Competitiveness of a country can be measured by the net exports and foreign exchange reserves.  To achieve a goal of prosperity amid social stability, the country must enhance its competitiveness while averting a potential depression. Governments have used two policy instruments - money injection and interest rate - to accomplish this goal. But such instruments have not helped USA, judging by the measures of competitiveness.

The U.S. economy is beset with continual liquidity-credit crises and potential depression, which are being preempted by new money injection and interest rate reduction. These policy instruments have basically served as antipyretics to contain a relapsing fever without really treating the ailment (source of depression and un-competitiveness) that underlies the fever.  Continual application of antipyretics has debilitated the economic patient, the U.S. economy.   

The system of governance needs to be more efficient in letting money at reduced interest rate flow to the effective producers and exporters of globally competitive goods, services, ideas and creativity.  The U.S. economy will exhibit higher inflation and face threats of depression if money continues to flow to the ineffective, those who are unable or unwilling to produce globally competitive goods, services, ideas and creativity.  How the money now flows to the ineffective is illustrated below:

1.     When regulated banks ail, the central bank injects new money to stem the systemic risk of banking panic.  But some banks reach the brink of failure primarily because of excessive executive pays in comparison to bank earnings.  By injecting new money, the central bank funds excessive pays of ineffective executives.

2.     Politicians continually create new money by borrowing for their pet schemes.  Most of this new money is almost freely passed on to their ineffective constituents.

3.     When governments increase borrowing to fund new tax cuts, the borrowed funds flow freely to taxpayers.  Those taxpayers, who merely hoard their tax savings as credits by lending back to government or other borrowers, are rendered ineffective.

4.     The current law allows creation of mutual fund companies with BOD members floating their private hedge funds to trade collusively with subordinate fund managers to reap mutual benefits at a cost to taxpayers-investors in those funds.  This law makes American talents ineffective.

5.     The current law permits hedge funds to borrow (with equity-to-debt ratio of 1:20) from federally regulated banks to take huge bets to deflate stock prices temporarily to cause panic for investors-taxpayers.  The law permits the Federal Reserve to pump new money to save the federally regulated banks which are construed to be too big to fail.  The law permits such banks to form firewalled subsidiaries to borrow massively from federally regulated banks to take bets designed to make taxpayers lose portfolio wealth and bear the brunt of higher prices due to federal monetary infusion.  Such laws make American talents ineffective.

6.     The education, health, defense and government sectors have effectively propped up the U.S. by inducing continual inflows of human and monetary capital.  They have effectively exported America’s security, education and healthcare. These sectors may be amassing hoards of credits less effectively now. They may have reached points of diminishing returns.  They need reform. 

A more effective system of governance will be based on reforms of laws that will permit the flow of money at lower rates to the effective.  As money continues to flow disproportionately at lower rates to the ineffective, the trade imbalance grows, currency depreciates, inflation soars, standard of living falls, social instability surfaces and depression looms.  The only solution is to let money flow to the effective at drastically lower interest rate. 

Lower interest rates do not necessarily lead to higher inflation as the case of Japan should illustrate amply.  The abundance of money with the ineffective is the source of inflation.  This money produces little, but takes huge bets to raise the prices of consumable goods.  Such bets would be limited in a more effective system of governance that makes money flow to the effective, as in China. 

The ineffective in the U.S. could take huge highly leveraged bets because their collaterals of mortgage backed securities were valued higher due to higher interest rates.  But the Federal Reserve has been raising interest rates simply in response to rising commodity prices, quite like administering antipyretics to contain fever without diagnosing and treating the underlying ailments.  The households could no longer support the rising interest rates, as indicated by unprecedented housing foreclosures. 

The Federal Reserve should not be confused about the downward sloping yield curve and rising commodity prices, because the abundance of money with the ineffective and the current system of governance are the reasons for the “conundrums.”  The current state of U.S. households (in terms of net assets) is more depressing than the Japanese to support any rate of interest more than 0.5%. 

Only the ineffective will desire to raise the interest rate and to keep the current system of governance unchanged.  They will even lobby through generous political contributions and induce talking heads through largesse to spread the myth about the rectitude of their paradigm.  It is their dharma to hoard credits ineffectively.

The dharma of a government is to enhance competitiveness of a country, avert potential depressions and achieve prosperity amid stability.  This can be done only by reforming the current system of governance and by letting money flow at drastically lower interest rates to the effective: real producers of globally competitive goods, services, ideas and creativity.[†]