Recognizing Growth Potential in the Aftermath of the Global Economic Recession

Paul Andreas Fischer

2/2/2017

Recognizing Growth Potential in the Aftermath of the Global Economic Recession

Glass-Steagall legislation was historically a prohibition of American investment in German Concentration camps and underestimated global antagonistic foreign threats; when viewed appropriately such an outcome was a certainty without this restriction in place. The prohibition on speculative loans using banking finances was also demonstrative of a long-standing disagreement between the billionaire families Rockefeller and Morgan, each of which had different views for the futures of their respectively massive fortunes built on industry in the former and upon military conquest in the latter and exorbitant returns on speculative investments. The Act worked brilliantly and allowed a basis of non-competition for domestic firms and industrial concerns for decades, though efforts to repeal it began as early as just two years after passage in 1932.

The United States is currently playing a dangerous game of recovering from a similar financial crisis while relying on foreign investments without this critical piece of legislation or an equivalency in place. Consequent to this has been stunted growth, exorbitant relative prices for large firms and relative impoverishment of the average worker. In order to evaluate the potential for growth by enforcing an optimal level of foreign investment through direct political means, a proof will be offered which demonstrates the hypothetical optimum investments in the recent past and the way those decisions can be replicated and watched play out for the long-term.

Foreign Direct Investment as a Result of Limitations on Banking Investment Capital

Each year an optimal level of foreign direct investment (FDI) can be seen as a function of the expected return on local investments and the return on foreign investments against the available stock. Financial securities play a role here as an economic function of the annual return on labor, or profit to the economic system from a domestic perspective. Contradiction is currently extant in the way that variance in the various forms of investment interacts with the cost of finances to produce a viable quantity of resources which are demanded.

There is no way to endorse the historical efforts which were made to open up American investment in foreign nations beginning with low levels of funding allocations to banking overwriting which were permitted as early as 1935. One fundamental problem with early attempts to repeal the effort which have been exacerbated in recent history, including the successful repeal of the Act, is constituted in the nature of the difference of the coefficient of inward investment to GDP and the outward investment to GDP.

Research conducted on nations up from the 1970s until the 1980s indicates that one dollar invested locally is equivalent in terms of GDP, funds lost to inefficiency that report to bank’s bottom line but which are lost to the general economy, is in fact worth 3.5 dollars abroad (Desai, 7). This means that under current market conditions, assuming normal statistical variations in investment, there are investment opportunities which should be directed outside of the domestic economy. An example of that is one of America’s major trading partners, China, which is among the ⅔ of the world which has not fully completed the transition towards democratic procedures. Current tax rates in China retain and reallocate ½ of income as taxes and in turn regional FDI, though this is low compared to many nations which claim higher rates of national income.

Repeal of Glass-Steagall as a Function of the Propagation of Democracy

American investments were not appropriately regulated during the 1930s, and the nature of the investmetns which were made played some role in the development of the Second World War. While the Rockefeller oil and industrial concerns did invest in Japan, the investments were targeted to prevent the boycott of specific regions which were beings starved out by the dictatorship (Moran, 262-4). Speculative investments which had been permitted by repeal efforts and compromise in the legislation in question allowed major investments to the dictatorship in Germany itself, which required direct negotiation with the leadership there. A leading financier for the Morgan family sat upon a German bank until 1940, shortly before the outbreak of war and well into the period of atrocities.

Incentivization to repeal Glass-Steagall and to condemn its fabricators is deterred by the reality of the economic situation with one of America’s primary trading partners at the time of passage, Germany, which was actively liquidating the investments through the Holocaust and had a government structure which could not support the reception of such funds. This means that, while these economic theories represent financial instruments which were not publically available at the time, had they existed it is likely that the coefficient for the bulk of such investments at the time was zero. Virtually none of the returns on American FDI in that scenario were being appropriately returned to the American economy, which demanded a complete prohibition of the leakage, something that was achieved for a short time period through passage of critical legislation, and restricted slightly with the American Banking Act of 1935.

For perspective, a similar situation has been reached in present day Bolivia, a nation whose capital is entangled with a large percentage of American foreign trade. The threat posed by the planned termination of American trade deals in 2022 for American firms downgrades the credibility of long-term claims which are made by the World Bank and other financial institutions which use the dollar as a standard of prosperity. The regional instability which has seen similar deals cancelled with Argentina as well as international nature of the cancelled deals with Germany and other NATO allies make this an act of warfare which is as terrifying for diplomats as for economists. Most importantly, it demonstrates a long-term consumption demand of financial capital which has historically and will currently not be sufficient to meet the basic demands of the population contained within the geographical boundaries of Bolivia as well as other nations.

Glass-Steagall and the Victory of the Cold War

Many trade deals are reciprocal in nature, so they require an influx of goods or services in return for goods or services. An exception is foreign aid, which is usually, though not always in the case of complementary goods such as military equipment that requires training, excluded from FDI estimates. Controlling this phenomenon through the Glass-Steagall Act, while not responsible for the fall of the former Soviet Union, was certainly a necessary component for the survival of the American economic system. Prior to the Doha and Monterrey Declarations, capacity building was not part of prioritizations efforts in foreign investments, so this change in global financial policy may significantly alter or change those decisions (OECD, 32).

It is only possible to view this as a matter of terms in contrast to the historical cliometric analysis of American investments at the time intrinsic to economic developments. The same is true of the current economic situation. The economic analyses revealed that the return to GDP from inward FDI during this period was indistinguishable from zero (Desai, 6). That means that FDI to the United States had been targeted in such a way that complementary products had to be bought in foreign trade at a loss or which would have no overall economic impact, ie reserve or surplus items.

Meanwhile, American investments abroad lost over two dollars in opportunity costs for investments which were made at home (Desai, 8). This does not yet prove that Glass-Steagall provided a necessary barrier to bad investments and saved America from falling to an economic crisis during the Cold War, because the barrier has already been demonstrated above to have saturated the domestic financial market with adequate funding as to prohibit effective addition to GDP. The question which emerges is whether thirty to forty cents on the dollar is still good trade, when the alternative of domestic investment will siphon funds away from other investment efforts.

Further research proved that savings encouraged an increase of spending of 26 cents for each additional dollar of domestic savings. This means that with Glass-Steagall, the proportion of FDI was bordering as inefficient already. Had Glass-Steagall been repealed during the period of research, then it can be safely estimated that the national reserves of cash liquidity would have been under threat as the shock of additional fund for foreign investment created an inefficient market. It is not a question of whether, but how, a critical limit of minimal reserves would be reached, prohibiting local and foreign investment and representing the financial insolvency of America.

Current Economic Forecast and the Return of the Glass-Steagall Era

There is no way for private industries to fail to take up the responsibility to save the United States, something which has occurred in the past. It can be implied that the lack of such a patriotic effort during the 1930s demonstrated foreign subversion in the economic system outside of that authorized by international treaties and obligations. There are a number of potential crisis regions which require both immediate and long-term attention for reasons which go beyond the financial, such as humanitarian or military, which have been addressed.

Impermeability of financial institutions to such an economic meltdown and foreign subversion is a state which is not attainable. In the short-run re-interpretation of fundamental American legislation will be necessitated in order to achieve and maintain a state of adequate financial security. This cannot be the long-term solution to a fundamental flaw in negotiating with despotic or even only partially democratic allies and trading partners, or former trading partners.

By adding a fail-safe which catches speculative investment, whether foreign or domestic, before it begins to lose compared to savings investments, the American economy can return to the natural rate of growth for the leading industrial nation in the world. Had the rates of growth observed during the time period in which loans inspired by the Glass-Steagall Act were in place, the decade after 1932, the standard of living in the USA experienced today would have been experienced by the early 1960s, the average American worker would be earning one million dollars a year by 1990, and today upwards of 4 million dollars annually. More importantly, the top 1% would not be able to collectively buy dictatorships and despotic governments to open them to democracy and trade, but individually buy them, opening the world to such a democratic expansion in social justice, welfare, and economic well-being as has not been rivaled in the history of humankind. It has been demonstrated that the returns during that period were not fabricated, but only the consequence of sound financial theory applied prudentially to national investment trends through noninvasive and logical expansion of the rewards and consequences of modern financial instruments

References:

Desai, Mihir C., C. Fritz Foley, and James R. Hines Jr. Foreign direct investment and the domestic capital stock. No. w11075. National Bureau of Economic Research, 2005.

Graham, Edward M., and Paul R. Krugman. "Foreign direct investment in the United States." Washington, DC (1995).

Organization for Economic Co-operation and Development. Foreign direct investment for development: maximising benefits, minimising costs. Paris: OECD, 2002.