – has managed to maintain a “very cozy relationship” with officialdom. When you see Ben Bernanke on TV, lest you get the idea he is looking out for you, remember he is on the payroll of the cartel, and his mandate is to look out for the best interests of the top-tier banks. With the help of taxpayer dollars, a break-up has not even been considered. Mission Accomplished, at least for now. From a banker’s perspective, 2008 must have been a year of Great Accomplishment.

The Stimulus Program of February 2009

Short on the heels of the largest economic rescue in the history of America, now comes the Stimulus Program, again to the tune of $800 billion. That number seems to take on magic connotations. Taking a close look at the component that includes specific cash disbursements in that program (the other component being “tax cuts”), one cannot help but notice that these disbursements are largely being poured into the veins of the entire Federal, State and Local Bureaucratic Infrastructure. In other words, one cannot help but get the impression that here too there is an element of institutional self-preservation at work. Short-term, my sense is that the program may have a mildly positive effect, as it will create and preserve jobs throughout the economy. But what about the Long-Term? Much money will be spent on fixing the old infrastructure, an infrastructure that created wealth during the 1960’s, 1970’s and 1980’s.

What I am missing in this entire conversation about the economy and the society it is supposed to support is the whole question of New Surplus Value Creation. What about Innovations in the private sector in general and in industry in particular? Where is the next Microsoft? Where is the next aviation industry? Where are the next high paying jobs? Where are the next waves of productivity enhancing investments? Waves of new start-ups? New job creation? We have tried hyper-deregulation. We now know, and perhaps should have known all along, that did not work. How about stimulating venture capitalism across a borad swath of sectors of re-industrialization? My own sense is that we need a third leg under the stool of programs to stimulate the economy, and perhaps it should be called:

The Innovation Program of September 2009.

Such a program would have at least four components. One component would allocate large amounts of money to venture capital endeavors of all kinds. Fixing the electricity grid is great but it takes ten to twenty years to produce results. Another component would be addressing all the bottle necks that have formed in our society that stand in the way of breakthrough technologies not just in esoteric industries like bio-tech but mundane ones like aviation, agriculture, distribution, transportation, conversion of shopping malls into business incubation centers. It would also include very attractive prizes for innovations and breakthroughs in 80-100 different areas of industrial endeavor. And it would completely revamp the way federal taxes are collected, no longer based on old ideas supporting old infrastructures but based on the knowledge we have today about the economy, society and the environment. For example, it would include a Value Added Tax Structure that included the services sector, and it would include a much heavier tax on fuel consumption than what we have today. These new companies, the new innovations, the numerous trials and errors of entrepreneurs, some will fail, some will survive, but some will be extremely successful, creating the productivity improvements we saw during the mid 1990’s when a whole family of companies descended upon the community of small and medium size businesses offering inexpensive new productivity tools that pushed them from survival to prosperity.

My point is this: If you can find $800 billion to come to the rescue of a small group of very big banks, you can also find $800 billion to provide funding for thousands, nay, hundreds of thousands of new small companies and start-ups throughout all corners of society.

One thing is clear and that is that we are on the brink of tinkering with an entirely new form of capitalism. The difference between the old form and the new form of capitalism would have to be that the micro capitalists (main street) get protected from the predatory practices of the hyper-capitalists (i.e. eight of nine very large banks and quasi-banks) that seem to have unrestrained access to tax dollars provided by the rest of society.

What is the bottom-line of my argument? Stop throwing GOOD money against BAD! Instead of using another $800 billion to bail out a small band of big-time shadow bankers at the top of our capitalist pyramid, invest all that money at the bottom of the pyramid, thereby creating a culture of renewal and revitalization from the bottom up. Not through consumption but through the creation of New economic Value!

Thomas Schinkel

A Crisis of the Commons!

By

Thomas Schinkel

September 2008

In the midst of yet another spectacular crisis allow me to step back and take you to a small community way up in Northern Maine. The name of the town is Millinocket.

Background

It was early 2002, not more than five months after 9/11. The fellow who shared an office with me in an office building close to downtown Boston came in to see me. A practicing bankruptcy attorney, he had received a call from a colleague, a respected lawyer in Bangor, way up in Northern Maine. My colleague had known me for several years and he was familiar with my work in the office products and paper industry. That is why he wanted to talk to me.

Bankruptcy!

What was the call from Bangor all about? A giant problem had erupted in one of their wilderness communities in the North country. It was in the middle of an unusually cold, harsh winter, and The Great Northern Paper Mill of Millinocket had been forced to file for bankruptcy! The question he had, were there any consultants in the Boston area who could help figure out what to do? Oh, and don’t look for anybody to expect any big fees because we are all stressed to the max up here!

During the next twenty minutes, my neighbor briefed me on what he had learned. At the end of his pitch, he asked if I had an interest going up there with him to see if there was anything we could do. At various intervals in my own career I had come up against the forestry and paper industry but never from this angle. Not knowing what to expect, I figured that – if nothing else – this might be a good learning opportunity. To make a long story short, the next day we called the Bangor attorney, told him of our intentions and started driving North. The attorney in Bangor in the meantime, made several appointments for us so that we would make good use of our time while there. Eight hours later we checked into a motel in the center of Millinocket, getting ready for meetings the next day.

Pandemonium!

I tell you, it was pandemonium. Millinocket is a tightly knit community of 5,000 that had managed to maintain a culture of independence and self-reliance in a way I had never seen before. Without exaggeration I met some of the most wonderful people you will ever meet in your whole life. However, it was obvious that disaster had struck with the large paper mill that had dominated the town for over a hundred years, being pushed over the cliff. The repercussions for the population were devastating. Schools, hospitals, the library, the grocery store, the hotels, you name it, everyone was affected. Worse, the pension money that had been tied up in the fortunes of the company had been lost as well. The descendants of ten generations of people who had lived comfortably off of skills they had honed in harmony with nature, saw their fortunes go up in smoke.

What Happened?

My first inclination was to try and understand what had happened. Get a fix on the recent history of the paper mill, and what challenges they were confronted with that had overwhelmed them. In a nutshell, two decades ago, the mill had been embroiled in a wave of consolidation within the paper industry. Then, several years ago, there had been a leveraged buy out. To pay for the transaction, one of their prime assets and a steady source of revenue, an entire network of hydro-electric dams across the Great North Country had been sold off. No sooner was the transaction completed, or they started to notice new competition. From Singapore. From Indonesia. From Brazil. From paper mills in Georgia.

It’s Globalization!

Unbeknownst to the people in Millinocket, some of those new competitors had invested in massive new technologies that had cost hundreds of millions of dollars. Now, Great Northern was forced to follow suit. On top of the leveraged buyout they were now forced to borrow another $100 million for the acquisition of a huge new piece of machinery from Finland. Absent the global wherewithal of some other companies in that industry, they did not realize they were just about the last party in the world making that investment and that all the other investments in this new equipment had caused a massive glut around the globe of exactly the kind of products Great Northern had been living off of for generations. Various qualities of newspaper print, you get the picture.

There was nothing I could do!

After listening to this story for an hour or so, I realized there was absolutely nothing I could do. I had no magic bullet to share with them that could get them out of the fix they were in. No way, and I told them so. The people I met must have thought “Oh, for heaven’s sake, another one of those city boys”, but no, they were very nice to me, and we started what even today I believe was a useful dialogue.

Except, ask a few Questions. . . .

What, I asked them, is your primary asset, your primary strength. Well, they said, we know everything there is to know about forest residue. It turned out that the State of Maine has the highest density of forest in North America, together with stretches of land in Canada. Remembering a conversation I had had a year earlier with a ‘clean energy’ scientist from Arizona, I asked what they knew about converting forest residues to energy. The Arizona scientist had been particularly enamored of the opportunities that could result form converting natural resources such as forest residue into hydrogen.

Peter Drucker

Plain and simple, the question I left them with was “what could they do with the assets they had and deploy them in a new and creative way”. Following Peter Drucker’s mantra that a problem properly defined was half solved, could they redefine the business they were in and instead of thinking they were in the paper conversion business, which led them to one way of reasoning about their future, could they start thinking of themselves as being in the clean energy business and get on a different course of reasoning altogether? This might open up entirely new avenues for raising capital, for recruitment, training, and business development. Conversations over, the next morning, my attorney friend and I drove back to Boston, saddened by the economic tragedy we had just witnessed first hand.

More than a bit intrigued. . . !

I could not shake the story and – using my newly acquired internet skills – I went on a research spree into all matters related to clean energy. Fairly quickly, I stumbled upon an obscure story about a small island nation way out in the Atlantic, Iceland. Many years ago, I learned from this e-news clip, the Icelanders had made a decision to wean themselves off of fossil fuel by embracing their only asset, geothermal energy that they had learned to convert into hydrogen. In fact, their first hydrogen-driven public transportation bus had just been inaugurated and pressed into service.

Off to Iceland! Why?

Thinking that there might be bits and pieces of information useful to the folks in Millinocket, I decided to investigate what this was all about. By sheer coincidence, one of my pilot friends was well acquainted with the situation in Iceland, and she made an introduction for me. Before I knew it I was seated across the table from Bragi Arnason, the father of the Iceland Hydrogen and Energy Independence idea. Frankly, I could not believe my ears! Being much closer to nature than we are, they had figured there was no way they would survive as an independent people if they continued down the road of dependency on fossil fuel, domestic or foreign. They had come to this conclusion by the early 1990’s, mind you!

Good Thinking over there in the Land of the Blue Lagoon

Not only that, they actually had arrived at a consensus among various political factions that this was the right way forward! Explaining the purpose of my mission, they were very helpful and left me with several suggestions that could be helpful for my project. On the way back to Boston from Reykjavik, I kept thinking to myself that maybe this could be a model in some form for my new friends in Maine and in Millinocket. Having done some more research on projects around the country, it was now time to go back to Maine. Was there an opportunity to start a “Government-Business-Consortium” – I asked – that would look into the Iceland model for Maine in general, and for Millinocket in particular? What would it take to get such a consortium off the ground?

A Consortium?

Several talks with the governor’s office and various government agencies later I got a sense that there was a lot of potential support for this idea. But what about the corporate sector? Who could sponsor this? Introductions were made to representatives of the only sector that was known to be flush in cash: the Oil and Gas Industry. Meetings were arranged, presentations made. The reception was polite. Now, mind you, it was in the middle of the winter, the demand for natural gas in places like New York and Boston was sky high and I could not help but notice that the people I spoke with were totally preoccupied with what they called an important ‘peak pricing’ cycle, a seasonal opportunity for selling their own energy products at higher than usual margins due to the cold temperatures that engulf the Northeast region every year.

No Money!

Several follow up calls later it became overwhelmingly obvious that they had absolutely NO interest in a consortium of any kind, let alone a consortium that would address an “off-the-reservation” subject like hydrogen. Get out of town, and don’t come back!

To make a long story short, what seemed to be a perfectly sensible idea, a public private consortium to start thinking about a new way of using forestry resources for the benefit of creating new sources of prosperity came to naught. The government did not have the money. Millinocket did not have the money. And the only people in Maine who were flush in cash did not have the money!

Here is my question.

Millinocket in and of itself is a non-event. Some of the problems were self-inflicted, no question about that. With the benefit of 20/20 hindsight, the  leveraged buyout was probably a bad idea. Investing in that new machinery so late in the innovation cycle was probably a bad idea. I realize that. But there are at least five such communities in the State of Maine. Perhaps more. And there are at least five of these communities in every state of the Union. Overwhelmed by Globalization! No support. No help. No money. No nothing. That is at least 250-300 communities across the land. Probably more. What about them? How come there is no money to support them in the struggle to reinvent their lives?

Of Roads, Bridges, Prisons,

Pre K education and elementary schools

There are two million prison inmates in our country. Eighty percent of them

have something in common that landed them in jail. They were doing drugs. Another thing they have in common is that they never went to pre-school, and they missed out on a good, standard quality elementary school education. The reason? No money! For almost a decade now, there has been no money to help a process going of rebuilding roads and bridges, let alone renovation and reinvention! Not even petty cash! No money for education. No money for diplomacy.

Capitalism at its finest?

How come there is never any money? Capitalism at its finest? Purification by fire? Survival of the fittest? Creative Destruction at Work? Perhaps.

BUT WAIT, WAIT. At the drop of a hat, we can find $700 billion to bail out a bunch of Wall Street executives who have been allowed to make one mistake after another! With the benefit of 20/20 hindsight, how about their errors of judgment. How did that come about? Where did that money come from? Whatever happened to all those promises to eliminate earmarks? Is this not the biggest earmark of them all?

The Great Rebate of 2008

Do you remember the U.S. Treasurer’s check you got earlier this year? The check that helped the economy going again? First of all, what you got there was your own money to begin with. But here comes the whopper. That check you got represents approximately one seventh of what is being proposed now. In other words, for every ONE dollar the government just returned to us they now want to take back SEVEN to fund the rescue a bunch of high-rolling gamblers on Wall Street. Seven hundred billion dollars – that is SIX percent of our Gross Domestic Product. That is the size of our entire Trade Deficit for 2007, and that is ballooning out of control. Help me out folks, am I missing something here?

Or socialism for the Rich?

Contrasting Millinocket with Wall Street, is this beginning to look like Socialism for the rich – Capitalism for the poor? Hmmm. . . .! Time to ask a lot of questions. I mean . . a lot of questions! While our pundits are talking up a “storm of distraction” on that that Great American side show called Sarah Palin – her hair, her voice, her glasses, her lipstick (sic), her thoughts, her dresses, her shoes, her children, her interview with Charley Gibson, ‘is our money being hoisted out the backdoor?’

What is the Difference, anyway?

When a person in Millinocket writes a toxic check, he or she goes to jail. Desperate or not. We all know that. But what about that Mississippi river of toxic loans written by the Wall Street crowd? How come the Treasury Department is all over the case, but the Department of Justice is nowhere in sight?

An ounce of Prevention?

That the paper industry was in some sort of trouble has been known since the 1980’s. What if the government had worked out a strategy together with the employers and the unions in that industry (and so many others for that matter), to arrive at an orderly transition over a period of two decades? Identify the weakest links in the chain and provide some support, financial, expertise and otherwise for the communities that were known to be the most vulnerable? This could have prevented a lot of the problems in the 500 communities swept away by the Tsunami of Globalization that has enveloped our world since the Fall of the Berlin Wall in 1989.

Energy Independence?

And what about Energy Independence? When you think about it, here are some obvious examples. Take Brazil, that tired old country mired in poverty and violence down South – During the 1970’s they conceived a plan to become energy independent by cultivating fuel from sugar cane. Today they reap the benefits. Not bad for a third world country in South America. The example of Iceland is obvious. What else can be learned about governance from cases around the world? Of course, in America we have a massive economy and we would have to come up with our own solutions. But I have a hunch that the cost of such an approach would be a tiny fraction of the $700 billion we now need to shell out in a hurry to bail out a few!

Crisis of the Commons

It seems to be exceedingly clear from the numerous symptoms of distress that plague our society, that we are suffering from a Crisis of the Commons. It is an inability or unwillingness to reach out among various groups and invest in long-term solutions even if the pay-out does not appear in the wallet during the next three months. The skill sets needed to look at our behavior from various perspectives and judge our actions on the basis of their impact on the common good seem to have been diminished if not completely lost in the rush towards material gain for the immediate term.

That the request for a bailout of this magnitude comes from the same people who did everything in their capability to help destroy the perspective needed for the creation of a common prosperity is the quintessential insult added to injury. My sense is that Millinocket and the 500plus communities that have suffered so much from globalization are first in line.

What about that old cliché that an ounce of prevention is better than a pound of cure? Next patient: Detroit!

Thomas Schinkel

617-818-8783

Thomas.schinkel@gmail.com

PS: What should the Government do? What should Congress do?

To provide stability in the market, my sense is that they should create a new bank, fund it with whatever it takes – i.e. $1.0 trillion – and direct those funds at providing relief to the American citizens who have been caught in the mess created by the financial institutions. And they should leave Goldman Sachs and Morgan Stanley to their own devices. Let them file for bankruptcy. There are plenty of other banks and institutions that can fill the void.