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Charlie Munger, Warren Buffett’s longtime business partner in Berkshire Hathaway, warns in a new column that the U.S. economic empire is crumbling before our eyes, thanks to federal debt and poor planning.
In an article penned for Slate.com, Munger uses the form of a parable to explain how Wall Street’s love affair with gambling has destroyed America’s Main Street.
The article leads with this headline: “Basically, It’s Over.”
Quote from : Wikipedia : Project for the New American Century
The Project for the New American Century (PNAC) was an American think tank based in Washington, D.C. that lasted from early 1997 to 2006.
It was co-founded as a non-profit educational organization by neoconservatives William Kristol and Robert Kagan.
The PNAC's stated goal was "to promote American global leadership."
Fundamental to the PNAC were the view that "American leadership is both good for America and good for the world" and support for "a Reaganite policy of military strength and moral clarity."
The PNAC exerted influence on high-level U.S. government officials in the administration of U.S. President George W. Bush and affected the Bush Administration's development of military and foreign policies, especially involving national security and the Iraq War.
Quote from : Wikipedia : Project for the New American Century : Statement of Principles
PNAC's first public act was releasing a "Statement of Principles" on June 3, 1997, which was signed by both its members and a variety of other notable conservative politicians and journalists (see Signatories to Statement of Principles).
The statement began by framing a series of questions, which the rest of the document proposes to answer:
As the 20th century draws to a close, the United States stands as the world's pre-eminent power.
Having led the West to victory in the Cold War, America faces an opportunity and a challenge:
Does the United States have the vision to build upon the achievements of past decades?
Does the United States have the resolve to shape a new century favorable to American principles and interests?
In response to these questions, the PNAC states its aim to "remind America" of "lessons" learned from American history, drawing the following "four consequences" for America in 1997:
* we need to increase defense spending significantly if we are to carry out our global responsibilities today and modernize our armed forces for the future;
* we need to strengthen our ties to democratic allies and to challenge regimes hostile to our interests and values;
* we need to promote the cause of political and economic freedom abroad;
[and]
* we need to accept responsibility for America's unique role in preserving and extending an international order friendly to our security, our prosperity, and our principles.
While "Such a Reaganite policy of military strength and moral clarity may not be fashionable today," the "Statement of Principles" concludes, "it is necessary if the United States is to build on the successes of this past century and to ensure our security and our greatness in the next."
Among the suggestions of the Good Father were the following. First, he suggested that Basicland change its laws. It should strongly discourage casino gambling, partly through a complete ban on the trading in financial derivatives, and it should encourage former casino employees—and former casino patrons—to produce and sell items that foreigners were willing to buy. Second, as this change was sure to be painful, he suggested that Basicland's citizens cheerfully embrace their fate. After all, he observed, a man diagnosed with lung cancer is willing to quit smoking and undergo surgery because it is likely to prolong his life.
The views of the Good Father drew some approval, mostly from people who admired the fiscal virtue of the Romans during the Punic Wars. But others, including many of Basicland's prominent economists, had strong objections. These economists had intense faith that any outcome at all in a free market—even wild growth in casino gambling—is constructive. Indeed, these economists were so committed to their basic faith that they looked forward to the day when Basicland would expand real securities trading, as a percentage of securities outstanding, by a factor of 100, so that it could match the speculation level present in the United States just before onslaught of the Great Recession that began in 2008.
The strong faith of these Basicland economists in the beneficence of hypergambling in both securities and financial derivatives stemmed from their utter rejection of the ideas of the great and long-dead economist who had known the most about hyperspeculation, John Maynard Keynes. Keynes had famously said, "When the capital development of a country is the byproduct of the operations of a casino, the job is likely to be ill done." It was easy for these economists to dismiss such a sentence because securities had been so long associated with respectable wealth, and financial derivatives seemed so similar to securities.
Warren Buffet on Derivatives
Following are edited excerpts from the Berkshire Hathaway annual report for 2002.
I view derivatives as time bombs, both for the parties that deal in them and the economic system.
Basically these instruments call for money to change hands at some future date, with the amount to be
determined by one or more reference items, such as interest rates, stock prices, or currency values. For
example, if you are either long or short an S&P 500 futures contract, you are a party to a very simple
derivatives transaction, with your gain or loss derived from movements in the index. Derivatives contracts
are of varying duration, running sometimes to 20 or more years, and their value is often tied to several
variables.
Unless derivatives contracts are collateralized or guaranteed, their ultimate value also depends on the
creditworthiness of the counter-parties to them. But before a contract is settled, the counter-parties record
profits and losses – often huge in amount – in their current earnings statements without so much as a
penny changing hands. Reported earnings on derivatives are often wildly overstated. That’s because
today’s earnings are in a significant way based on estimates whose inaccuracy may not be exposed for
many years.