If it were a business school assignment, what grade would be given to the current strategic plan of the "USA Corporation"?
Sizeable companies typically have a succinctly-written Strategic Plan, focused on a period like the next five years, addressing questions like:
- How sound is our financial position, and how can we improve upon it?
- How can we better put our income and expenses into trim, given our goals?
- How can we best parlay our financial and other resources to achieve our goals?
By addressing these questions in a focused and creative way, a small business can become a large business or a large business can make significant strides in five years - a totally different pace than the way five years can slip by with tepid growth while public policy directions are thrashed out. If we could grow our GDP the way many companies grow their NOI – rather than considering 3% a good growth rate and 4% a very good rate – we wouldn’t have any worries about balancing the budget.
Public policy can’t replicate that of a private business in all ways, but there are some important principles we can bring into focus by looking at government using the same methodologies businesses actually use. The result of doing so may come as quite a surprise to those who are careless in using rhetoric about government becoming more “business-like”. An example is government building of an asset base for business reasons. Some people don’t want government to be that business–like!
Every MBA student is taught how to prepare a strategic plan for a case-study company. Typical elements include:
- An evaluation of the firm’s current financial condition – a Balance Sheet analysis
- An Income and Expenses analysis
- A Strategic Threats and Opportunities Profile
- A Timeline indicating what products and services should be delivered to the market
- A Financial Plan
- An Organizational and Key Alliances plan
An MBA who eventually becomes a CEO will find the question that weighs most heavily on his or her mind before going to sleep each night is this: “Where do we stand financially – right now and in the foreseeable future – if things do or do not go according to plan?” There will likely be other opportunities to bring another product to market if it slips from the current schedule, provided the firm does not become financially crippled. Then, all bets are off. So getting the firm into the right financial position to conduct business and making sure that there are no blow-out’s in terms of revenue losses and ongoing expenses are the business basics to be mastered first.
A new semester is beginning at the nation’s business schools, with assignments requiring MBA students to prepare a strategic plan for a company treating all key points. It must be done by the end of the term, without fail. How would a Business student write up a succinct strategic plan for the “USA Corporation”? Let’s take it from the beginning.
Starting with Balance Sheet and Income and Expense Statement analyses, several things immediately jump out about the USA Corporation. For an organization with such large revenues and, regrettably, large expenses, not to mention large risks, it has remarkably few income-producing and liquid assets. That means an enterprise in an inherently risky position. A student might note, from a little back-ground research, that there have been proposals to sell various USA Corp. assets, often discarded after examinations of whether the stock-holders (citizens) would do better or worse on account of such sales when all is said and done. But in the days since the last of the great land acquisitions, how much thought has been given to types of assets to be acquired and developed, with a goal of creating a stronger Balance Sheet? There is not so much to find, in that category.
Our MBA student reviews past discussions on this subject. Some in management have stated that the organization’s chief “asset” is its sovereign ability to collect taxes and fees. But, the student observes, isn’t that correctly shown where it is in the Income and Expense Statements, and properly discussed as projected income from services provided rather than an asset? Isn’t the amount of revenue that can be counted on from those sources determined by future economic conditions and politics, with historic evidence that when the economy is bad those income streams can plummet at the very time they are most needed? The student grapples with the upshot. There will always be revenues from these sources, but in and of themselves they do not provide the stabilizing effects that he has learned are typically provided to businesses by accumulated assets.
So the USA Corporation is dependent on current revenues and debt. What improvements can be made there? Perhaps someday it will be possible to reduce taxes and thereby create some long-term growth benefits. (The corporate tax rate, notably, is a little above the norm). But the ability to reduce taxes would need to be secured by taking the “crisis” element out of the USA Corporation’s currently tenuous financial picture. There’s no free lunch, the student has so often heard business people say. He has learned about what happened when things were done backwards - how a decade ago, when tax cuts were made at an inopportune time in hopes of “spurring growth”, the reduction in revenues was followed not by a decade of prosperity but one of recession and increased debt. Lesson learned. He will focus on strategic improvements to the USA Corporation’s financial position so as to allow any tax reductions that might ultimately be made, to the individual delight of many of the shareholders.
The records show that another questionable notion has been advanced. It is the idea that the Corporation’s financial position and whether its operations are in the red or in the black aren’t of any real importance! The theory maintains that the USA Corporation could create fiat money in unlimited amounts by ordering its Federal Reserve System affiliate to credit imaginary deposits to its checking accounts. What a pointless distraction, the student thinks, as a quick review of the chartering documents shows that this would be explicitly against the law as well as problematic on other counts.
But here is a real irony, he realizes. It can be seen that the USA Corporation has created fiat money in the past, in the manner provided for in its charter (the Constitution) – outside of the Federal Reserve System. It has done so to meet major strategic goals like the growth of its predecessor organization, The Colonies, has done so to create the USA Corporation (the American Revolution and the early days of the republic), has done so to preserve itself during the Civil War and Reconstruction, and (in indirect ways), has done so to get through the Great Depression.
Considering how vital this capability was to the Corporation’s very survival on these occasions, the student finds himself wondering about what went on behind closed doors in 1913 when that critical capability was simply given away to outside parties. That surely is what happened, he can see, as the coterie of private banks to come under the Federal Reserve umbrella was given a no-cost license to create money backed by the USA Corporation through its anti-counterfeiting enforcement and through maintaining the court system which enforces “legal tender” status.
What the USA Corporation did wind up with and what the Strategic Plan must work with, today, is a system that is quite effective in expanding credit and the money supply when times are good – but not so when times are bad, worsening recessions. To apply his free-market thinking, the student reasons that the economy would do better if the public had alternative borrowing sources like the public banks now being so much talked about, and/or if the private banks were required to lend up to some minimum percentage of their capacity and/or invest to a minimum percentage of their assets in the real economy during recessions rather than just collecting interest on excess reserve deposits and speculating in the shadow banking system which we are also hearing so much about. Also, if we are concerned about tempering recessions, then not all money creation should be done then by private banks in conjunction with lending, as lending activity is so curtailed during recessions. This would be an argument for a certain amount of the old government-issued money. When your case study organization’s major revenues are from taxes and fees, you have to think hard about keeping the economy healthy, reasons our student, because you can’t increase tax rates and fee schedules freely without harming the economy and you can’t just go further and further into debt.
Our student observes that the current financial system works quite imperfectly for the party whose interests he is assigned to analyze, the USA Corporation. Having given away the goose that lays the golden eggs in terms of money creation, and having no access to even one of those golden eggs, ever, the USA Corporation is saddled with constant debt build-up in good times as well as bad.
Pulling together his analysis of the Corporation’s finances, our student recognizes that the relationship of the USA Corporation and its Federal Reserve System affiliate – important in so many ways to the Corporation’s finances – is a symbiotic relationship. The entities critically affect each other. Moreover, on the Federal Reserve side, there are loosely-bound sub-affiliates under separate ownership (the private bank members). The interests of those sub-entities – the ones that actually make the lending / money creating decisions the governing board tries sometimes in vain to influence, are neither necessarily the same as nor or at odds with those of the USA Corporation. They’re just different entities with different ownerships to which they must be accountable. At times the Federal Reserve has floated government debt, and at times the USA Corporation has bailed out the banking system.
A hallmark of good business planning in such a situation, the student recalls his professor saying, is not precise forecasting of all the possible scenarios, which is just about impossible to do. It is, rather, sound pragmatic basics. Each of the parties to a symbiotic relationship must be able to “stand on its own two feet”, so one will not destabilize the other. How can this principle be worked into the strategic plan, the student wonders. He realizes that, as a first step, each of the affiliated parties must be allowed to develop a Balance Sheet that meets its needs and puts it in a stable position.
Since the Federal Reserve is the more set-upon party in terms of pressures by the other, and the one actually required to have prescribed assets as reserves, he gives thought to its charter. Perhaps it will clarify what is essential and what is vestigial. The charter shows it was set up by the USA Corporation with a back-out provision. At the time, the US Dollar was considered to be backed by redemption guarantees constituting obligations of the USA Corporation. So the 1913 charter provided that if the USA Corporation took over its affiliate it would acquire its “required reserves” to compensate for the obligations the USA Corporation would be taking on.
That rationale became muddied as the basis for the value of the dollar became not guarantees of redemption but rather the power of the court system to enforce what had now become pure fiat money – “Legal tender for all debts, public and private.” Meanwhile, the USA Corporation continued to directly issue its own variant of the US Dollar, United States Notes. The two currency versions were not variants as far as recipients were concerned because of convertibility, equal acceptance and equal value. They were variants on account of being issued according to two different issuing authorities. United States Notes were issued by the Treasury (until 1971); Federal Reserve Notes were issued by the Federal Reserve Bank.
At this point, the real need for the reserves of the Federal Reserve System is as a safeguard for the financial system in the event of a financial crisis. A fitting strategic plan must keep that goal in view, the student realizes.
In analyzing what each of the symbiotic partners needs in terms of financial stability, our student decides that the Bank’s needs are the simpler to nail down. He can see that the Federal Reserve has stipulated assets and an established regimen for acquiring them. But to an increasing extent – as the financial condition of the USA Corporation has become more tenuous – they consist of debt paper of the USA Corporation. In a pinch, the Federal Reserve affiliate could sell that debt, but then it would be reducing its reserves – eating its cake – during a downturn when it also needs to have its cake, its reserves. In that same “pinch” (or at any other time, these days), the USA Corporation would have to fund deficits by selling Treasury bonds – going into competition, in the bond market, with its Federal Reserve affiliate. It has become clear that the USA Corporation cannot actually pay off its debt held by the Federal Reserve affiliate, but only re-cycle it, with an exposure to interest rate risk and to a debt compounding effect. These considerations call into question excessive reliance on USA Corporation debt paper by the banking system, for its own “rainy day” purposes.
So, which party really has a sufficient store of income-producing and readily-saleable assets? One might think it is the banking system, but reading up on the subject reveals there have been steps in many countries, including our own, toward “bail-in” provisions based on the realization that during the next crisis financial weaknesses and political realities may prohibit governments abroad and the USA Corporation from stepping in with a bail–out’s. Through “bail-in” provisions as used in Greece and now anticipated in other countries, a bank can draw on the funds of its depositors to bail itself out. In the US, those depositors happen to be the stockholders of the USA Corporation, and as they are affected so is the economy affected, with attendant threats to tax and fee income of the USA Corporation. The “bail-in” strategy also poses risks to the banks themselves, as if the free market works at all, depositors will find safer places to put their money than in US banks.
As for the USA Corporation, its current reliance on using ever-increasing debt for the need to roll over compounding debt makes the whole system ultimately dependent on inflation and prone to crowding out of investments in the real economy. These factors wreck havoc on the Balance Sheet of the USA Corporation, and persistently weaken its Income and Expense projections. Clearly the professor will look for a plan designed to create movement in the direction of a more sound financial foundation.
The loss of the ability to create some money for itself stands out as an absolutely critical issue in examining the Income and Expense Statements of the USA Corporation. Clearly the required strategic plan must address the year-after-year hemorrhaging of red ink as priority #1. Returning to the
provisions of the USA Corporation’s charter (the Constitution), and re-instating the power of the USA Corporation to issue its own money – goes directly to the heart of the matter of persistent operating losses. In identifying such a curative step, our student will demonstrate to the professor his efficiency in problem-solving by identifying first the obvious and low-hanging fruit. This good judgment would not be evidenced if he were to jump right into proposing operating cost cuts that will have pros and cons.
Since the USA Corporation and the Federal Reserve System share the need to build massively stable foundations while actively furthering the public good – making them a unique pair among prospective co-investors – classic business school thinking prompts the idea that a good strategy would be for them to accumulate assets through creating value synergistically. They are well-paired investors. The Federal Reserve must acquire and maintain an asset base anyway, but one which meets conservative fiduciary standards. The USA Corporation has an ace-up-its-sleeve in being the only Constitutionally designated party able to create an economically appropriate amount of money at no cost. It also has capabilities in things like coordinating research and development efforts and cooperative efforts involving foreign governments. These complementary investor profiles could be put to good use in investing in industries providing a near-term consistent income stream enhanced by technological development upsides.
There would be many ways to share the pie. One would be on the model of a general partner with a larger ultimate upside but a smaller near-term gain, and a limited partner with a more immediate and defined gain, but less of the upside. The USA Corporation, with potential no-cost money to invest, might play the role of the general partner and the Federal Reserve, with banking fiduciary responsibilities, might play the role of the limited partner. Or the USA Corporation might be the early in / early out partner, funding R&D to a point of viability and then recouping its cost by selling out to the Federal Reserve, which would provide funds to capitalize on the idea. In the latter case, the USA Corporation could perhaps keep an interest in the asset which it could retain or sell. Or perhaps both partners could share on the same terms on a mixed portfolio of assets and projects, some income-generating and some under development for a future upside – much like stock owners investing in a typical company. On that model, shares could be bought and sold as suits the interests of either major initiator or other investors, institutional or individual. This would follow the model of the first and second Bank of the United States.
In what sorts of industries would such an active role of government be justified? They would be industries largely yet to be created, or those in which there is an overriding public interest, or those that would benefit from the involvement of the government with all its powers, or those in which there is a need to overcome a hurdle which it is seen that conventional enterprises, investments and financing sources are not working well to overcome.
As an example, our student selects electrical power plants. He notes that electric power plants generate fairly consistent revenues during all economic cycles, and can be sold even in the trough of a recession if need be. There’s an asset in the real economy – not just unnecessary government debt paper, one that can function well as an asset in good times and bad, one that will allow an accumulation of assets without meaning that the nation is going bankrupt (i.e., a massive build-up of Treasury bonds), one that can attract third-party institutional and individual investors. We need new power plants using today’s technologies and we need to develop new types of power plants using tomorrow’s technologies. In addition to sound investment economics – an investment with good cash flow and an upside – there is a psychology here. Was it not easy to sell war bonds during World War II, drawing on a similar sense of national purpose?
Researching this industry, our student finds that under former CEO Dwight D. Eisenhower, the USA Corporation was well on its way to introducing, for commercial use, the Thorium reactor. The
Corporation had a strategic goal known as its “Atoms for Peace” project by which all nations could prosper from the use of safe nuclear energy without the threats posed by the creation of enriched uranium. The program was intended to reduce strategic threats on several counts from around the
world and to develop better customers for the USA Corporation as other economies developed.
However, it was abandoned as the Cold War deepened and the USA Corporation sought the creation of large quantities of enriched uranium for a growing weapons stockpile. So the model that became the standard – the one which we now want so many nations not to have – was the uranium fission reactor.
But after arms control treaties reducing the needs for a massive US nuclear arsenal, concern having now shifted to nuclear proliferation without US / Allies involvement, growing tensions over fossil fuel depletion, and climate change…isn’t it time to re-visit the possibility of having something to offer developing countries other than military threats and sanctions if they seek to develop nuclear energy? Successful research into Thorium reactors and fusion reactors (now surging forward in Europe) could benefit investors, the USA Corporation’s future financial position and other strategic goals like abundant energy, economic development, peace and reduction of the climate change threat.
Follow-on ventures could include nuclear “package plants”, nuclear water desalinization, nuclear-powered commercial ships and nuclear-powered air and space vehicles. That’s enough technological development activity to pump major new life back into the USA Corporation’s economy. Other strategic avenues could be taken in areas as diverse as water distribution, health care delivery, transformative redevelopment finance, etc.
How good of an idea is the power plant one? The point is, it isn’t about any one example that might be picked. Our MBA student knows the purpose of his academic exercise is not to answer all technical and market questions about a particular product or technology. There will be legions of experts at the service of the real company he will work for, if its projects will include ones as ambitious as the power plant undertaking. His task, for now, is to illustrate a strategic mode of thought. In the case of the USA Corporation, he can list 10 or 20 or 30 ideas for possible new ventures – as many as he has time to do research on – which would meet multiple strategic objectives while providing real revenues from real assets timed appropriately to investor expectations. Gather all that the economy has to offer in terms of entrepreneurial initiatives in, say, a dozen basic areas of national concern and there will be more than enough choices to prove attractive for, say, 20% of the Fed’s reserve requirements – much more attractive than a lot of government debt paper the Fed gets little out of. And let the Fed keep the profits and multiply its assets for a rainy day fund!
Our MBA student is beginning to feel he’s going to be on top of the situation in proposing his strategic plan. He has:
Examined the USA Corporation’s Balance Sheet, identifying its weakness in income-producing and liquid assets identified the symbiotic relationship between the USA Corporation, its Federal Reserve affiliate and its individual bank affiliates, identifying ways in which they have both at times benefitted and at times burdened each other, and figured out a strategy by which they can both develop more meaningful and stabilizing assets over time identified a major expense blow-out, the funding of deficits 100% by debt, and how to use the unique and distinctive advantage of the USA Corporation to create its own money limited only by the mandate to control inflation so that the pattern of constantly-increasing debt can be arrested arrived at a criterion by which investment decisions should be made: They should be profitable within a reasonable time frame, financially durable as accumulating assets and productive in improving the national economy so as to improve operating results.
As students sometimes do, our MBA candidate finds himself sweating over putting all this in proper and finished form by the deadline. So when he comes across a document in the USA Corporation’s
offices to which he has been granted access, he is quite taken aback to see the title: The Official Strategic Plan of the USA Corporation. “Oh my God”, he thinks. Here it all is, laid out in splendid detail, and his professor doesn’t even know about it. “Could I draw upon some of it? Could I use . . . all of it?” No sooner does that troublesome thought cross his mind than does another: “But what grade would I get?”
The writer greatly appreciates the education he gained in the MBA and Real Estate and Urban Development programs of American University in Washington, DC. He has served as the CEO of a large real estate development company, which required constant attention to the financial position of the firm as it undertook new projects. In that connection, he invited a Harvard Business School team case study of his own firm as part of his efforts to “recession proof” the firm. Based on what has been seen in the real estate industry and in the plight of communities badly affected by recessions, we believe more can be done and should be done toward “recession-proofing” the national economy.
Many times we have encountered reluctance to accept our invitation to comment on the subject of our current series because of the presupposition that the subject area is exclusively the domain of Ph.D. macro-economists. We have great respect for those of that background and are working closely with several of them. However, the subjects we have touched on here also involve economic history, money and banking, government and politics, investment market dynamics and…as we have attempted to illustrate here – business strategy. With the belief that the introduction of new disciplines can mean valuable new insights, we continue to solicit publishable comments of two or more sentences from across a range of economically-aware disciplines, political viewpoints and institutional types in response to the question: Under any set of limitations or conditions, should we consider the re-introduction of no-debt government-issued money to ease our debt-and-austerity crisis?
Sizeable companies typically have a succinctly-written Strategic Plan, focused on a period like the next five years, addressing questions like:
- How sound is our financial position, and how can we improve upon it?
- How can we better put our income and expenses into trim, given our goals?
- How can we best parlay our financial and other resources to achieve our goals?
By addressing these questions in a focused and creative way, a small business can become a large business or a large business can make significant strides in five years - a totally different pace than the way five years can slip by with tepid growth while public policy directions are thrashed out. If we could grow our GDP the way many companies grow their NOI – rather than considering 3% a good growth rate and 4% a very good rate – we wouldn’t have any worries about balancing the budget.
Public policy can’t replicate that of a private business in all ways, but there are some important principles we can bring into focus by looking at government using the same methodologies businesses actually use. The result of doing so may come as quite a surprise to those who are careless in using rhetoric about government becoming more “business-like”. An example is government building of an asset base for business reasons. Some people don’t want government to be that business–like!
Every MBA student is taught how to prepare a strategic plan for a case-study company. Typical elements include:
- An evaluation of the firm’s current financial condition – a Balance Sheet analysis
- An Income and Expenses analysis
- A Strategic Threats and Opportunities Profile
- A Timeline indicating what products and services should be delivered to the market
- A Financial Plan
- An Organizational and Key Alliances plan
An MBA who eventually becomes a CEO will find the question that weighs most heavily on his or her mind before going to sleep each night is this: “Where do we stand financially – right now and in the foreseeable future – if things do or do not go according to plan?” There will likely be other opportunities to bring another product to market if it slips from the current schedule, provided the firm does not become financially crippled. Then, all bets are off. So getting the firm into the right financial position to conduct business and making sure that there are no blow-out’s in terms of revenue losses and ongoing expenses are the business basics to be mastered first.
A new semester is beginning at the nation’s business schools, with assignments requiring MBA students to prepare a strategic plan for a company treating all key points. It must be done by the end of the term, without fail. How would a Business student write up a succinct strategic plan for the “USA Corporation”? Let’s take it from the beginning.
Starting with Balance Sheet and Income and Expense Statement analyses, several things immediately jump out about the USA Corporation. For an organization with such large revenues and, regrettably, large expenses, not to mention large risks, it has remarkably few income-producing and liquid assets. That means an enterprise in an inherently risky position. A student might note, from a little back-ground research, that there have been proposals to sell various USA Corp. assets, often discarded after examinations of whether the stock-holders (citizens) would do better or worse on account of such sales when all is said and done. But in the days since the last of the great land acquisitions, how much thought has been given to types of assets to be acquired and developed, with a goal of creating a stronger Balance Sheet? There is not so much to find, in that category.
Our MBA student reviews past discussions on this subject. Some in management have stated that the organization’s chief “asset” is its sovereign ability to collect taxes and fees. But, the student observes, isn’t that correctly shown where it is in the Income and Expense Statements, and properly discussed as projected income from services provided rather than an asset? Isn’t the amount of revenue that can be counted on from those sources determined by future economic conditions and politics, with historic evidence that when the economy is bad those income streams can plummet at the very time they are most needed? The student grapples with the upshot. There will always be revenues from these sources, but in and of themselves they do not provide the stabilizing effects that he has learned are typically provided to businesses by accumulated assets.
So the USA Corporation is dependent on current revenues and debt. What improvements can be made there? Perhaps someday it will be possible to reduce taxes and thereby create some long-term growth benefits. (The corporate tax rate, notably, is a little above the norm). But the ability to reduce taxes would need to be secured by taking the “crisis” element out of the USA Corporation’s currently tenuous financial picture. There’s no free lunch, the student has so often heard business people say. He has learned about what happened when things were done backwards - how a decade ago, when tax cuts were made at an inopportune time in hopes of “spurring growth”, the reduction in revenues was followed not by a decade of prosperity but one of recession and increased debt. Lesson learned. He will focus on strategic improvements to the USA Corporation’s financial position so as to allow any tax reductions that might ultimately be made, to the individual delight of many of the shareholders.
The records show that another questionable notion has been advanced. It is the idea that the Corporation’s financial position and whether its operations are in the red or in the black aren’t of any real importance! The theory maintains that the USA Corporation could create fiat money in unlimited amounts by ordering its Federal Reserve System affiliate to credit imaginary deposits to its checking accounts. What a pointless distraction, the student thinks, as a quick review of the chartering documents shows that this would be explicitly against the law as well as problematic on other counts.
But here is a real irony, he realizes. It can be seen that the USA Corporation has created fiat money in the past, in the manner provided for in its charter (the Constitution) – outside of the Federal Reserve System. It has done so to meet major strategic goals like the growth of its predecessor organization, The Colonies, has done so to create the USA Corporation (the American Revolution and the early days of the republic), has done so to preserve itself during the Civil War and Reconstruction, and (in indirect ways), has done so to get through the Great Depression.
Considering how vital this capability was to the Corporation’s very survival on these occasions, the student finds himself wondering about what went on behind closed doors in 1913 when that critical capability was simply given away to outside parties. That surely is what happened, he can see, as the coterie of private banks to come under the Federal Reserve umbrella was given a no-cost license to create money backed by the USA Corporation through its anti-counterfeiting enforcement and through maintaining the court system which enforces “legal tender” status.
What the USA Corporation did wind up with and what the Strategic Plan must work with, today, is a system that is quite effective in expanding credit and the money supply when times are good – but not so when times are bad, worsening recessions. To apply his free-market thinking, the student reasons that the economy would do better if the public had alternative borrowing sources like the public banks now being so much talked about, and/or if the private banks were required to lend up to some minimum percentage of their capacity and/or invest to a minimum percentage of their assets in the real economy during recessions rather than just collecting interest on excess reserve deposits and speculating in the shadow banking system which we are also hearing so much about. Also, if we are concerned about tempering recessions, then not all money creation should be done then by private banks in conjunction with lending, as lending activity is so curtailed during recessions. This would be an argument for a certain amount of the old government-issued money. When your case study organization’s major revenues are from taxes and fees, you have to think hard about keeping the economy healthy, reasons our student, because you can’t increase tax rates and fee schedules freely without harming the economy and you can’t just go further and further into debt.
Our student observes that the current financial system works quite imperfectly for the party whose interests he is assigned to analyze, the USA Corporation. Having given away the goose that lays the golden eggs in terms of money creation, and having no access to even one of those golden eggs, ever, the USA Corporation is saddled with constant debt build-up in good times as well as bad.
Pulling together his analysis of the Corporation’s finances, our student recognizes that the relationship of the USA Corporation and its Federal Reserve System affiliate – important in so many ways to the Corporation’s finances – is a symbiotic relationship. The entities critically affect each other. Moreover, on the Federal Reserve side, there are loosely-bound sub-affiliates under separate ownership (the private bank members). The interests of those sub-entities – the ones that actually make the lending / money creating decisions the governing board tries sometimes in vain to influence, are neither necessarily the same as nor or at odds with those of the USA Corporation. They’re just different entities with different ownerships to which they must be accountable. At times the Federal Reserve has floated government debt, and at times the USA Corporation has bailed out the banking system.
A hallmark of good business planning in such a situation, the student recalls his professor saying, is not precise forecasting of all the possible scenarios, which is just about impossible to do. It is, rather, sound pragmatic basics. Each of the parties to a symbiotic relationship must be able to “stand on its own two feet”, so one will not destabilize the other. How can this principle be worked into the strategic plan, the student wonders. He realizes that, as a first step, each of the affiliated parties must be allowed to develop a Balance Sheet that meets its needs and puts it in a stable position.
Since the Federal Reserve is the more set-upon party in terms of pressures by the other, and the one actually required to have prescribed assets as reserves, he gives thought to its charter. Perhaps it will clarify what is essential and what is vestigial. The charter shows it was set up by the USA Corporation with a back-out provision. At the time, the US Dollar was considered to be backed by redemption guarantees constituting obligations of the USA Corporation. So the 1913 charter provided that if the USA Corporation took over its affiliate it would acquire its “required reserves” to compensate for the obligations the USA Corporation would be taking on.
That rationale became muddied as the basis for the value of the dollar became not guarantees of redemption but rather the power of the court system to enforce what had now become pure fiat money – “Legal tender for all debts, public and private.” Meanwhile, the USA Corporation continued to directly issue its own variant of the US Dollar, United States Notes. The two currency versions were not variants as far as recipients were concerned because of convertibility, equal acceptance and equal value. They were variants on account of being issued according to two different issuing authorities. United States Notes were issued by the Treasury (until 1971); Federal Reserve Notes were issued by the Federal Reserve Bank.
At this point, the real need for the reserves of the Federal Reserve System is as a safeguard for the financial system in the event of a financial crisis. A fitting strategic plan must keep that goal in view, the student realizes.
In analyzing what each of the symbiotic partners needs in terms of financial stability, our student decides that the Bank’s needs are the simpler to nail down. He can see that the Federal Reserve has stipulated assets and an established regimen for acquiring them. But to an increasing extent – as the financial condition of the USA Corporation has become more tenuous – they consist of debt paper of the USA Corporation. In a pinch, the Federal Reserve affiliate could sell that debt, but then it would be reducing its reserves – eating its cake – during a downturn when it also needs to have its cake, its reserves. In that same “pinch” (or at any other time, these days), the USA Corporation would have to fund deficits by selling Treasury bonds – going into competition, in the bond market, with its Federal Reserve affiliate. It has become clear that the USA Corporation cannot actually pay off its debt held by the Federal Reserve affiliate, but only re-cycle it, with an exposure to interest rate risk and to a debt compounding effect. These considerations call into question excessive reliance on USA Corporation debt paper by the banking system, for its own “rainy day” purposes.
So, which party really has a sufficient store of income-producing and readily-saleable assets? One might think it is the banking system, but reading up on the subject reveals there have been steps in many countries, including our own, toward “bail-in” provisions based on the realization that during the next crisis financial weaknesses and political realities may prohibit governments abroad and the USA Corporation from stepping in with a bail–out’s. Through “bail-in” provisions as used in Greece and now anticipated in other countries, a bank can draw on the funds of its depositors to bail itself out. In the US, those depositors happen to be the stockholders of the USA Corporation, and as they are affected so is the economy affected, with attendant threats to tax and fee income of the USA Corporation. The “bail-in” strategy also poses risks to the banks themselves, as if the free market works at all, depositors will find safer places to put their money than in US banks.
As for the USA Corporation, its current reliance on using ever-increasing debt for the need to roll over compounding debt makes the whole system ultimately dependent on inflation and prone to crowding out of investments in the real economy. These factors wreck havoc on the Balance Sheet of the USA Corporation, and persistently weaken its Income and Expense projections. Clearly the professor will look for a plan designed to create movement in the direction of a more sound financial foundation.
The loss of the ability to create some money for itself stands out as an absolutely critical issue in examining the Income and Expense Statements of the USA Corporation. Clearly the required strategic plan must address the year-after-year hemorrhaging of red ink as priority #1. Returning to the
provisions of the USA Corporation’s charter (the Constitution), and re-instating the power of the USA Corporation to issue its own money – goes directly to the heart of the matter of persistent operating losses. In identifying such a curative step, our student will demonstrate to the professor his efficiency in problem-solving by identifying first the obvious and low-hanging fruit. This good judgment would not be evidenced if he were to jump right into proposing operating cost cuts that will have pros and cons.
Since the USA Corporation and the Federal Reserve System share the need to build massively stable foundations while actively furthering the public good – making them a unique pair among prospective co-investors – classic business school thinking prompts the idea that a good strategy would be for them to accumulate assets through creating value synergistically. They are well-paired investors. The Federal Reserve must acquire and maintain an asset base anyway, but one which meets conservative fiduciary standards. The USA Corporation has an ace-up-its-sleeve in being the only Constitutionally designated party able to create an economically appropriate amount of money at no cost. It also has capabilities in things like coordinating research and development efforts and cooperative efforts involving foreign governments. These complementary investor profiles could be put to good use in investing in industries providing a near-term consistent income stream enhanced by technological development upsides.
There would be many ways to share the pie. One would be on the model of a general partner with a larger ultimate upside but a smaller near-term gain, and a limited partner with a more immediate and defined gain, but less of the upside. The USA Corporation, with potential no-cost money to invest, might play the role of the general partner and the Federal Reserve, with banking fiduciary responsibilities, might play the role of the limited partner. Or the USA Corporation might be the early in / early out partner, funding R&D to a point of viability and then recouping its cost by selling out to the Federal Reserve, which would provide funds to capitalize on the idea. In the latter case, the USA Corporation could perhaps keep an interest in the asset which it could retain or sell. Or perhaps both partners could share on the same terms on a mixed portfolio of assets and projects, some income-generating and some under development for a future upside – much like stock owners investing in a typical company. On that model, shares could be bought and sold as suits the interests of either major initiator or other investors, institutional or individual. This would follow the model of the first and second Bank of the United States.
In what sorts of industries would such an active role of government be justified? They would be industries largely yet to be created, or those in which there is an overriding public interest, or those that would benefit from the involvement of the government with all its powers, or those in which there is a need to overcome a hurdle which it is seen that conventional enterprises, investments and financing sources are not working well to overcome.
As an example, our student selects electrical power plants. He notes that electric power plants generate fairly consistent revenues during all economic cycles, and can be sold even in the trough of a recession if need be. There’s an asset in the real economy – not just unnecessary government debt paper, one that can function well as an asset in good times and bad, one that will allow an accumulation of assets without meaning that the nation is going bankrupt (i.e., a massive build-up of Treasury bonds), one that can attract third-party institutional and individual investors. We need new power plants using today’s technologies and we need to develop new types of power plants using tomorrow’s technologies. In addition to sound investment economics – an investment with good cash flow and an upside – there is a psychology here. Was it not easy to sell war bonds during World War II, drawing on a similar sense of national purpose?
Researching this industry, our student finds that under former CEO Dwight D. Eisenhower, the USA Corporation was well on its way to introducing, for commercial use, the Thorium reactor. The
Corporation had a strategic goal known as its “Atoms for Peace” project by which all nations could prosper from the use of safe nuclear energy without the threats posed by the creation of enriched uranium. The program was intended to reduce strategic threats on several counts from around the
world and to develop better customers for the USA Corporation as other economies developed.
However, it was abandoned as the Cold War deepened and the USA Corporation sought the creation of large quantities of enriched uranium for a growing weapons stockpile. So the model that became the standard – the one which we now want so many nations not to have – was the uranium fission reactor.
But after arms control treaties reducing the needs for a massive US nuclear arsenal, concern having now shifted to nuclear proliferation without US / Allies involvement, growing tensions over fossil fuel depletion, and climate change…isn’t it time to re-visit the possibility of having something to offer developing countries other than military threats and sanctions if they seek to develop nuclear energy? Successful research into Thorium reactors and fusion reactors (now surging forward in Europe) could benefit investors, the USA Corporation’s future financial position and other strategic goals like abundant energy, economic development, peace and reduction of the climate change threat.
Follow-on ventures could include nuclear “package plants”, nuclear water desalinization, nuclear-powered commercial ships and nuclear-powered air and space vehicles. That’s enough technological development activity to pump major new life back into the USA Corporation’s economy. Other strategic avenues could be taken in areas as diverse as water distribution, health care delivery, transformative redevelopment finance, etc.
How good of an idea is the power plant one? The point is, it isn’t about any one example that might be picked. Our MBA student knows the purpose of his academic exercise is not to answer all technical and market questions about a particular product or technology. There will be legions of experts at the service of the real company he will work for, if its projects will include ones as ambitious as the power plant undertaking. His task, for now, is to illustrate a strategic mode of thought. In the case of the USA Corporation, he can list 10 or 20 or 30 ideas for possible new ventures – as many as he has time to do research on – which would meet multiple strategic objectives while providing real revenues from real assets timed appropriately to investor expectations. Gather all that the economy has to offer in terms of entrepreneurial initiatives in, say, a dozen basic areas of national concern and there will be more than enough choices to prove attractive for, say, 20% of the Fed’s reserve requirements – much more attractive than a lot of government debt paper the Fed gets little out of. And let the Fed keep the profits and multiply its assets for a rainy day fund!
Our MBA student is beginning to feel he’s going to be on top of the situation in proposing his strategic plan. He has:
Examined the USA Corporation’s Balance Sheet, identifying its weakness in income-producing and liquid assets identified the symbiotic relationship between the USA Corporation, its Federal Reserve affiliate and its individual bank affiliates, identifying ways in which they have both at times benefitted and at times burdened each other, and figured out a strategy by which they can both develop more meaningful and stabilizing assets over time identified a major expense blow-out, the funding of deficits 100% by debt, and how to use the unique and distinctive advantage of the USA Corporation to create its own money limited only by the mandate to control inflation so that the pattern of constantly-increasing debt can be arrested arrived at a criterion by which investment decisions should be made: They should be profitable within a reasonable time frame, financially durable as accumulating assets and productive in improving the national economy so as to improve operating results.
As students sometimes do, our MBA candidate finds himself sweating over putting all this in proper and finished form by the deadline. So when he comes across a document in the USA Corporation’s
offices to which he has been granted access, he is quite taken aback to see the title: The Official Strategic Plan of the USA Corporation. “Oh my God”, he thinks. Here it all is, laid out in splendid detail, and his professor doesn’t even know about it. “Could I draw upon some of it? Could I use . . . all of it?” No sooner does that troublesome thought cross his mind than does another: “But what grade would I get?”
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The writer greatly appreciates the education he gained in the MBA and Real Estate and Urban Development programs of American University in Washington, DC. He has served as the CEO of a large real estate development company, which required constant attention to the financial position of the firm as it undertook new projects. In that connection, he invited a Harvard Business School team case study of his own firm as part of his efforts to “recession proof” the firm. Based on what has been seen in the real estate industry and in the plight of communities badly affected by recessions, we believe more can be done and should be done toward “recession-proofing” the national economy.
Many times we have encountered reluctance to accept our invitation to comment on the subject of our current series because of the presupposition that the subject area is exclusively the domain of Ph.D. macro-economists. We have great respect for those of that background and are working closely with several of them. However, the subjects we have touched on here also involve economic history, money and banking, government and politics, investment market dynamics and…as we have attempted to illustrate here – business strategy. With the belief that the introduction of new disciplines can mean valuable new insights, we continue to solicit publishable comments of two or more sentences from across a range of economically-aware disciplines, political viewpoints and institutional types in response to the question: Under any set of limitations or conditions, should we consider the re-introduction of no-debt government-issued money to ease our debt-and-austerity crisis?
