Critical challenges facing the US Economy Implications under Old Capitalism Implications under Free Capitalism
1. Current economic and financial crisis
  1. No fundamental corrective action.
  2. Fiscal stimuli at taxpayers’ cost.
  3. Efforts to induce growth through increasing money supply, which will again cause credit losses and a speculative bubble.
  4. Government bailouts of financial institutions and the financial system.
  5. Excessively high burden on the sovereign credit; firstly because of its own borrowings and secondly due to the guarantees issued and credit risks assumed to keep our financial system functioning.
  6. Debasement of the fiat money: the US dollar.
  7. Financial system will continue to be a hurdle (interest) against most environment related industries and those with future potentials. Current low interest rates don’t help these industries because of the possibility of interest rising in future.
  8. Old Capitalism will continue to feed the crisis.
  1. Addresses the fundamental problems with the financial system
  2. Discontinues interest which is a hurdle against wealth creation, and also causes recurring financial system breakdowns.
  3. Increases investment demand through improving economic potentials and creating new economic incentives for investment.
  4. Increases consumption demand through increasing income (no income tax and higher employment) and reducing prices (no interest, no inflation).
  5. Restructures the financial system to stand on its own feet and to significantly reduce its dependence on the government.
  6. Fortifies the sovereign credit
  7. Structurally strengthens the fiat money system and thereby improves the soundness of the US dollar.
  8. Free Capitalism will solve the current crisis for the US and for the world.
2. Diminishing investments and potentials in most employment intensive industries in the US.

3. Industries migrating overseas where they obtain better returns due to higher growth potentials, low wages, and low environmental standards.

  1. Standard response of Old Capitalism is that interest rates will go down enabling new investments potentials to materialize.
  2. Currently low interest rates tend to increase activities in ongoing firms and fuel speculative activities (asset bubbles) rather than increase investment in new low yield industries.
  3. Low interest rates are a temporary phenomenon. We need low long term interest rates over a long duration to enable establishment of new (environment friendly and other low return) industries.
  4. Interest rates have for centuries hovered at 5%. When interest rates are close to zero they are certain to go up because interest rates can’t go below zero and also because of their long established tendency to be around 5%. As long as there is interest it will translate into significant hurdle against establishment of environment friendly and other new industries.
  5. Given the massive industrialization of developing countries it is likely that marginal returns from a large number of industries in developed countries have gone down below 5% for the foreseeable future. Old Capitalism has no mechanism to help maintain the domestic level of investments under these conditions.
  6. Since money supply is controlled through interest it is easy to see that it can easily go up, particularly under a fiat money system, even if that is to curb inflation or speculation.
  7. Old Capitalism offers no method to stem the overseas migration of industries.
  8. It currently doesn’t offer any tools or means to develop new (environment friendly) industries to replace those that have migrated overseas.
  9. The hollowing of our economy is too major a problem to be solved by subsidies or tax cuts. Given the current levels of US debt and budget deficits we are past our capacity for big tax cuts and subsidies
  1. Eliminating interest dramatically reduces the threshold return required for investments.
  2. Establishment of new industries will be incentivized by elimination of interest.
  3. Industries with low asset tax will see establishment of new units and slow down of migration.
  4. Asset tax will allow us to deal with diminishing returns as far as they can go, theoretically even below zero. It will help us maintain employment levels, achieve economic growth, and build economic potentials.
  5. There can be economic benefits in making investments even at subzero returns. Old Capitalism wouldn’t even recognize that possibility. An asset tax rate below that on cash will make it possible even in the private sector.
  6. Asset tax can be precisely targeted therefore industries that need help to exist, compete, or are of strategic importance can be helped in a focused way through lower asset tax.
  7. High asset tax on fossil fuel based and similar other industries will provide additional competitive and return advantage to clean energy and similar other industries.
  8. Eliminating income tax will further increase returns and consequently investment incentives.
  9. Free Capitalism will promote increased savings because of higher aggregate incomes and elimination of income tax. People will need higher savings to offset the effect of asset tax on cash and other assets. More savings will support increased investments, even at lower returns.
  10. Free Capitalism can be easily implemented in the US because the huge amounts of monetary wealth in the country and in dollar denominated assets globally don’t have many non-dollar alternatives.
  11. Migration of industries due to low wages is discussed in the following section.
4. Low wage competition from developing countries.
  1. If we wish to compete with low wage countries without sacrificing our way of life we need to establish non-wage cost advantages over low wage countries.
  2. Huge cost advantage can be gained if interest costs are reduced or eliminated. Interest adds up to a huge component in most products. For example around 50% of the amount most of us end up paying for a car is composed of interest.
  3. Interest increases production costs and very significantly contributes to our un-competitiveness.
  4. Interest will also keep demand for our products low at home because of higher prices, and lower investments and incomes.
  5. Interest hurts us much more than it hurts developing countries, because their growth potentials are still high and their low wages give them additional room to accommodate interest.
  6. If we are not able to compete globally protectionist sentiments will rise at home.
  7. If free markets have to survive then interest cost has to be reduced or eliminated.
  8. In 2009 the per capita income in China was $6546 whereas it was $46443 in the US. China which borders 13 other countries, has roughly the same land mass as the US, and is right in the middle of the mass markets of Asia, including its own market, has great marketing advantage in addition to its low wages. If we don’t develop some other advantage to support our much higher income levels; the income levels in both countries will tend towards equalizing. Given the limits of the planet that would take us a long way down.
  1. 1. Eliminating interest will bring costs down and make us competitive. It will, through higher investments, also enhance our ability to build competitive advantages in marketing and technology.
  2. Our abundant natural resources, trained and talented workforce, administrative and physical infra structure, and technology will support our higher wages, once we remove interest from the cost equation and incentivize new investments through low asset tax.
  3. Total Federal Taxes would go down because Free Capitalism will eliminate interest expenses; it will also help achieve a number of economic objectives currently being pursued through subsidies, grants and other programs. Smaller government and low taxes will result in lower overall cost of goods and services.
  4. Elimination of interest, low taxes, and competitiveness enhancing tax structure will enhance the competitiveness of most of our industries and will enable establishment of new ones as well.
  5. Our enhanced competitiveness will keep protectionist sentiments at bay and therefore keep global markets free.
  6. Free Capitalism will make our economy very efficient and therefore competitive.
  7. It will help our corporations and business create jobs at home and be heroes again.
5. Global Warming
  1. The rates of return of environment friendly energy industries are low because they use highly diffused (thinly spread) sources of energy like sunlight, wind, waves, gravity etc. as compared to fossil fuel which is concentrated energy formed and stored in the earth over millions of years.
  2. Interest rates generally are too high a hurdle for environment friendly industries to cross; therefore they fail to attract necessary investment.
  3. The Central Bank’s lowering of interest rates to spur demand usually just increases investment in existing industries which after a certain point tends to result in bad investments (mal-investments) and speculative investments (asset bubbles).
  4. Temporarily low interest rates will not help establishment of new environment friendly industries because their returns are permanently low.
  5. Old capitalism does not effectively translate environmental costs (damages) into financial costs for polluting entities, nor does it reward clean industries.
  6. Since money is fungible we cannot apply a lower interest rate for environment friendly industries and higher for the rest. Additionally if we fix interest rates for long durations it ceases to be an interest rate, a market price for money. Interest rates cannot be fixed for a long time, nor can they be selectively applied to environment friendly industries.
  7. Cap and trade will not work in developing countries because of administrative and enforcement problems. The administrative and enforcement structure required for a global cap on pollution is impractical. Even getting countries to really agree to a particular cap seems extremely difficult.
  8. Carbon tax if pushed hard to work will create hardships for low income individuals and for businesses competing internationally. Most developing countries including China and India give heavy fuel subsidies; they are a long way from carbon tax.
  1. Eliminating interest will remove the biggest hurdle to the establishment of environment friendly industries.
  2. Through lower asset tax rates governments can help allocate needed capital to environment friendly industries and to those that are capable of creating sustainable and planet-friendly growth.
  3. Free Capitalism effectively and successfully translates environmental damages into financial costs through higher asset tax.
  4. Asset tax can be used to discourage fossil fuel usage by highly taxing assets that consume it.
  5. Asset tax will make our higher environmental standards economically sustainable by providing incentives for environmentally responsible behavior among consumers and businesses.
  6. Low asset tax can help make clean energy competitive, thereby protecting the environment without significantly increasing energy prices.
  7. Since governments will have lower expenses (no interest and fewer funded programs and subsidies etc.) taxes and inflation will be low, which in turn will improve financial returns and will result in higher investments, particularly in environment related industries and assets.
  8. No subsidies required to promote low carbon economy. No taxes needed for the environment. Governments and societies will become environment friendlier.
  9. High asset tax on fossil fuel based and similar other industries will provide additional competitive and return advantage to clean energy and similar other industries.
  10. Asset tax can help advancements in oil technology that may reduce carbon emission per unit of energy6. .
6. Dwindling Petroleum and other mineral reserve7. Our dependence on foreign oil
  1. Until China and India started industrializing the mineral resources of the earth seemed plentiful. Now we are facing constraints from both sides: supply and waste disposal. Old Capitalism offers no mechanism to save the planet’s store and its environment.
  2. Interest causes rapid consumption of resources. The possibility of earning interest speeds conversion of minerals into cash.
  3. Oil is soon going to cost more because of decreasing reserves, increasing demand, increasing cost of extracting oil from the new fields, and increasing environmental clean up costs. High oil prices are going to hurt us much more than they will hurt developing countries because our industries and life styles are more energy dependent. Their low wages will help them to better absorb increases in oil price.
  4. Our dependence on foreign oil which is already endangering our economic and national security will become painful. In 2008 our oil import bill was a staggering $475 billion.
  5. Soon the world will need energy supply for almost 6 billion people; that is far more energy than known reserves of oil can support for the expected remaining length of our lives.
  6. Under Old Capitalism “Peak oil” will soon become a fact due to increasing consumption. It will severely impact global peace because of scramble for oil.
  7. Private sector incentives for developing non fossil resources are very weak and cannot be relied upon. The government has to pave the way for the private sector to invest; but the incentives needed are too huge to be provided through subsidies.
  8. Old Capitalism is endangering the survival of our economy and global peace. It is almost suicidal to continue with Old Capitalism.
  1. Eliminating interest will take away the pressure to quickly convert minerals into cash.
  2. Free Capitalism will protect finite resources by structuring asset tax in a way that incentivize preservation of mineral and other natural resources e.g. no tax for minerals in the mine and high tax for those above.
  3. The economic effects of a subsidy can be achieved just by setting asset tax on a particular asset lower that that on cash. Lower asset tax will provide incentives to invest in clean energy and similar planet benefiting industries and their development.
  4. Free Capitalism will reduce our dependence on foreign oil through developing alternatives and making them available at competitive prices.
  5. Free capitalism can help achieve clean energy production at effectively Zero capital cost or even lower. It will soon make clean energy cheaper than fossil energy.
  6. Clean energy will thus reduce fossil fuel consumption.
  7. The beauty of Free Capitalism is that it will increase the resource pie of the planet by harnessing forces that are not yet put to use and by bringing areas of land and water under sustainable production that are not in use. When a wind mill is established the planet’s resource pie is increased when an oil powered power plant is established the planet’s resource is consumed. This is a difference that can account for growth or decay.
  8. Asset tax can help responsible oil exploration and development thus increasing reserves
8. General Differences
9. US Budget deficit
10. US Trade deficit
11. US debt
12. US dollar
13. US unemployment
14. US leadership
  1. Interest establishes hurdles in the way of real capital accumulation; it restricts wealth from creating further wealth. It is a major hurdle against higher income and prosperity.
  2. Interest is very costly and inefficient mechanism for allocating capital. It is socially and economically very inefficient if economic rewards are given just for having wealth. Wealth should always be acquired by producing value.
  3. In a fiat money system interest is fully avoidable.
  4. Exponential growth in debt through interest is the main factor contributing to a debt laden economy and is behind regular occurrences of financial crises.
  5. Old Capitalism gives little value to cash-flow beyond 30 years due to discounting, thus creating huge disincentive against capitalizing on opportunities beyond 30 years or more.
  6. Tends to make the rich richer even in a time when the whole economy is becoming poorer; increasing wealth and income disparities.
  7. Interest creates the need for redistribution of wealth.
  8. Interest works against most businesses, particularly in the competitive global economy.
  9. Old Capitalism is causing our debt, particularly our government debt, to increase; which is compromising US sovereign credit, and debasing our dollar.
  10. The US provides the world with an important service: liquidity in the form of US dollar and dollar denominated assets. The dollars we owe gives the world money to do business in and to save. We should not be paying in the form of interest for providing this service. US dollar should be a source of revenue not a source of expense.
  11. Interest today serves only some very narrow vested interests.
  12. Old Capitalism worked fine under earlier conditions; we are going through a fundamental change in global economics.
  13. It has no solution for the current economic crisis and will not help us reduce unemployment. Free Capitalism is the only available answer.
  1. Elimination of interest will put more capital at work; that means higher employment, production, and aggregate incomes.
  2. Clean energy with zero capital cost (interest) may cost less than fossil fuel energy. It will again bring costs down.
  3. Absence of interest and income tax will allow the emergence of a larger middle class with higher wealth levels that in turn will increase national spending and income levels which will translate into higher prosperity.
  4. Cutting down our oil import bill will almost solve our trade deficit problem. In 2008 our trade deficit was $696 billion and our import of oil was $475 billion; in 2009 these figures were $381 billion and $265 billion respectively.
  5. Budget deficits will be rare because governments won’t pay interest and won’t need to spend for many programs that use tax dollars because asset tax will help them achieve the objectives of those programs and subsidies.
  6. Since future cash flow will not be discounted it will enhance the value of future incomes and therefore tremendously increase incentives to capitalize on distant future opportunities.
  7. Zero capital cost will allow us to develop advanced and innovative industries of the future like space, biotech, clean energy, ocean culture etc. It will reaffirm our global leadership.
  8. Since debt will not grow through interest, the economy will have a higher share of equity which will lend stability to the financial system and the economy.
  9. We will continue to attract international investments because of the enhanced potentials of the economy; and significantly reduced risks due to elimination of interest and strengthened foundations of the economy. There are not many non-dollar alternatives for large international savers.
  10. US dollar will become a source of revenue (asset tax) for the US not a source of expense (interest).
  11. Old Capitalism hurts us far more than it hurts developing countries because of their greater room for growth, low wages, low environmental and living standards, and lower sensitivity to the price of oil.
  12. If we remain with old capitalism developing countries will tend to pull down our standard of living to equal theirs. That is the essence of the current economic race.
  13. Free Capitalism is far more important for developed countries than it is for developing ones.
  14. By having an effective system for addressing global warming we will again establish our leadership in global affairs of critical importance.
  15. Free Capitalism serves people, the planet, and the society.

Chapter 5

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