the myth of american productivity

8/4/2019 The Myth of American Productivity

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The Myth of American Productivity

1. WWII left the world without the means of production.

Germany, Japan, Europe were all bombed flat, with mandates

of no military and other postwar demands that made

rebuilding GDP from scratch a reality, leaving the sole

production advantage with the USA.

2. WWII also marked the effective beginning of women's rights.

They worked while men were at war.

3. A 1942 coincidently marked the bottom of all financial

leverage in the United States which had been

contracting annually since its prior peak in 1929, a

precursor to the Great Depression.

4. Typical that American economists only like to use economic

data beginning 1942 to 1945 when American had women now

working, men coming back from WWII matriculating back into

society. War based GDP was replaced with real individual

contributor, GDP, without government ownership. In other

words, the government was not spending money to fight wars

and instead the productivity was based on individual people.

So the GDP drained of war become a powerful GDP for gross

domestic product positive with accelerating labor/work

force participation.

5. Versus item number 4 and reference number 1. The USA with

WWII win, we won WWII and came out ahead of Europe and

obviously Japan and Germany; and with support of Europe the

USA lent billions of dollars. Europe was financially in

shambles after the war. The USA had capacity to produce

what the world was physically incapable of producing for

itself. USA had vast stores of gold, political favor post

WWII to fund an expanded military and aerospace effort

which added significant economic and political clout and

contributed to a strong dollar through the year 1972.

6. President Nixon in the early 1970s realized that the United

States would be trade impaired on a global basis in lose


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its trade advantage and political advantage with respect to

foreign policy and trade with the then socialized austerity

measures in place at the time. Nixon thus removed the gold

standard from the United States Department of Treasury and

the Federal Reserve System thus devaluing the US dollar.

This in an effort to spur an reaccelerate US exports,

reviving the economy in the depths of 1972-1975. Our

means of production and taxation from that moment on became

the real backing of the United States dollar and thus fed

policy with Nixon and Carter, after Nixon, embarked upon an

inflationary policy which was not arrested until 1981 under

Volcker and with Ronald Regan in office with yet another

Fed induced recession to deal with.

7. The myth of American productivity--- with booked value of

assets inflated way and Volckers "breaking the back of

inflation" through increased short term interest rates, the

Regan\Thatcher agreement for deregulation seemed the only

way to reignite productivity that was not inflation-induced.

A new policy of laissez-faire capitalism and free-marketry

was in place, the deconglomeratization of the Americas

began in earnest as private markets were allowed

substantial policy control and the private market became

unusually powerful, taxes dropped, the velocity of capital

increased and in the USA embarked upon a 30 year process of

leveraging itself and we leveraged what we will call excess

productivity vis-a vis the hiring and extension of the

productivity benefits of each individual USA worker that

were then coming to market. Simply put, labor force

participation increased, leverage increased, cost of debt

service decreased, commodity input costs decreased, and

that became what we now call The Myth of American

Productivity --- We rather would refer to this as an

accident of history.

8. The enhanced productivity was not actually enhanced at all,

it was leveraged. Cost of money descended from 18%

interest rates in 1981 and 30-years later, (from 1981 to


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the year 2010), interest rates dropped in 2-3 year rolling

periods, descending to down to (current) 3.6% long-term

interest rates; thus, dramatically lowering the cost of

leverage and dramatically increasing Americas ability to

create financial leverage which in turn served to increase

human leverage, thereby magnifying the learning curve

associated with increased economic output. A biological

(bio-economic) transformation in the United States, not due

to the innate superior ability of a certain race of people.

Human capital (in aggregate) is as uniformly productive as

that of horses, cows or chickens. Repeating the above

items, and the true source of excess productivity was

A. Lowered credit cost.

B. Lower commodity input cost as commodities had

declined in price for approximately 25-years,

bottoming in the area of 2006.

C. Massive leverage of human capital and the b

balance sheet capital as leverage became a

religion which became a belief and it became

part of our political economy.

9. This mythical, American productivity is a false reality

which continues today.

A. USA and European banks remained over

leveraged.

B. USA and European countries as sovereigns remain

wildly over leveraged and they have agreed to

borrow from one and another, have agreed to back

all measure of corporate and municipal debt, all

of this while China and India and Korea maintain

support of "two bankrupt brothers writing checks

to one another".

10. Currently some 75% of the world assets are denominated in

either USA dollars or Euros. Interestingly enough, almost

75% of the worthwhile political and commodity assets are

legally and/or politically and/or militarily tied up by the

same two countries. The collective populations of the US


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and Europe are well under 600,000,000 and yet 10%, that

means 10% of the population of the planet, control some 80%

of the worlds key assets and the owners have no capacity to

service their current liabilities in real terms. Meaning

they cannot service obligations without some measure of

inflation or excess money printing. From a competitive

standpoint, the USA and Europe would like APAC to watch

them inflate their debts away without their demanding more

in the form of global political, economic and legal

infrastructure with which they may empower their own

nation-states. The push-pull is that the USA and Europe

resisting this necessary rebalancing and so the rebalancing

becomes one of give and take, with the USA and Europe

clearly attempting to cling onto assets and power positions

that from an osmotic (an osmosis-like process) process,

things must necessarily flow from areas of higher

concentration to areas of lower concentration. Bio-

economics rears its head again!

11. Without the capacity to provide debt service in real terms,

these SOLES, the super over leveraged sovereigns must

inflate. Their religion of leverage permeates state and

local governments as well as households and many

corporations within their restrictive countries who have

continuously had greater access to credit, greater access

to lower borrowing costs and a the rate of the rate of

velocity, cost, and availability of capital increasing

from 2004-2007 created the fat-tail that we are now working

through today. They all thought that this type of trend

was a birthright when in fact it was simply a very long-

term trend that has now ended.

12. Example, we have the hyper leveraged American economy: $14

trillion dollars of which 40% of the economy is represented

by financial leverage. The USA collects only $3 trillion

or so in annual taxes. They have $5 trillion in annual

budgetary expenditures and on top of that, they have an

additional $5 trillion dollars of roll-up expenses in the


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form of Social Security, Medicare, Medicaid, transfer

payments with respect to government pensions which

accumulate annually on top of the $1-$2 trillion dollar

annual budget deficits. These are huge numbers and they

are unequivocally and undeniably true. Without leverage,

now outed as the key component to the so-called American

productivity myth, GDP falls to just $8.4 trillion. Mort

alarming is that current budget ($5T) plus roll-up

liabilities ($5T) plus deficit spending ($1-$2T) add up to

an astonishing 137% of leverage-adjusted GDP!

13. Some 50% of GDP, in the United States, is in the form of

deficit and/or debt or future liability spending (non-

leverage adjusted) which rolls up annually without any

ability to incrementally tax the system. This means the

government is in fact incapable of pulling cash back into

the treasury that it is currently spending in the deficit

scenario as we discussed. Without serious damage to a high

unemployment system and without means to create incremental

economic benefit with the leverage currently enjoyed and

they are trying to do this currently with yet more leverage.

Yet they are doing it anyway and aggressively so because

the world has a religion of dollar superiority, again it is

backed by the myth of American productivity suggesting that

the productivity myth is still alive and well despite clear

and concrete evidence that we have no such negative

incremental returns with each incremental dollar of

stimulus and/or credit and the current credit trajectory is

extraordinary.

14. Without massive excess leverage, the GDP output should be

somewhere around half of the business we used to do in

America. Without benefit of stimulus this is precisely

where we are at; and GDP today is a product of simply more

pumping of money versus organic growth coming from an

increase in population or an increase in general

productivity: biological phenomena which occur naturally

in the system that we have today. Post-crisis, the only


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thing real that still remains is the debt and it remains

today that this is the only true equity in American since

the paper money is now fundamentally without value. In a

corporate bankruptcy, the owners of the debt become the new

equity owners. One might consider taking residence at his

new second home in Washington, DC on Pennsylvania Avenue.

15. An Army of Dollars: The emergence of the United States in

WWII as a net creditor nation and as such a global reserve

currency and with luminous positions and a victorious

position in WWII, USA and Europe worked together to become

with Europe with huge sums of money and with the Americans,

Europe's global assets to the United States in the process

of repaying its extraordinary indebtedness after WWII which

garnered the United States position of enormous political

and military favor around the world which again, for

certain reasons, continues today. In many ways this is how

global rebalancing happened between WWII and the current

day with respect the USA and Europe, this we feel is how

the global rebalancing will happen today between the United

States and the Asian Pacific region countries. We will

begin to see global assets because we simply do not have

the capacity to repay what has been borrowed. Without

capacity for repayment of liabilities in real terms, the

Americas and Europe will, as happened with Europe versus

the USA post WWII, the USA will have to cede assets in

legal infrastructure on a global scale in order to satisfy

Asian-Pacs obligations in real, meaning inflation adjusted

terms. Asian countries are acutely aware that they are 3

trillion dollars of safe and FX foreign exchange reserves

are merely ownership of someone else's money. As the

wealthiest men in the room who is incapable of spending his

hard earned accumulated savings, the USA and Europe control

the keys to the global assets. They have the military and

political legal infrastructure for that control and Asia as

a result is sitting on money that is being aggressively

devalued to the money printing mechanisms of the European


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Central Bank and the Federal Reserve Bank of New York,

essentially destroying the value of the currency and bonds

held by our largest trade partners. Partners who also

represent some of the largest pools of human that is

intellectual capital on the planet, mainly countries, India

and China.

16. When knowledge transfer is not enough. Knowledge from on

nation to another is the primary source of a nation's

wealth. Just as one university to another knowledge

transfer permeates tremendous impact, tremendous

productivity with students when parents transfer knowledge

to their children. This is how human beings learn. This

is how people have been able to improve the human condition

for centuries today and now just for decades, the Asian

Pacific regions have tolerated being shut out of the global

political economic system and being shut out of the ability

to spend their own and deploy their own FX reserves at will.

The reason was because necessary diplomacy, necessary

diplomatic action, through which these smaller countries

could expand their economies through crisis, rebuild

governments, rebuild infrastructure as well as global trade,

manufacturing, outsourcing in order to effectuate the

knowledge transfer of their own and the knowledge transfer

was from western nations, from Europe to the Asian Pacific

regions. As we see, the East is now relatively rich and

measured, in only dollar terms at least, it has some policy

in place and the policy here, the policy of knowledge

transfer is in the rear-view mirror to a certain extent and

from a trade perspective. Asia-Pac now rightfully demands

a large number of seats at the Global Trade and Political

table in the world and as a producer and as the world's

largest creditors.

16. As I have previously advised, World Bank officials and

political leadership in Europe and Asia-Pac, we have talked

about the fact that Europe gained its global power in

getting some 300 years ago with global military activity on


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behalf of the crown, the Queen of England, they would claim

lands on behalf of the crown and that creation of global

base of assets which they could not manage, effectively

could not manage, Hong Kong, Africa, just to name two

countries, were given back to the respected constituencies

to a series of missteps, excess leverage and mismanagement.

Great Britain benevolently gave back what they simply could

no longer hold or control through military occupation;

200 years of accumulation lost gradually over 50 years from

roughly 1950 to the year 2000. Again neatly coinciding

with the bottom of the last credit cycle, directly after

WWII.

17. Asia-Pac now sits on trillions of dollars in foreign

exchange resources with trade partners who must inflate

away what they cannot and frankly are impotent to tax away

from their citizens and while the Euro-American construct

which has previously held the keys to all the positions

again, legal, physical and military infrastructure around

the world, those days of growth are over and the days of

transference are ahead of them.

18. An army of dollars and a Japanese solution to global trade

imbalances are what we are going to discuss as a potential

solution. As with Great Britain, China-A-Pac has no

significant military but A-Pac does have 3 trillion of

foreign exchange reserves. This army of dollars must then

be deployed to acquire real assets around the world as we

have demonstrated, that the real value of someone else's

money is being strategically and aggressively destroyed out

of some religious Keynesian pipe dream that the US worker

productivity myth is somehow possible, and it isn't. In

the absence of massive and self-fulfilling leverage,

leverage that continues today in earnest; leverage which

has ended badly and continues to worsen through the

religion of current monetary policy, these trends may

fearfully come to a violent end. As a result, Asia-Pac is


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demanding a greater seat at the global table, sensing that

the true underlying value of its FX reserves are numbered.

19. A wise, and potential systemic fix, as observable from the

Great Britain of the Orient A Japanese Solution. A true

fact remains today, that at one time the stock market value

of the Nikkei index, the stock market in Japan, could have

bought 100% of North America, the United States of America,

four times over. The year was 1981. The question should

not be whether or not this was rational. The question

should be how was it made possible.

20. Japan had few people, no land, and great export products

without the means for production vs Human Capital. What

did they do? Capitalized verticals around the world,

partnering with foreign countries in order to produce

abroad that which it had no ability to produce itself.

This required acquisition and capitalization of these new

global assets with foreign exchange. Japan had no land

mass of its own. It set up a global based manufacturing.

It brought the knowledge transfer directly from Japan to

the United States, to Europe, to different areas of China

to different areas of India, etc, etc, etc, and it used its

knowledge transfer plus local manufacturing to make its

trade partners rich. As those factories did well, it turns

out that they repaid trade of large quantities of capital

back to Japan and that outsource model of technology and

partnership is exactly what created the wealth in Japan

that still to a large extent continues today. The Chinese

model is going to be the Japanese model but they are going

to export their human capital in addition to their foreign

exchange reserves deploying the Japanese model of

partnership that should be balance the economy effectively

creating partnership around the world. In short, bring

your people in for management in equally trade partners,

immediately surrounding these new verticals, allowing your

trade partners to become rich and to the inevitable

socialization that happens when you bring another 2000


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Chinese people into let's say Peru for mining or to copper

in Afghanistan or farming in central United States. This

socialization will occur at the local level and as a

natural multiplier effort of racial, cultural, capital

exchange to create the powerful environment from

productivity and a very high level socially which will

serve to empower citizens in a harmonious, stable way which

actually becomes a net positive for respective governments

who benefit from global taxes, benefit from increased bank

rolls, benefit from increased trade and local traffic and

who allow these key verticals to be acquired and

capitalized from abroad in the spirit of global partnership.

Japan had no land so it set up global manufacturing. Asian-

Pac has no commodity resources but it does have an enormous

mass of people. Its human capital is huge, well-educated

and its foreign exchange and its debt holdings of the

United States and Europe allows them a key role in

capitalizing these verticals for many, many, many years to

come.

Shawn Anthony Mesaros

Pacific Asset Management

the myth of american productivity

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