THE ZERO SUM GAME AND THE COST TO THE GLOBAL SOCIETY

Trickle down economics has left us all thirsty!

By Melvin J. Howard

Most advocates of the “trickle down” theory often overlook a key part about our monetary system, is that it is a ZERO SUM GAME, because our money is entirely based on debt. The more of a positive net money balance I have, the more of a negative balance someone else has. I can put my positive balance to work earning more money, while I either sit around and do nothing, or go and work for more money. So the most likely situation for a positive balance person is that their positive balance will keep growing. Also, in the zero sum game, means that someone else’s balance gets more negative. The negative sum person would be unlikely to get a loan to start his or her own business, and so would have to go work for someone that already has money. Under current wage structures and interest rates for "high risk" customers it would be difficult for many negative balance people to ever get to a positive balance position no matter how hard they work. They have the added disadvantage that they can’t put a positive balance to work earning more money. Most likely their balances will get more negative, while the people that already have money will get more money to balance out the zero sum game.

With positive money balances always earning a positive return on capital, combined with no requirement for redistribution of wealth, which is implicitly prohibited by neo-liberal policy because it eases such governmental intervention, the results are clear. The rich will keep getting richer and the poor will keep getting poorer, and the more interest bearing debt-money you "invest" in developing nations the worse (not better) the situation gets.

Those that believe that the "trickle down" effect will result from investment in poorer (more negative balance) countries and neighborhoods demonstrate a poor understanding of the monetary system. In fact they believe in something that cannot possibly materialize, and is evidenced by the consequences of investment in developing nations. This situation is compounded by the fact that the banking system must not fail. What this really means is that the major section of the world-banking sector - namely the Western financial institutions - must not fail. This would actually be disastrous for rich and poor alike, as in the great depression. To reduce risk of banking system failure (which ultimately comes from sudden loss of confidence or trust in the system) institutions such as the IMF and World Bank have evolved into mechanisms for preventing banking system collapse. Unfortunately, however, what these mechanisms amount to is transferring the cost that could collapse the banking system outside of the banking system. And these costs end up being borne by those who have the least say in the financial system. This actually distorts free markets where, ideally, investors take personal responsibility for the risks they assume. Those that support so-called free market ideology and think that today's markets are actually consistent with this ideology are seriously misguided as proof by the recent global financial crisis. They overlook the biases and distortions built into today's markets, making them very inefficient and highly volatile.

Along these lines, it could be argued that much of the hardships forced upon the people of Indonesia and other Asian countries after the Asian financial crisis were the result of excessive risks taken by Western financial institutions in search of large returns or profits. It turned out that if these institutions were to bear the full costs of the risks they took leading up to the crisis then the whole financial system may have faced collapse. Through the IMF bailouts they effectively passed these otherwise bankrupting costs to parts of society that would not threaten the financial system, because they are not costed in its accounts. This, as usual, meant the poor, workers and Mother Nature, who form the balancing item of the biases built into today's unfree and inefficient markets.

Banks are supposed to manage risks to prevent themselves from going insolvent or losing market confidence. Regulators and supervisors are supposed to be watching to make sure they actually manage these risks both in their own interests and to avoid broader financial crises. In this fashion the regulators should represent the public interest to ensure that banks are not taking such excessive risks that the public may eventually have to bail them out to avert a financial disaster. But more and more it seems that crisis prevention and exercise of the precautionary principle are being pushed out the back door in favor of the wishes of a global finance sector that wants less supervision. It prefers a system of cure (in the form of bailouts) after risk taking gets out of hand, to the publicly preferred system of prevention whereby financial players take on less risk and accept lower returns.

This preference for cure over prevention is encouraged by the bailout mechanisms. One "cure" (or bailout) leads to another crisis down the track, leading to another bailout, another crisis and so on. For every bailout income and wealth gaps increase, because the funding of the bailout must come from places that are not accounted for in the financial system. This is simply because the financial system would be put at risk if the full costs of the risk taking were born by it. Then investors would lose confidence and the whole financial system may collapse. The costs that do not appear on financial accounts are additional burdens to the poor and excessive natural resource extraction. In effect, that is what funds bailouts so that the cost of the bailout will not hit the books of the financial system. This is the mechanism whereby risk takers do not take full responsibility for the risks they assume but rather pass that responsibility on to those outside the financial system. This system of cure over prevention obviously provides higher overall returns to the banking system than would a corresponding regulatory regime focused on prevention.

The Globalization Of Health Care

The International Trade In Health

By Melvin J. Howard

The US dollar is the hard currency or reserve currency of the world. Everything is measured in terms of the US dollar. And whereas banks once held gold in their vaults to back their currencies, now they generally hold US dollars. This US Dollar standard of money means that if the value of the US dollar ever collapses relative to other currencies, it probably will result in collapse of the global financial system. Remember the Asian Crisis it started with the Thai bath it began as an arbitrage feeding frenzy bankers, on the one hand, advising the Thais to devalue. But they were also were operating in Malaysia and selling financial instruments to Korean banks that would lose money if the Thai baht was devalued! That’s how the devaluation immediately slammed the Korean banks. The Koreans banks then started dumping a bunch of Brazilian bonds that they’d been holding since one of the deals that ended a previous speculator induced crisis the Latin American debt crisis. The cost of borrowing shot up in Brazil and this stripped Brazil of a quarter of its bank reserves in a single month. So then Brazil had a financial crisis on its hands. And so on, and so on, the crisis spread. The Asian crisis spilled over to Russia, already in a precarious position due to high levels of debt. Before long the Russian government defaulted on its debt. After this series of events the international speculative community was in a mad panic and began what is known as a "flight to quality", selling down bonds of foreign governments and riskier firms and buying up on the safer US government bonds. This pushed down the prices on foreign bonds, and pushed up the prices on US treasuries. This is the same as saying that interest rates on US bonds went down and those on foreign bonds went up. In the financial world we say that spreads on foreign debt over US treasuries got bigger, or widened.

The western financial institutions were also over extended in loans to Asia because the 1988 Basel Capital Accord did not adequately set capital requirements for loans to banks in these countries. They also did not differentiate between various types of commercial borrowers. Hence the banks were incented to lend extensively to foreign banks where they could get higher returns, and to more risky corporate ventures. Central banks of these Asian countries were putting their countries financial reserves at risk by allowing their banks to invest them in high risk, high return investments. And much of the loan activity of the time was around over-priced real estate ventures, similar to what happened in our own Savings and Loan crisis. In summary the financial risks taken by banks world over were huge, and the distribution of bank capital could not bear the brunt of the costs if those risky bets should go bad.

As we know the bets went bad and various economies almost collapsed. Many of the financial players did suffer huge losses and those losses were born by both Western financial institutions and foreign players. However, Western institutions escaped the gambling extravaganza bearing a disproportionately small share of the costs. While a myriad of Asian banks were allowed to collapse, not a single Western financial institution went under. At the end of the crisis most major Japanese banks (and insurance companies) were technically insolvent and later dependent on these western institutions to inject capital through acquiring ownership rights something the Japanese never welcomed to their banking system before. Banks collapsed throughout the rest of Asia, the most dramatic case being Indonesia where we still have images of the physical run on banks fresh in our minds. The western institutions were not allowed to fail because if they did, the entire global financial system would go down with it. To prevent such a collapse the IMF bailouts primarily work to ensure that the market does not lose confidence in the financial system. Generally this translates into making sure that the larger financial system players are not hit with large enough losses that could cause them to drop below minimum capital requirements, go insolvent, or suffer a loss of confidence in them by investors and depositors. In a true "free market" those western institutions would bear those defaults and suffer the consequences, which would be consequences for all of us, because we are dependent on the financial markets they dominate. So do we really have free markets or it just an illusion because the so called too big to fail companies and financial institutions seem to get free money when they get bailed out. Maybe that’s what they mean by free markets.  

One of the main complexities of the international monetary system, which is the mechanism through which all international trade and investing happens, is the determination of the value of one country's currency against another, known as the exchange rate. The problem of managing exchange rates has troubled international relations for the past 2 centuries and so far none of the management regimes have worked out very well. Any country involved in international trade would like their exchange rate relative to the currency of trading partners to remain fairly stable and predictable and not to suffer sudden shocks. For if their money suddenly loses value relative to other money their imports cost more and if it gains value their exports are less competitive.

It is for this reasons that health care professionals should understand global capital markets because international trade in medical services will become increasingly more prevalent. For ensuring quality, well-known medical facilities are likely to invest (commercial presence) in countries overseas. The destinations of “consumption abroad”. The supplier of patients mainly due to “poor quality” of medical care rather than the cost of care. International migration of foreign medical graduates will likely be associated with commercial presence rather than traditional migration. New migration pattern will further encourage adoption of consumption abroad approach for reducing overall healthcare cost in both developed and low-income developing countries. Further expansion of consumption abroad will discourage purchase of expensive health insurance plans. In high medical care cost countries; international trade in health services will encourage purchase of catastrophic insurance plans. Health expenditure in the world in 2005 was about $4.8 trillion ($60 trillion was the global income) $4.0 trillion in OECD countries,  $800 billion in the remaining 160 countries of the world. Globalization has increased trading in health care services. Cost of international communication, travel has declined. Time lag has declined significantly and for electronic transfer of information, it has become almost zero (origin to destination). Cost of obtaining services of similar quality varies significantly among developing countries as well as between developing and developed countries of the world. There are types of medical care services that are extremely time sensitive. Waiting will rapidly reduce the benefit of treatment. The benefit function declines rapidly. If the time lag between the onset of the condition and reservation benefit level is shorter than the time needed to travel to a country, the service will be demanded locally. Worldwide, 1.3 billion people do not have access to effective and affordable health care. Low- and middle-income countries bear 93% of the world's disease burden, yet account for only 18% of world income and 11% of global health spending. What are the governance structures that are necessary to encourage the right mix of public and private health care provision? What regulatory framework is needed to induce businesses to provide insurance, provision and finance for health in poor countries? How can the fruits of medical knowledge and technologies be shared among rich and poor countries without destroying incentives to generate more knowledge? What forms of international cooperation are conducive to the finance of health systems in developing countries? What international institutions are required to make health care for the poor an attractive opportunity for business? One thing is clear these provisions must be put in place in order to insure a seamless orderly market in the delivery of health care services worldwide. Health care is not static with globalization the health industry must be flexible to adapt to ever changing needs of a global society.

Ayn Rand Shrugged Medicare, Medicaid, Social Security And Health Care For All

I OBJECT TO OBJECTIVISM

By Melvin J. Howard

The famous extreme capitalist Ayn Rand, who once said, "If money is the root of all evil, then what is the root of all money?" Alan Greenspan, the last Chairman of the Board of Governors of the Federal Reserve, worked with her extensively on her book "Atlas Shrugged", released in 1957, which many claimed to be the most influential book at that time. In subsequent years Greenspan also contributed to Rand's publication "The Objectivist". Since money has become the backbone of so much of our social fabric and well-being. Then we should know a little something about the beliefs of those that run our governments and our financial system. Mr. Greenspan rigorous training in Ms. Rand’s philosophy, which is known as "objectivism" and whose fundamental features seem to overlap extensively with today's so-called neo-liberal economic policy. This philosophy of objectivism largely rejects the idea that capitalism and capitalists should have any social goals at all, and promotes the idea that all acts and intentions should be purely selfish. Not surprisingly Rand's work was a huge hit with the far right in America at the time, this was right after the McCarthy era when he accused everyone and their grandmother that they were a communist. In coming up with her rather extreme, theories it appears that Ms Rand had no interest in the field of physics.

If she had looked into the developments in Physics that took place in the early 1900s in the form of Quantum Mechanics and Special Relativity it would have been clear her philosophy would have hit a few stumbling blocks. Both of these radical developments in physics shook the foundations of Western thought premised on objectivity, independence of objects, the absolute nature of time, and certainty. Gradually this new way of looking at the world, replaced the old Newtownian (or classical) mechanics way of looking at the world, I call it Quantumnomics. Not only are today’s mainstream economic theories, and philosophies like objectivism, outdated by being based on the Newtonian or classical worldview, but also these same outdated views are reflected in our current monetary system. Nothing illustrates this better then what has happen to the financial system over the last 20 years.

The House Republican budget unveiled by Rep. Paul Ryan of Wisconsin leads me to suspect he is a pupil of Ms. Rand’s. For starters he would repeal President Barack Obama's health care overhaul in its entirety. The plan would slash federal spending by about $5 trillion over 10 years. Mainly by changing the fundamentals of Medicare and Medicaid. Here is how he would do it:

• _ People now 54 and younger would not get the same Medicare coverage their parents and grandparents have. Instead, future retirees would get a fixed amount from the federal government to buy insurance from a range of regulated private plans. The federal payment would go directly to the health insurance plan. Starting in 2022, the eligibility age for Medicare, now 65, would be gradually increased until it reaches 67 in 2033.

• _ Seniors already on Medicare and people within 10 years of retirement would be able to go into the traditional program as it exists today. Once the new program is set up in 2022, beneficiaries in traditional Medicare would be free to switch, but they would be under no obligation to do so.

• _ The government Medicare payment – called "premium support" by Ryan and a voucher by critics – would be adjusted so that beneficiaries whose health gets worse would receive more. Wealthier retirees would get a lower subsidy, and lower-income beneficiaries would receive extra help with their out-of-pocket costs. The payments would be indexed for inflation, but at a level that's expected to be lower than the current rate of increase in medical costs. Medicare now covers about 47 million retirees and disabled people.

• _ Medicaid, which covers about 50 million low-income and severely disabled people, would be turned over to the states. Washington would send each state a lump sum to cover services from prenatal care for low-income women to nursing homes for Alzheimer's patients. The block grant would allow each state to design its Medicaid program according to local needs. Low-income people would lose their current federal right to Medicaid. Safeguards would be spelled out in subsequent legislation, but that’s no guarantee states could stop accepting new applications in an economic downturn.

As I mentioned in earlier entries in the coming years, more and more of society's resources will be going towards supporting retirees and increasing medical expenses for society as a whole (both workers and non-workers alike). This will be true whether benefits are funded in the public sector or the private sector, or both. Thus, Private Savings accounts and privatizing Social Security cannot solve the problem and discussion of these as a solution should also not be allowed to distract debate from the real issues. It is the increasing share of national expenditure devoted to healthcare. This effects all of Medicare funding, Medicaid funding, private medical funding. In fact, putting current contributions into private accounts will make the current funding situation worse, because these funds are now used to pay for current retirees and not "saving" for future retirees. In response to Rep. Ryan House proposal Senator Baucus has introduced a bill. The express the sense of the Senate that Medicare should not be dismantled and turned into a voucher program bill:

112th CONGRESS

1st Session

S. 789

IN THE SENATE OF THE UNITED STATES

April 12, 2011

Mr. BAUCUS (for himself and Mr. NELSON of Florida) introduced the following bill; which was read twice and referred to the Committee on Finance

---

A BILL

To express the sense of the Senate that Medicare should not be dismantled and turned into a voucher program.

Be it enacted by the Senate and House of Representatives of the United States of America in Congress assembled,

SECTION 1. SENSE OF THE SENATE THAT MEDICARE SHOULD NOT BE DISMANTLED AND TURNED INTO A VOUCHER PROGRAM.

(a) Findings- The Senate makes the following findings:

(1) The Medicare program has been providing affordable health care for elderly and disabled Americans for decades.

(2) Forty-seven million Americans currently rely on the Medicare program for their health care.

(3) The Congressional Budget Office has stated that under the House Budget Committee fiscal year 2012 budget resolution ‘most elderly people would pay more for their health care than they would pay under the current Medicare system’.

(b) Sense of the Senate- It is the sense of the Senate that--

(1) Medicare should not be dismantled and turned into a voucher or premium-support program;

(2) deficit reduction should not be achieved by simply passing on the costs of health care to Medicare beneficiaries;

(3) guaranteed Medicare benefits should be preserved;

(4) medical decisions should be made by seniors and their doctors, not insurance companies; and

(5) deficit reduction should be achieved by lowering health care costs through delivery system reforms.

This disconnect into modern physics, while talking about the relationship between a capitalist society and the poor, may seem rather odd. Nevertheless it brings home my point that money is a social and psychological factor and so the beliefs and "science" adopted by those that create money and control the monetary system must take this into account. These changes in perspective, force us to think about things differently, to always acknowledge the interconnectedness of everything, and to recognize the ever-present uncertainty in everything. The capital markets of today do not operate in this fashion. Rather they treat people and objects as independent economic units, and discount the future as less important than the present. Furthermore they have limited mechanisms for coping with uncertainty as from financial crisis past.

Under this old or classical worldview central bankers use more or less traditional techniques for exercising some control over the economy, and a large part of this is maintaining the confidence of the markets in the monetary system. So people that don’t have much money don’t factor into central bankers decisions very much at all. This is a big mistake. Now on the surface many might think that there is no relationship between Central Bankers and the poor to speak of. However this ignores a very important fact the interconnectedness of everything and this is perhaps best considered within the context of the "Zero Sum Game". As income and wealth gaps have widened few people have more money, and the majority of those people are getting less. What have we learned over the past 50 years is this that economies that function as central governments or central planning are time bombs waiting to happen. And extreme capitalist or free market systems unrestrained are time bombs waiting to happen. Globalization is a fact of life whether we like it or not. We are all inter-connected and the classical models simply will not work. The ever-present uncertainty in everything is a reality. We need to solve the problem as a nation not as divisions of sound bites and political propaganda. If we keep ignoring these laws of Physics we should not be surprised of the catastrophic events that  follow. If you jump from a 30-story building you are going to fall and it will probably be fatal Physics 101.