The US had a 532 billion dollar overall trade deficit last year and a 758 billion dollar merchandise trade deficit. The US also has over a 500 billion dollar federal budget deficit. The Trump tax cuts and increased spending on infrastructure would increase the federal budget deficit to over a trillion dollars per year.

People all over the world are losing confidence in the US dollar. If people all over the world try to dump dollars and buy something tangible, the US will have double or triple digit inflation. Because of the US massive trade deficit there are 10 trillion dollars floating around outside the US. There are over one quadrillion dollars worth of derivatives worldwide. Most of the derivatives are against interest rates or currency changes. The holders of the derivatives would demand payment for losses and the whole global financial system would implode.

In 1980 Ronald Reagan became President and Donald Regan was his Secretary of Treasury. Donald Regan was the former CEO of the brokerage firm Merrill Lynch. Inflation was double digit and the Federal Reserve increased interest rates to over 20% to cool down inflation. In Japan the Ministry of Finance, which controls the five largest banks in Japan, dropped interest rates on mortgages to 1.8% Banks could loan up to 80% on both commercial and residential property. Everyone wanted to buy property because the borrowed money could be invested in the US at a much higher rate. This was the so called carry trade. By 1989 the value of Japanese real estate was 4.3 times the North American continent and that included Canada and Mexico. The Japanese corporations would have a stock offering but they would only sell 30% of the stock. The rest they would trade with other corporations to create equity. The Japanese government would loan money to corporations at near zero rates so they could sell below cost and put US manufacturing companies out of business. The Japanese stock market hit 38,000 and 6 out of 10 of the worlds largest banks by assets were Japanese. Everyone was talking about the Japanese economy. Then real estate values dropped for 10 straight years starting in 1989.

Donald Regan knew what the Japanese were doing and the US and other countries followed the Japanese model. Manufacturing and the middle class were no longer needed. Money could be manufactured directly by manipulating the interest rates and expanding credit. So today the world has 275 trillion dollars of debt and doesn't know what to do. The Chinese leaders have degrees in economics and engineering and have been eagerly moving US manufacturing to China. Communist doctrine says that you must own the means of production. China manufactured money and leveraged money they acquired through their trade surplus with the US. The Chinese consider trade just another method of waging war against an enemy and have purchased large amounts of farmland and resources with their cash. They are buying small- and medium-sized companies all over the world.

I agree with David Stockman, the Reagan Office of the Management of the Budget Director, who said that all of the Bush tax cuts should be ended. This includes ending tax cuts to the middle class. We also need to put an import duty of 20% on everything coming into the US, no exceptions. There needs to be a clause that the importer must give 60 days notice if they raise prices or increase the quantity of merchandise. To make the system work, part of productivity needs to be passed on to employees in the form of higher wages. In a mature industrial country, people are the countries greatest asset. Countries in Northern Europe understand this and give free college education. Unemployment insurance and the safety net were created after WW2 to keep money circulating during a recession and prevent the economy from spiraling into a depression. Don't cut back on the safety net.

Renegotiating trade agreements with S.E. Asia countries will not work because they use nontariff methods to exclude US products. For instance, in China they have the Indigenous Innovation Act which states that the 60 million people who work for the Chinese government can only buy from a company that is 100% Chinese owned. People can buy over the internet but only Chinese products. You cannot practice “Free Trade” with a country that is totally government controlled.

Cutting taxes will not encourage corporations to invest more in the US. In 2015, 72% of the corporate profits went into stock buybacks. The problem is lack of demand. Wages are going down so people have less money to spend. The theory of downward leveling says that if two countries practice free trade, the wages in the higher wage country will go down and the wages in the lower wage country will go up. However, the wages in the lower wage country will not go up until full employment is reached. We saw this in Bangladesh. Young women in sweat shops went on strike. They were getting 35 cents per hour wages and they wanted 48 cents per hour. WalMart said they would move out of the country rather than pay higher wages. The strike ended. Globalization allows corporations to play one country against another and in the end the world economy collapses because lower wages decrease demand and the whole system becomes unstable and grinds to a halt. In 1960, 7 percent of the US economy was financial services, 8 percent was health care and 30 percent was manufacturing. From 1945 to 1975 productivity went up 109% and wages, corrected for inflation, went up 75%. Families had more money to spend and this created the great US consumer economy. From 2000 to the present, real wages have gone down, 18% of the US economy is medical and 24% is financial services, and 41% of the corporate profits are financial services. Only 11% of the economy now is manufacturing. Part of productivity increases have to be passed on in the form of higher wages for the system to work.

Spending money on infrastructure does not create permanent jobs. It does create temporary jobs and there is a multiplier of two to seven depending on how much of the material used is made in the US. However, only manufacturing and other forms of production create permanent jobs. The reason is obvious. Production creates a positive cash flow that pays employees wages and profits that can be reinvested. Every manufacturing job creates three to seven additional jobs as money circulates through the economy. Over half a century ago I took my first course in Geography. On the first page of the first chapter it said in big letters, “We owe our standard of living to production from: farming, ranching, mining, forestry, manufacturing, heavy industry, fisheries, and the energy sector.” Only investment in production in the United States produces permanent jobs and raises the standard of living. And as stated above, the system only works if part of productivity is passed on to the employees in the form of higher wages. This increases consumption and encourages further investment.

After 1980 the US became a financial service economy that manufactured money by increasing debt, inflating asset value, expanding credit, and the Federal Reserve printing money. Instead of higher wages people got easy credit and the ability to borrow against the equity in their property. The trade deficit represents a transfer of wealth from the country with the trade deficit to the countries with a trade surplus. The cumulative US trade deficit from 1980 to the present is over 11 trillion dollars. That is 35,000 dollars for each person in the US. Globalization is being financed by wealth and technology transfers from the US. The US trade policy with China has turned China into a super power and the US into a country in rapid decline. China is buying up the world with money it makes from the US. China has purchased over 60 million acres of farmland throughout the world, oil and mineral properties and large numbers of companies for their technology. Rich Chinese that invest in the US are usually members of the Communist party. Often they are children of communist leaders. Is this what we want?

Six Things to Consider:

1. The basis of a strong military is our manufacturing and industrial base. The US moved our manufacturing base to China so corporations could increase their short term profits. In 1937 the US ranked 17th as a military power behind Bulgaria. Japan attacked Pearl Harbor because they thought it would take 10 years for the US to mobilize. By the end of the war the US had produced 53,000 aircraft and 42,000 Sherman tanks and was the greatest military power in history. China is at war with the US and trade is just another means of weakening the US. Mao Zedong said, “Either you kill the tiger or the tiger will kill you.” Army officers have written 3 books on the coming war between China and the US.

2. The Thirteen Colonies fought a war with England because we didn't want to be a British resource colony. Manufacturing was forbidden by the British. Now the US has allowed itself to become a Chinese resource colony. The Reagan Administration told the American people how lucky we were to be the worlds first post-industrial service economy. Over 47,000 US factories left the US for China during the George W. Bush Presidency. The US is the first country in history that voluntarily deindustrialized. The US is now foreign owned. Foreign investors now own at least 30 trillion dollars of US assets. Foreign investors living outside the US do not have to pay taxes on capital gains, interest or dividends in most cases.

3. The US subsidizes China by at least 600 billion dollars per year through the US trade deficit with China and technology transfers. Think how absurd it is for the US to be subsidizing China hundreds of billions of dollars per year and at the same time spending billions of dollars to counter the massive Chinese military buildup.

4. China is interfering in a massive way in US politics. Every corporation that builds a factory in China has to: license their latest technology with China, lobby for China in the US, take a Chinese partner, give them 51% of the company, and train them to run the company. The partners are picked from the upper levels of the communist party. China has turned the tables on the US. US companies are lobbying for what is best for China. China has numerous front organizations that reward think tanks and authors that write favorable articles on China.

5. When the State Dept. needs a political favor they trade an economic favor. China plays good cop bad cop with North Korea. When we complain about unfair trade practices with China, N. Korea acts up and we run to China for help; they insist we reciprocate by backing off on trade and we do. Asian countries use nontariff methods to exclude US products so only tariffs and quotas will correct the problem with Asian countries. The proposed Trans Pacific Partnership has 30 chapters. Only 4 deal with trade. The rest deal with the rights of corporations. Included is a tribunal for corporations to recover damages if they lose money because countries passed laws that affect their profits.

6. Conservatives in the Republican Party today have nothing in common with Eisenhower, Nixon, Ford, and Goldwater. A Conservative in the 1960's believed in: a balanced budget, a trade surplus, a government that is as small and nonintrusive as possible, a healthy skepticism of foreign involvement, and that government couldn't borrow its way to prosperity. Communism was the enemy of Democracy. George Bush called himself a compassionate conservative and did the opposite of conservative principals. Bush took a 236 billion dollar budget surplus left by the Clinton administration and turned it into a trillion dollar deficit.

Every authoritarian system that I have studied had three basic features: concentration of wealth, concentration of political power, and control of people. Senator Ron Paul called the present conservative movement corporatism. That's what I would call it also. Corporatism is government of corporations, by corporations, and for corporations. The difference between corporatism and fascism is that fascism has a strong charismatic leader. Bonito Mussolini, the wartime leader of Italy, said that fascism was the merging of corporate power with the power of the government. President George W. Bush hired people for government positions from corporations to regulate the corporations they came from. Fed Chairman Greenspan and Bush believed that the market was self-policing and self-correcting and no government oversight was necessary. Corporations during the Bush Presidency went on a feeding frenzy. In the year 2000 the total federal, state, and local debt, plus the corporate and private debt was 27 trillion dollars. In 2008 the total debt was 60 trillion dollars. The financial service industry manufactured over 33 trillion dollars and restructured the US economy during the Bush years. The US and world economy is at a breaking point and it would not take much to push it over the edge. I believe that the US and world economy can be stabilized but it will have to be done carefully.

I have some suggestions:

1. The mega-banks need to be broken up. They are too big to fail. They're involved in too much foreign business and own too many foreign subsidiaries to understand how they work, and they have too much political power to be regulated. They have to be broken up. We also need to reinstate the Glass Steagall banking act in its original form.

2. Derivatives need to be abolished worldwide. If a company wants to buy insurance, the provider needs to have the money to cover the liability.

3. The Federal Reserve needs to be replaced. It has become corrupted and now represents the New York Banks. I would have each state form a state bank patterned after North Dakota. Each bank would have one vote for the Federal Reserve and they would elect a Fed Chairman. The Fed should be moved to Omaha, Nebraska and away from New York.

4. Total world debt is 275 trillion dollars and will have to be restructured or written down.

5. Bank deposits up to one million dollars needs to be treated like segregated funds, not as unsecured loans. The equity in the bank's stock should be what is risked.

6. Historically, the 10-year government bond paid at least 5% interest and the interest rate average for the last 100 years was 3% above the rate of inflation. A web site--www.shadowstats.com--calculates inflation as it was calculated in 1990 and, according to them, inflation has averaged 6% for the last 15 years. The government has changed how they calculate inflation 20 times since 1990 and used correction factors to get low inflation. Food and energy are not considered in the base rate because they are too volatile.

7. Only investment in the United States in manufacturing and other forms of production creates real wealth and permanent jobs. Inflating asset value and expanding credit create fiat money that distort the economy and restructure the existing wealth. Every major economist in the last 300 years prior to 1980 wrote about production creating wealth and that production was financed from savings and company profits. Research and development work closely with manufacturing and heavy industry. If a country loses their manufacturing base they will eventually lose their R & D also.

8. We must take the money out of the election system and create a system where each vote has the same political value. Democracy requires a strong healthy middle class where everyone shares in the prosperity. The rich and super rich have the most to lose if the United States implodes and the most to gain by keeping the US a superpower.

9. Globalization and free trade are not working. In Europe a strong currency works well for Germany but poorly for Greece and Italy. A loose confederation probably would work but each country needs to control immigration and the value of their currency. The one size fits all concept just doesn't work in practice. Free trade doesn't work because some countries use nontariff methods for restricting trade, and corporations in the US can adjust their profits by using offshore sales subsidiaries in tax free countries like the Grand Caymans to adjust costs. The US has to have an industrial policy and protect its manufacturing base. The State Dept. needs to end its policy of using trade so freely as a bargaining chip. The US needs to be reasonably self sufficient. That includes mining and energy.

10. Every authoritarian system has three basic characteristics: concentration of wealth, concentration of political power, and control over people. Hitler's propaganda minister, Dr. Joseph Goebbels, said, “You must have an enemy. You must convince people they are under attack. And people must be convinced to give up freedom for security.” The playbook is the same today as it was in Nazi Germany. I have hundreds of books on economics, trade, management and related subjects. The best book I have found on the East Asia Economic Model is a book called In The Jaws of the Dragon by Eamonn Fingleton and printed by St. Martins Press. The East Asian economic model goes back to the early 1930s with the Japanese forced industrialization of Manchuria. Every Japanese Minister of Finance until 1977 had experience in the forced industrialization of Manchuria. The US used a similar model during WW2 with spectacular results. It consists of suppressed consumption, investing 30 to 40 percent of gross domestic product in manufacturing and heavy industry, and government coordination and control. China looks for choke points that will cripple the US economy anytime they choose. China bought the company that developed the rare-earth super magnets and moved it to China. Now the US is dependent on China for both rare-earth metals and super magnets that are used in everything from cell phones to electric cars. The US desperately needs an industrial policy and the government needs to protect US companies and technology.

The theory of Globalization is a bastard form of Marxism. Michael Lind in his book Up from Conservatism correctly called it inverted Marxism. In the early 1970s corporate-financed think tanks hired a group of Marxists from New York City to come up with the theory of Globalization. The theory of Globalization states: The world is going to converge on the US economic and cultural model, everyone wants what we have. The state is going to wither away and be replaced by a more efficient system based on corporations taking over the functions of government; borders between countries will vanish and people will be able to live and work in any country; wars will be a thing of the past with the efficient economic system, and we'll have found the laws governing history so we'll be able to predict the future. The Chinese must be rolling on the floor laughing at the United States trying to sell a bastard form of Marxism, and we actually are dumb enough to believe that we're doing the right thing. If free trade and globalization are going to succeed, they must provide high paying jobs and solve the social and environmental problems. They have done just the opposite.

It would be easy to discourage companies from leaving the US. Congress could pass a law that companies leaving the US had to pay the employees two years wages. This would include part time and contract employees. Congress could also pass a law that if a company leaves the US they have to pay a 40% import duty for five years. It would go towards repaying the subsidies they've received from taxpayers and the loss of technology they've transferred from the US.

E-MAIL THE ABOVE DISCUSSION TO AS MANY PEOPLE AS POSSIBLE. WE NEED TO GET THE WORD OUT.

James Fritz
Director: Port Townsend Think Tank - www.porttownsendthinktank.org
Cell: 360-316-9635 -- E Mail: jfritz@olypen.com