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EDITOR’S COMMENT: One of our readers called in to say that we were acting as though we had someplace to go when we don’t. He meant that in his native country, Chile, when the Banks took over and things became bad for the average citizen they amrched in unison in the streets because they understood that bad things don’t just happen to bad people, they happen to everyone who is a potential target or just collateral damage. He said ultimately he migrated to the United States because that was the only solution to the conditions in his country for him and his family. What concerns him, he says, is that if the U.S. continues down the same path as third world economies and becomes a third world economy itself, where will we go?

How The U.S. Will Become a 3rd World Country (Part 2)

Submitted by Tyler Durden

Submitted by Ron Hera of Hera Research

How the U.S. Will Become a 3rd World Country (Part 2) (Part 1 found here)

The United States is quickly coming to resemble a post industrial neo-3rd-world country.  Unemployment, lack of economic opportunity, falling real wages and household incomes, growing poverty and increasing concentration of wealth are major trends in the U.S. today.  Behind these growing problems are monetary inflation created by the Federal Reserve’s monetary policies, federal government deficit spending and the dominant influence of “too big to fail” banks and large corporations in Washington D.C., which has altered the direction of law in the United States.  To make matters worse, the U.S. government faces a historic fiscal crisis.

High unemployment, lack of economic opportunity, low wages, widespread poverty, extreme concentration of wealth, unsustainable government debt, control of the government by international banks and multinational corporations, weak rule of law and counterproductive policies are defining characteristics of 3rd world countries.  Other factors include poor public health, nutrition and education, as well as lack of infrastructure—factors that deteriorate rapidly in a failing economy.

Apparently ineffective regulation and relatively little law enforcement action by the federal government in the wake of the sub-prime mortgage meltdown resulted in widespread speculation that special interests had taken priority over the rule of law.  Critics have also charged that the federal government’s policies threaten to eliminate what remains of the American middle class.

Accelerating Concentration of Wealth

In response to the economic downturn that began in 2007 and the start of the financial crisis in 2008, the U.S. federal government and the Federal Reserve resorted to a radically inflationary policy intended to save banks and to shepherd the U.S. economy through a recession.  Instead, radically inflationary policies greatly increased the concentration of wealth.

Under ordinary circumstances, monetary inflation has the effect of redistributing wealth in favor of those who receive newly created money first.  The value of money is reduced as a function of the number of currency units in the economy but recipients of newly created money can spend it before it loses value.  In a declining economy, however, the wealth redistribution effects of inflation are magnified.

When the Federal Reserve or the federal government supports banks and financial markets through liquidity injections, bailouts, asset purchases, quantitative easing, etc., the lion’s share of financial support, i.e., newly created money, is captured by the largest financial institutions and by the wealthiest 1% of Americans.  Money printing skews the distribution of money over the economy while the value of money, i.e., the purchasing power of wages and savings, is reduced.  The overall effect is a wealth transfer from proverbial Main Street to literal Wall Street.

Looming Fiscal Crisis

U.S. government debt and deficit spending have markedly accelerated over the past decade.  For example, The U.S. Department of Homeland Security (DHS) was created and the U.S. military grew to 3 million active duty and reserve personnel, not including contractors.  Since 2001, the U.S. spent approximately $1 trillion on military expansion while the total cost of the U.S. wars in Afghanistan and Iraq has been estimated to exceed $3.7 trillion.

Although the U.S. federal government remains in denial, the Congressional debt ceiling debate and subsequent U.S. credit rating downgrade on August 5, 2011 were only the tip of the iceberg.  In fact, the United States faces a historic fiscal crisis.

As of 2012, the majority of new federal government debt will stem from interest on existing debt.  Treasury bond issues totaled $2.55 trillion in 2010, roughly 2x the federal budget deficit of $1.3 trillion.  Artificially low U.S. Treasury bond yields, created by the Federal Reserve’s quantitative easing (QE1 and QE2) programs and by its current “Operation Twist,” only slow the rate at which the federal debt balloons.

The U.S. federal government’s fast growing debt is $14.94 trillion, approximately 100% of GDP.  Additionally, future liabilities total $66.6 trillion based on generally accepted accounting principles (GAAP accounting) and using official data from the Medicare and Social Security annual reports and from the audited financial report of the federal government.

1.    Medicare: $24.8 trillion
2.    Social Security: $21.4 trillion
3.    Federal debt: $10.2 trillion* (not including intra-governmental obligations)
4.    State, local government obligations: $5.2 trillion
5.    Military retirement/disability benefits: $3.6 trillion
6.    Federal employee retirement benefits: $2 trillion

The eventual insolvency of the U.S. federal government cannot be averted through any combination of taxes, budget cuts or realistic GDP growth.  Inflationary policies, i.e., increasing deficit spending by the federal government and debt monetization by the Federal Reserve, would devalue the U.S. dollar and potentially trigger a hyperinflationary collapse of the currency.  To stave off the inevitable, interim measures might include tax increases, exchange controls, nationalization of pension funds or other measures similar to those taken in 3rd world countries.

Dominant Corporate Influence

In a 2009 radio interview on Elmhurst, Illinois’ WJJG 1530 AM, Senator Dick Durbin (D-Ill.) explained that “…the banks—hard to believe in a time when we’re facing a banking crisis that many of the banks created—are still the most powerful lobby on Capitol Hill.  And they frankly own the place.”  Senator Durbin was unequivocal in saying that the federal government of the United States is controlled by banks.  Simon Johnson, former chief economist of the International Monetary Fund (IMF), had reached the same conclusion one month earlier in his widely read article The Quiet Coup.  Johnson explained that the finance industry had effectively captured the U.S. government, a state of affairs typical of 3rd world countries.

Corporate influence over the political process, as well as over the tax and regulatory policies of the United States, is at an all time high.  The federal government is the largest single customer in the U.S. economy and, through taxation or regulation, the government can grant or deny market access to private companies and can either prevent or mandate the consumption of their products and services.  As a result, virtually every large corporation in the United States seeks to win the government’s business and to steer government tax policies and regulations in their favor.  Naturally, politicians who accede to the wishes of particular corporations are given campaign funds to ensure their reelection.  In the past decade, the amount of money spent on lobbying has more than doubled and there are currently 24 lobbyists for every 1 member of Congress.

The interdependence of elected officials and the largest U.S. corporations reached a new high with the 2008 bank bailouts.  The influence of private corporations and de facto industrial cartels (comprising the largest corporations in each major industry) over tax and regulatory policies creates significant economic distortions that ultimately compromise the sustainability and the stability of the economy.  Ideally, the government would be an impartial referee, rather than an active business partner that overwhelmingly favors large businesses over small businesses, despite the fact that small businesses account for the vast majority of American jobs.

Impact on the Rule of Law

Corruption, cronyism and weak rule of law are typical of 3rd world countries.  The United States exhibits a clear corporate influence over elections and legislation and, arguably, relatively little law enforcement action where large, legally well-equipped corporations are concerned.  Reports of so-called crony capitalism have appeared in the U.S. news media, but the term “corruption” has been avoided, along with discussion of fundamental reforms.

A cursory examination of legal developments over roughly the past decade evidences a pattern in which U.S. federal law systematically favors the largest financial institutions, as well as a paradigm in which financial institutions heavily influence both the regulations that putatively govern their activities and the laws that apply to consumers of their products and services.  The financial crisis that began in 2008 and the subsequent response of the federal government appear to follow logically from prior legislative events:

1. 1999 Gramm–Leach–Bliley Act (GLB).  The Act repealed key provisions of the Banking Act of 1933, commonly known as the Glass–Steagall Act.  In the aftermath of the Great Depression, the Glass–Steagall Act prevented depository institutions from engaging in high risk financial speculation.
2. 2000 The Commodity Futures Modernization Act (CFMA).  The Act deregulated over-the-counter (OTC) derivatives, such as credit default swaps, referred to by Warren Buffett as “financial weapons of mass destruction.”  OTC derivatives were at the heart of the financial crisis that began in 2008 and are the root cause of the “too big to fail” doctrine.  The Act preempted state gaming laws that had prevented banks from speculating in OTC derivatives with no connection to underlying assets.
3. 2001 USA PATRIOT Act.  The financial provisions of the Act allow banks to collect additional financial information about account holders, for example, linking business accounts to the personal financial records of business owners, thus weakening both financial privacy and the corporate veil.  The Act enhances the ability of creditors to collect and allows federal authorities to monitor financial transactions and to obtain financial records without a subpoena.
4. 2005 Bankruptcy Abuse Prevention and Consumer Protection Act (BAPCPA).  The Act, which was sponsored by banks and credit card companies, effectively eliminated the concept of a “fresh start” by allowing banks and credit card companies to engage in collections activities, in effect, forever.  As a result, small business owners who end in bankruptcy are less likely to ever start another business.  The Act places banks in front of bankruptcy courts, creates liabilities for bankruptcy attorneys and contains many widely criticized, anti-consumer provisions.
5. 2008 Emergency Economic Stabilization Act.  The Act, commonly referred to as a “bank bailout,” authorized the United States Secretary of the Treasury to spend $700 billion to purchase distressed assets, especially mortgage-backed securities (MBS).  Instead, the funds were given to foreign and domestic banks to offset their risky MBS, OTC derivatives and other losses.  The bank bailout set a precedent of socializing losses but keeping gains private.  The Act effectively bound the fate of the U.S. Treasury to that of the largest U.S. financial institutions.
6. 2010 Citizens United v. Federal Election Commission.  The Supreme Court of the United States held that corporate funding of independent political broadcasts in candidate elections cannot be limited under the First Amendment, overruling prior case law and guaranteeing the ability of corporations to influence elections without meaningful restrictions.  The Court’s decision gave carte blanche to corporations to influence elections, legitimized the interdependence of elected officials and large corporations and created a precedent under which the rights of corporations supersede those of citizens.
7. 2010 The Dodd–Frank Wall Street Reform and Consumer Protection Act.  The Act failed to restore critical provisions of the Glass–Steagall Act, significantly regulate OTC derivatives, break up “too big to fail” banks, prevent another financial crisis and prevent further bailouts.  The Act created a Consumer Financial Protection Bureau, but did not repeal any provision of BAPCPA or restore the financial privacy of U.S. citizens removed by the USA PATRIOT Act.  The Act failed to provide adequate funding to the government’s watchdogs, the Securities and Exchange Commission (SEC), the Commodity Futures Trading Commission (CFTC) and the Federal Bureau of Investigation (FBI), potentially hobbling enforcement.  The Act has also been criticized for the burden it places on smaller competitors in the financial sector, which could ultimately result in an increased concentration of financial power in “too big to fail” banks.

Critics have alleged that, underlying the sub-prime mortgage meltdown that triggered the financial crisis in 2008 was rampant fraud.  Fraud has been alleged at virtually every level from the assessment of property values and credit risk; to the loans themselves and to their securitization as MBS assets; to the ratings of MBS assets as AAA; to hedging or betting against MBS assets in the OTC derivatives market (perhaps including financial firms allegedly betting against MBS assets that they themselves created and sold to clients as AAA assets).  After the crisis, a seeming pattern of fraud continued apparently unabated in the robo-signing foreclosure scandal where documents submitted to courts were falsified.  Despite an avalanche of alleged crimes under existing federal law, no firm or individual of any significance in the financial crisis has yet been prosecuted.

President Barack Obama said in October 2011 that the mortgage finance practices leading to the economic meltdown were “immoral, inappropriate and reckless … but not necessarily illegal.”  Since fraud is, in fact, illegal, critics claim that the U.S. federal government has simply failed to enforce the law.  Adding fuel to the fire, the Solyndra loan scandal could be construed to suggest corruption at high levels and the MF Global debacle could be construed as indicative of weak regulation and law enforcement and even of questionable market integrity.

In theory, selective enforcement of the law risks the creation of two sets of laws: one for big banks and corporations, and for their executives, i.e., those with connections in Washington D.C. or on Wall Street, and one for everyone else.  Among other things, failure to enforce the law could create an environment in which crime pays, but, for ordinary citizens, hard work, prudent financial decision making, saving and investing for the long term do not.

SEE ENTIRE ARTICLE AT how-us-will-become-3rd-world-country-part-2

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