Tuesday, May 19, 2015

Fair Trade Trumps Free Trade

Barack Obama’s ambitions to pass sweeping new free trade agreements with Asia and Europe are getting bogged down. It seems Democrats are on a collision course with the White House as the party’s newly emboldened liberal wing digs in its heels over global free trade deals it claims will drag down US wages and working conditions. What we are looking at are two separate agreements, the Trans-Pacific Partnership (TPP) and the Transatlantic Trade and Investment Partnership (TTIP). As we view the global economy we must ponder how much of this is about individual governments giving up control and becoming subservient to corporate “efficiency” and the desire of companies to both develop and control future rules. Many people see the global economy as currently being run as an ill-regulated business model tilted to favor big business. The benefit to the public is again the promise it will create new jobs, we should expect that will turn out to be largely a myth.

The more controversial of the two agreements is the TPP which excludes China and sets up a robust trade agreement between North America and some of China's nearest neighbors. A big issue is the exact language and details of the agreement are being kept secret by the Obama administration. Summaries indicate the agreement will affect tariffs, workers' wages, intellectual property, and environmental regulations in the US and 11 Asia-Pacific countries. Some people view the Trans-Pacific Partnership (TPP), currently being pushed by the Obama administration and its corporate allies as a blatant attack on labor, farmers, food safety, public health and even national sovereignty. Part of the problem is the details of the deal have been kept largely secret and other than what’s been leaked we have no access to its contents. Even members of Congress don’t know much with only, “cleared advisers,” mostly corporate lawyers, having full access because the TPP is way too important to its sponsors to allow little details like congressional or public input to get in its way.

Making all this more controversial is the beliefs held by many Americans that bad trade deals with low wage countries have contributed to our current economic woes. When Massachusetts Senator Elizabeth Warren, came out strongly against these agreements Obama said the Massachusetts senator was “absolutely wrong” and accused her of speculating about the contents of the emerging 12-nation trade deal for personal gain. Many people see Obama's criticism of Elizabeth Warren as not only disrespectful but as disingenuous. His statement did little to quell the controversy, instead it seemed to throw fuel on the fire. It should be pointed out that just because the President says someone is wrong on an issue does not make it true. Former Labor Secretary Robert Reich called the TPP “Nafta on steroids”  Senator Warren and those concerned that a trade agreement with low wage nations will not be a great job creator for America have history on their side.

Economist Dean Baker said, “This really is a deal that’s being negotiated by corporations for corporations, and any benefit it provides to the bulk of the population of this country will be purely incidental.” It is difficult to say why Obama sees this as a big plus, but it’s worth noting that in 2008, as a presidential candidate, he said, “I voted against Cafta, never supported Nafta, and will not support Nafta-style trade agreements in the future.” Historically, trade laws are geared to enrich the “mother” country and was often used to build a nation. Following World War II free trade arguably benefited the economies of the countries involved. But the new laws, starting with 1994’s North American Free Trade Agreement (Nafta), recognized that capital is now mobile, it moves about the world and owes allegiance to shareholders rather than loyalty to any one country.

Those supporting the TPP, claim it will be a boon for America when it reduces tariff barriers to vast Asian markets and strengthens protection for intellectual property a strong plus for America.  Moreover, the overall gain is more than just economics. In our competition with China for influence in the region, they reason it would anchor our relations with Pacific Rim nations keeping them out of China's orbit. Even if a Republican controlled Senate gives the administration the authority that it wants to negotiate trade agreements other countries may not fall in line. Some players may not feel they gain by changing the status quo.  Both Japanese and EU trade negotiators have their own issues and are facing their own domestic constraints. Japan has yet to fully embraced TPP and Abe is unlikely to make the politically unpopular decision do so any time soon. European Commission President Jean-Claude Juncker has split negotiating authority between his Trade Commissioner and Commission Vice President in an effort to placate Europeans worried about the proposed investor-state dispute settlement in TTIP.

With the old saying that "all politics are local" in mind politicians remain mixed on these plans. The 12-nation Trans-Pacific Partnership, would have a big effect on Montana which exports most of its grain to Asian Pacific markets. In Montana agriculture is the No. 1 industry. It’s a $5 billion a year industry in Montana and 80 percent of their wheat crop is exported, Montana farmers and ranchers know that 96 percent of the consumers in the world are located outside the United States. The TTIP between the European Union and the United States includes markets to which Montana products are rarely exported, but the TPP is very important. Steve Daines Republican Senator from Montana last month told The Billings Gazette he would have to consult with Montana “stakeholders” before deciding on how to vote on trade promotion authority. Now Daines says “Montana farmers, Montana ranchers, Montana manufacturers want us to get this done to create jobs and opportunities for our future in Montana.”

If trade promotion authority is granted it would be months before Congress actually votes on these agreements, before that happens the document must be made available to the public and Daines said he will vote against the final TPP if it is bad for Montana. Daines said he knows from personal experience the challenges of doing business in the Asian Pacific and believes the Trans-Pacific Partnership will help. Daines oversaw business in Australia and Japan for Bozeman software company Right Now Technologies. Both of those countries are members of the Trans-Pacific Partnership. Having a trade agreement that protects intellectual property is crucial to the tech economy. “Intellectual property is something we are always having to fight for because it’s where we lead the world, especially when we go forward in the high-tech age," he said. "Really, we’re shipping electrons, and that’s why it becomes so important. We must protect intellectual property.” Several manufacturers endorse Daines’ decision to back TPP.

This is a bipartisan effort if ever there was one and last week, a bill was introduced that would give the president “fast-track authority” to negotiate trade agreements. If that passes, Congress will be able to vote only up or down on the final negotiated agreement, they would not be able to amend it. As it is, failure to secure so-called “fast track” negotiating authority from Congress could stop the current trade negotiations dead in its tracks at the same time marking the high-water mark in the decades of steady trade liberalization that has fueled globalization. Many critics exist because these trade deals over the years have been blamed for environmental problems and exacerbating economic inequality within many developed economies as manufacturing jobs have been outsourced to low wage countries. Internet activists also claim the deal would curb freedom of speech, other detractors even charge it would enshrine currency manipulation.

It is only prudent that we question the merit of these agreements. At least NAFTA intended to bring up our neighborhood, it was thought that when Mexico and Canada benefited America would gain some degree of safer borders and a mutual interest would be served. Nafta is the paradigm of what are most accurately called deregulation deals. It promised better jobs in both the United States and Mexico. Instead, as well-paid workers in the United States were losing jobs to low paid workers in Mexico, badly paid Mexican workers were losing jobs to those in China who would work for even less. This in turn put more pressure on workers in the United States. Yes, free trade is often credited for creating more jobs than it does and the TPP in some ways is more objectionable than NAFTA. Obama told the Wall Street Journal "If we don't write the rules, China will write the rules" implying America will be left dangling in the wind with American businesses and American agriculture suffering and a loss of US jobs.

While free trade is important, fair trade is far more so and should trump it as an issue. Developing a long-term sustainable economic system that is balanced would contribute to both global cohesion and the world economy. It is logical that no country can endure a trade deficit year after year. Nationalistic exploitation of trade agreements has occurred throughout history and it is naive to think such schemes will suddenly end. The changes brought about by the development of the global economy have been hard for many. Promises of wide spread prosperity has fallen short and we have seen the benefits flow to only a few. Considering this, it is little wonder trade has become such a heated issue. I see no quick fix nor can I be optimistic the proposed agreements will bring about anything other than a system for long drawn out arbitration that will most likely dish out solutions that will neither thrill or satisfy.

Friday, May 15, 2015

Public Transportation And Empty Buses

The Tax Payer Is Being Taken For A Ride
 In the city where I live the bus system that carries us about goes by the name of Citilink. The Fort Wayne Public Transportation Corporation that controls this system has a rather slick detailed web site that gives a fair amount of information and some I hope you will find very interesting. If you do not think a taxpayer subsidized entity would be incredibly efficient in accomplishing its mission then you will not be disappointed. The whole point of the following article is to highlight how a quasi-government entity needs little accountability to be accepted into a community as a positive force. The article below is comprised of real numbers directly from the PTC annual report and these are numbers that are easy to get your head around.

Darkened Windows Mask Lack Of Riders
On the average day buses with darkened windows dart to and fro with the intent to provide safe, courteous, dependable public transportation, and at the most reasonable cost to our community. It is not uncommon to sometimes see as many as three or four buses in a small area. Citilink considers itself much more than a ride. In their words "more or less" its about getting us where we want to be on many levels. They see as their claim and goal to contribute to the community in many ways including, but not limited to revitalizing our neighborhoods, helping with developing the downtown area, and contributing to economic development.

PTC brags and carries on about how local dollars are leveraged to match federal and state resources that are invested in mobility for Fort Wayne residents.  Annually, over $3.5 million dollars from outside our community support Citilink services. In addition, millions of dollars in discretionary federal funds help pay for new buses and transit facilities.They say on their web site under the "about us" section listed as, board of directors and mission, that whether you ride it or not, public transportation benefits all of us. This point is driven home by a You Tube video. It is only when you look a little deeper into the annual report that shows the numbers behind this operation that reality begins to filter through.

Yes indeed, the picture painted by the numbers of the annual report is not pretty or impressive. With total expenses of $11,562,713 the revenue summary shows only $1,378,905  or about 12% comes from fare revenue. This means as shown the bulk of its operating money comes from the taxpayer and is listed as Local Assistance $5,515,212, State Assistance $1,971,789, Federal Assistance $2,141,288. When considering the city has a population of 256,496 people, this means assistance from each man, woman, and child represents $37.54. Again, it must be highlighted that when someone cannot or will not pay their portion the burden is transferred to those who will. Again, if you paid attention to the numbers most the money comes from close to home.

A glaring problem becomes apparent and clear in the report and that is these buses are not darting about full of paying riders or nonpaying riders receiving a free service, it is far worse than that. The numbers prove the buses are empty even after all the massive efforts to encourage ridership few people in the city have ridden a bus in decades. With a total vehicle operating expense of  $6.21 per mile operating expense per passenger trip comes in at $5.68. This becomes clear when they state the number of passengers per vehicle mile traveled as a mere 1.09 or in layman terms this means a Citilink bus on average carries only one passenger and its driver, if one bus has three passengers most likely two other have none. 

It should be noted that many of the buses act as traveling billboards and are covered in advertising as a way to garner a few pennies of additional revenue, The most common theme sports the strength of a certain bankruptcy law firm, the city recycling program, a positive message related to local government or another entity subsidized in some way by tax payer money. Colleges receiving state funding, local subsidized sport teams or their arenas, hospitals, and even the groups like Airport Authority tend to pony up money in this incestuous demonstration that they too care about the city.

Also, revealed on the web site is the ugly reality as to just how badly the PTC spends our money. For example I followed through to view one of the several recommended videos Citilink had produced and put on You Tube over three months ago. The 19 minute video prepared in Spanish told someone how to ride the bus, since being placed on You Tube it had been viewed only four times. This means I boosted its audience by 20% when I kicked it on. Sadly, the bulk of the other viewers were most likely the producer or some in house close associates of Citilink checking out their little gem before showering themselves with praise. It is clear this highly orchestrated production had to have cost thousands of dollars to produce. 

PTC through Citilink goes to great lengths to spread the myth they are helping to make the city "green" and is ecologically friendly, but this claim quickly goes out the highly tinted windows of the buses, I contend the windows have been darkened more to mask the lack of riders then for their comfort. The fleet of buses consumed 332,570 gallon of fuel and traveled 1,682,072 miles. This is a whopping 5 miles per gallon or 5.07 to be exact. If this is any indication of the state of mass public transportation across much of the nation it would seem the word mass should be dropped as a misnomer. When looking at all the numbers it seems some scheme to subsidize payments for private taxi service for those needing transportation might cost us far less. As far as claims that jobs would be lost a case can easily be made that more taxi drivers would be needed if we had less buses.

Sunday, May 3, 2015

GDP Number Is A Master Illusion

Its Magic Illusion 101
Years ago a Seinfeld episode was centered around the idea of producing a television show about nothing! Sadly, in many ways this is the direction America has moved towards when it comes to measuring our economic growth. We have allowed numbers that mean "nothing" to seep into how the gross domestic product (GDP) is calculated all in an effort to create the illusion of growth. In years past America far out produced the rest of the world and manufactured goods that it exported across the seas. Today much of our economy is dominated by the service sector, this means if you wash my windows, then I will mow your yard. The recent first quarter GDP number of 0.2% could be no more than a rounding error and makes the hyped pre-election 2014 third quarter 5% growth a distant memory.

As time goes by small events often seem to drift into the distance or be forgotten, it could be I'm getting a little soft in the head or this is how I explain having to do research when I write. The Bureau of Economic Analysis (BEA) has made a significant change on how they calculate the GDP.  It slid by unnoticed by many people but they changed how they classified and recorded expenditures for R&D and for entertainment, literary, and artistic originals. An announcement of this change was made by the BEA during February of 2013, this resulted in an increase in the GDP. This kind of "bump" means that a gain of 2% today is in reality less than a gain of 2% years ago. This means we are comparing apples to oranges.

Gross Domestic Product is defined as the total market value of all final goods and services produced in a country in a given year, equal to total consumer, investment and government spending, plus the value of exports, minus the value of imports.Within that definition it appears those in power have discovered some wiggle room and even before that a debate exist as to what it really tells us. When we delve into all of this it is easy to see this is not simple at all and that the GDP can be a master illusion when we look at how it filters down to both society and the Main Street economy. The first comprehensive set of measures of national income was developed by economist Simon Kuznets who in 1934 told the US Congress the formula was problematic, he said. 

"The valuable capacity of the human mind to simplify a complex situation in a compact characterization becomes dangerous when not controlled in terms of definitely stated criteria. With quantitative measurements especially, the definiteness of the result suggests, often misleadingly, a precision and simplicity in the outlines of the object measured. Measurements of national income are subject to this type of illusion and resulting abuse, especially since they deal with matters that are the center of conflict of opposing social groups where the effectiveness of an argument is contingent upon oversimplification."

In 1962 Kuznets again emphasized that we must keep in mind the difference between quantity and the quality of growth. He made clear a distinction exist between cost and returns, and between the long and the short run. Kuznets went further to specify we needed goals concerning both growth "of what, and for what." Other economist have agreed that GDP is an empty abstraction with a very weak link to the real economy. The framework fails to reflect the difference between real wealth expansion or capital consumption. Kuznets used the example of the government building a pyramid that added nothing to the well-being of individuals, it would be viewed as economic growth, but in reality divert funding away from real wealth generating activities harms the generation of real wealth.

What is not stated can often be far more important than what is. The number we are spoon fed and await with such glee has little to do with real growth but most likely mirrors or is merely a reflection of monetary pumping. The GDP number fails to highlight a slew of important factors that feed directly into our standard of living and the health of our economy, such as;

    * How wealth is distributed and inequality
    * Taxation and how it effects both the economy and society
    * Non- market transactions like volunteer and off book work
    *  Underground economy, illegal trade and many cash transactions.
    * Asset value, meaning GDP ignores changes in what things are worth
    * The non-monetary part of the economy, bartering of goods and services
    * Distinguishing between production that is subsidized and that which is not
    * Quality improvements and new products
    * What is being produced, bombs or butter and a better educated populace
    * The sustainability of growth or misallocation of either capital or resources
    * Cross border parity and changes in currency value
    * External factors such as negative environmental effects or the health of the people

Some countries have even gone as far as to including things like prostitution and other illegal activities in a way to boost GDP and in effect lower their ratio of GDP to government debt. In 2013 in advice to their government the UK's Natural Capital Committee highlighted some of the failures of GDP when they pointed out its focus on flows can allow an economy to run down its assets while recording high levels of GDP growth until a point is reached where this begins to impact future growth. They went on to make it clear the recorded GDP growth rate is prone to overstate the sustainable growth rate. This number as with most numbers once put out there is subject to full blown manipulation and spin. Bottom-line in the words of its creator, "The GDP framework is more or less an empty abstraction devoid of any link to the real world."

Saturday, May 2, 2015

The Great "Time-lag" Effect!

Events Play Out At Different Speeds
Time-lag is defined as the period of time between to closely related events. Not everything happens at the speed of light, often a time-lag exist such as the gap between seeing and hearing the lightning bolt. Some of what we see occurring in the financial markets and the economy should be viewed with this in mind. Only during a panic does it become obvious just how precarious a position we have allowed to develop. Recently, I stumbled across a line describing how the markets have lost their ability to discover fair market value and no longer reflect honest or real value. The lack of true pricing should raise red flags and be of great concern for all of us.

The great "time-lag" effect may soon exert itself in a most wicked way over our economy. Recent data has been underwhelming and once again attempts to spin these numbers in a way that emboldens those trying to paint a picture of a growing economy are beginning to fail. Momentum appears to have turned downward and the time looms ever closer when being able to rally the market on bad news could become a distant memory. At some point bad news will simply become bad news and seen as a sign that the economy has problems that more quantitative easing can not address. At some point it will become apparent that we have only delayed addressing the root cause of what ails both our economy and many of those across the world, that is to much debt that will or can never be repaid.

We should remember two issues are in play that have yet to fully impact both our day to day economy and markets these are the strong dollar and falling oil prices. While these hit months ago it takes time for the effects of such powerful forces to totally work their way through the economy.  The recent drop in drilling is only now beginning to take hold and leave its mark. If oil prices remain in a slump as expected it will become obvious over the next few months that many people overlooked just how important a driver the energy sector has been to the U.S. economy during the last three years. This sector has been responsible for much of our job and growth and investment spending since the onset of the great recession.

As for the strong dollar, as I have written earlier, unstable currency markets can be a precursor to massive shifts in value and a sudden drop in confidence. It is logical to think that in such a situation insiders would be the big winners. The main reason the world has chosen a "reserve currency" is to have some benchmark to peg currency values to and lessen the impulse of countries that have accumulated massive debts to attempt to address their problems by just printing more money, this results in devaluing their currencies but often fails to face the root cause of their problem. This is especially true in our modern world where the carry trade is a major force and money flows across borders at the blink of an eye.

History shows wealth will  flee both from a country when its currency drops in value and temporary flow to a safe haven, that is happening today. The bottom-line is that while many people go about their daily lives giving little thought to currency valuations they leave themselves open to the whims of those that control, manipulate and play in this important area of the global economy. When your currency moves ten percentage points higher or lower against a foreign currency it can have a great deal of impact on how your net worth stacks up against someone across the world and the ability of your country to be competitive in producing and selling products.

The fact is with little in the way of real demand there is not much reason to invest in plants or equipment unless it is to lower cost or with the goal of reducing labor. Over the years artificially low interest rates and easy money have caused a massive rise in the misallocation of capital. Market seem hell bent on imitating a crazy dog chasing its own tail. The huge number of stock buybacks is a direct result in a lack of compelling investment opportunities. An example of such an over-saturated market is the recent announcement that McDonalds will be closing or reducing the number of stores it has in America. Central banks have been pushing on a string with their flawed policies and allowed a false economy to develop by propping up those who should have been allowed to fail.

What is being hailed as our economic future holds a troubling aspect, as more large companies crowd into existing markets they will only dilute profits and fracture those markets further. A recent example is Google's unveiling of its long-awaited phone service which will put the search giant in competition with Verizon, AT&T and other wireless service providers. This should be viewed as bringing lower cost to the consumer but will cripple earnings of those already in the business. It is difficult to argue the current giant distributors of wireless phone will not be affected or feel the pain. Small business has been under such assault for years and as the trend continues to play out it will become even more apparent the gross domestic product is moving sideways rather than upward even as government and private debt explodes.

Sunday, April 26, 2015

Pensions And Promises Will Be Broken

People Will be Stripped Of Their Pensions
Pensions and promises will be broken so get ready for more pain. This should not come as news or a shock because the subject tends to surface every now and then in the news. Back in the 2012 Presidential campaign both Barack Obama and Mitt Romney raised concerns about underfunded pension programs and how poor management has led many pension systems to seek bailouts. The 25 largest U.S. public pensions face about $2 trillion in unfunded liabilities, showing that investment returns can’t keep up with ballooning obligations, according to Moody’s Investors Service.  Even worse is the view from State Budget Solutions a nonprofit group, according to their report State pension funds are underfunded by $4.1 trillion. 

Pensions Are A World Wide Problem
The blame for the underfunding of public employee retirement systems often lies with legislatures, which have raised pension benefits to unaffordable levels while failing to contribute enough to properly fund obligations. If economic growth slows as the world matures we should also expect a new normal in the way of lower returns on investment. The super low bond rates of today and recent years as well as zero interest rates do not bode well for pension funds or those saving for their later years. Many planners and funds have not accounted for this. Moderate portfolios these days still are hoping for an annual gain of 5 to 7 percent.

By assuming they will receive a high rate of return those managing pensions are able to make plans appear better funded than they are. The reality that they will consistently earn such a high a return on a conservatively managed portfolio, as anticipated by its fund managers is both optimistic and unlikely. Lately the markets have been hooked on monetary morphine and ignoring fundamentals. Many of the financial structures we have built are on flimsy foundations or unsustainable. If the wheels come off the financial system pension plans will take a direct hit. To those who base their future on money coming from these monthly payouts I urge caution, it is not unreasonable to suggest they be prepared to take a "haircut" or worse. Sadly, this goes beyond pensions and will probably include a slew of other promises have been piled on to give the impression our golden years will be more enjoyable. 

The 25 biggest systems by assets averaged a 7.45 percent return from 2004 to 2013, close to the expected 7.65 percent rate, Moody’s said in a report released recently. The bad news from the New York-based credit rater is that pension liabilities have tripled in the eight years through 2012. Despite the robust investment returns since 2004, growth in unfunded pension liabilities has outstripped returns. Inadequate pension contributions, as well as the sheer growth of pension liabilities as benefit accruals accelerate, salary increases and additional years of service are increasing the gap. A report from State budget Solutions found state pensions funded at 39 percent while they claimed a 73 percent rate. States with the lowest funded ratio include, Illinois, Connecticut, Kentucky, Kansas, Mississippi, New Hampshire and Alaska. In addition to low funded ratios, states like Alaska, Ohio and Illinois also have some of the largest unfunded liabilities per person weighing in at Alaska with $32,425, Ohio with $24,893, and Illinois at $22,294.

It is a fact the generation that is now beginning to retire has leveraged its size into favorable policy that it will enjoy in later life. All this must be coupled with the fact many baby boomers have little or nothing in the way of savings and will be totally dependent on the promise that government will step in and care for them in their older years if they need help. We should remember governments slashed tax rates in the 1980s to revitalize their lagging economies just as boomers approached their prime earning years. The average federal tax rate for a median American household, including income and payroll taxes, dropped from more than 18% in 1981 to just over 11% in 2011. This means less revenue for the generous benefits boomers have continued to vote themselves. Programs like a prescription-drug benefit paired with inadequate premiums have caused deficits to explode and they will dramatically worsen after 2017.

The arithmetic leaves few ways out of the approaching storm, the numbers are ugly and much of it is only now becoming visible in our soaring National Debt. Faster growth would help, but the debt left by the boomers adds to the drag of slower growth in the labor force. Carmen Reinhart and Kenneth Rogoff, two Harvard economists, estimate that public debt above 90% of GDP can reduce average growth rates by more than 1%. Meanwhile during the boomer era we have seen falling levels of public investment in America. Annual spending on infrastructure as a share of GDP has dropped from more than 3% in the early 1960s to roughly 1% as of 2007. Austerity is one way we might address this problem, but the consolidation needed would be large. The IMF estimates that fixing America’s fiscal imbalance would require a 35% cut in all transfer payments and a 35% rise in all taxes, far too big a pill for our creaky political system to swallow.

Fiscal imbalances rise with the share of population over 65 and with partisan gridlock, this is troubling news for America, where the over-65 share of the voting-age population will rise from 17% now to 26% in 2030. As this voting block grows and strengthens it is unlikely they will loosen the noose. Another possibility is trying to inflate the problem away. A few years of 5% price rises could help households reduce their debts faster. Other economists, including two members of the Federal Reserve’s policy making committee, now argue that with interest rates near zero, the Fed should tolerate a higher rate of inflation and try to speed up recovery. The generational divide makes this plan a hard sell. Younger workers are typically debtors, who benefit from inflation reducing real interest rates, older people with large savings dislike it for the same reason. A recent paper by the Federal Reserve Bank of St Louis suggests that as a country ages, its tolerance for inflation falls.

The bottom-line is that all these promises result is some rather ugly math, as things stand an American born in 1945 can expect nearly $2.2m in lifetime net transfers from the "state" far more than they pay in, and far more than any previous group. A study by the International Monetary Fund in 2011 compared the tax bills of what different age citizens pay over their lifetime with the value of the benefits that they are forecast to receive. The boomers are leaving a huge bill. Those aged 65 in 2010 may receive $333 billion more in benefits than they pay in taxes. This is  an obligation to the government, 17 times larger than that likely to be left by those aged 25, this is a huge burden that the young is about to inherit.

A massive four trillion dollar underfunding in State Pension funds alone represents roughly $12,000 for every man woman and child in America. This means we should place pensions into the category of a giant Ponzi scheme or lie. The fact is both the public sector and private companies have simply promised too much to workers that are living longer at a time that business pressures are changing, but what remains unclear is who will pay to clean up the messes. Will it be the millions of retirees owed trillions of dollars in benefits that take the hit or the bondholders who lent states and cities trillions more, or local taxpayers who may have to pay more to cover the shortfalls? We are already seeing that pension liabilities are crowding out spending for services, roads and schools. One thing is certain, regardless of how this is resolved the process will be painful and likely play out over many years.

Footnote; For more about what the youth of this Nation are facing read the post below. Other related articles may be found in my blog archive, thanks for reading and comments are encouraged,

Friday, April 10, 2015

Silly Or Delusional?

The Dollar Dropped On News Job Creation Slows
I caution those who are silly or delusional enough to think a bad jobs report should bolster other currencies and weaken the dollar. While it may lessen the call for raising the interest rates sooner rather than later little else changes. The dollar remains the best house in a bad neighborhood,or the cleanest dirty shirt in the closet, this means it is still the least worse option or currency to place your wealth. The bad news that blows a weak dollar theory out of the water is that consumption by Americans is what fuels the export economies of countries like Japan and China. Without the continued flow of goods from their shores such economies are "toast" and will further slow, this has a negative effect on their currency. As the world's reserve currency the dollar has gained as faith in other currencies has diminished because of central banks pursuing policies of printing evermore money.

These policies to support and prop up both derivatives and economies have morphed into the main driver of economic data but has generated little real growth. Between the low interest rates that propel investors into high risk assets in search of a positive return and all the money being pumped into the system the markets have become distorted and disconnected from the economy. The myth that poor quality growth can be sustained or generate escape velocity and free us from our economic woes is again proving false. No matter how hard we try to forget, it is becoming more apparent that America's last big economic surge just before the 2014 elections was driven by a 10% jump in federal spending, mostly on Pentagon hardware. This "pre-election" spending was the biggest increase in spending by the federal government since 2009 when the Obama administration put in place its huge economic stimulus package. This means that 2014 third quarter growth was directly tied to government action rather than true demand, this is not a formula for sustainable growth.

The chickens may be coming home to roost on a policy the Fed has pursued for seven long years. Over this time the Federal Reserve has failed to take serious efforts in pushing the government to take the necessary reforms needed to move the economy forward. Not dealing with what we were told were massive problems has only reinforced the idea that far too much has been made as to the ramifications of an out of control budget. Remember the horror stories surrounding sequestration and the financial cliff? I recall one Sunday morning talk-show host referring to them as "draconian" and predicting "dire consequences." Up to this point a strong case can be made that sidestepping financial responsibility has been rather painless, sadly to many people this only reinforces the idea that we can continue down this path.

Over the years investors have been lulled into complacency by the extraordinary actions taken by central banks and governments. These actions have temporarily masked major flaws and structural problems, but by not demanding the right kind of growth and merely throwing money at problems we have only delayed and added to a financial day of reckoning that faces us in the future. In what most of us view as a fast moving world many people have come to think if a financial crisis doesn't occur today or in the next few weeks it is simply not going to happen at all. But when looking at the numbers the thought that we will be able to grow out of our problems is a bit simplistic and an unrealistic strategy. "Future growth" is often promoted as the best path forward because it is viewed as a painless easy solution to problems and avoids confronting hard choices to address deeper rooted flaws that undermine our economic system.

Those in power have embraced and taken it to a new level financial engineering with MMT or Modern Monetary Theory. Unfortunately, a critical flaw exist in the concept and while it is viewed as our salvation by many economist and much of the world MMT has a Achilles heel. That flaw is revealed by the question, what do you do when it becomes apparent the economic efficiency of credit is beginning to collapse? This means that as more money is poured into the system and lower rates are no longer effective in driving the economy forward options evaporate. As the extra GDP growth generated by each batch of loans drops and momentum ends this become the equivalent of pushing on a string and is a sign of exhaustion. Now that companies have ushered in the savings from interest they paid on debt into their earning columns we should consider that a huge onetime tailwind is now mainly behind us.

As artificially low interest rates promoted by America's Federal Reserve and other central banks in time proves to be a massive one-off in driving corporate earnings only then will people realize the size of the problems before us. Now that rates are in the cellar and may even reverse the positive effect of MMT is about to ebb and become a major headwind. Keep in mind a major reason inflation remains low is that companies are sitting on a hoard of cash, this contributes to the drop in the velocity of money and is apparent by the large number of stock buybacks that have pushed the markets higher.  Also, adding to instability are falling oil prices and unrest in the currency markets. With massive government debt in many countries and the economy still weak these factors if untethered have the potential to create a devastating situation.

We are constantly bombarded by the message that we have rounded the corner and things are getting better, this invites optimism to return and generates a feeling that blue skies with promising times will soon arrive, but avoiding real action comes at a great cost that we will have to pay in the future. A great deal of our problems come from the poor quality of what we call growth, again we have seen policy makers aided by the media promising simplistic answers to solve both economic and society’s problems with little or no effort required from the masses. We often forget how interesting the times we are living through will be when viewed from a historic perspective. Hope tends to blurs reality, but understand the worst of the financial crisis most likely is still before us. I hate to beat the same drum, but proof that the economy is not well is obvious in that the numbers simply do not work.

Wednesday, April 1, 2015

Interest Rates, Inflation, And Debt Matter

Back in September of 2012 I wrote an article reflecting on how the economy of today had been greatly shaped by the actions that took place starting around 1979. Interest rates, inflation, and debt do matter and are more significant than most people realize. Rewarding savers and placing a value on the allocation of financial assets is important. It should be noted that many Americans living today were not even born or too young to appreciate the historical importance and ramifications of the events that took place back then. The impact of higher interest rates had a massive positive impact on corralling the growth of both credit and debt acting as an crucial reset to the economy for decades to come. Below is a copy of the article. 

                       A Time For Action, 1980?

In his book "A Time For Action" written in 1980 William Simon, a former Secretary of the Treasury tells how he was "frightened and angry".  In short he sounded the trumpet about how he saw the country was heading down the wrong path. William Simon (1927 – 2000) was a businessman, and a philanthropist. He became the Secretary of the Treasury on May 8, 1974, during the Nixon administration and was reappointed by President Ford and served until 1977.

I recently picked up a copy of the book that I had read decades ago and while re-reading it I reflected on and tried to evaluate the events that brought us to today. As often the future is unpredictable, looking back, it is hard to imagine how we have made it this long without finding long-term solutions and addressing the concerns that Simon wrote about so many years ago. Back then it was about billions of dollars of debt, today it is about trillions of dollars. It appears that something has gone very wrong.

Do Not Underestimate The Importance Of The Reset By Paul Volcker In 1980
By the end of the 70s inflation started to soar. Only by taking interest rates to nose bleed levels was then Fed Chairman Paul Volcker able to bring inflation back under control. Paul Volcker, a Democrat was appointed as Federal Reserve chairman by President Carter and reappointed by President Reagan. Volcker is widely credited with ending the stagflation crisis where inflation peaked at 13.5% in 1981. He did this by raising the fed fund rate which averaged 11.2% in 1979 to 20% in June of 1981.  This caused the prime rate to hit 21.5% and slammed the economy into a brick wall. This also effected and shaped the level of interest rates for decades

Rates Today Are Ready To Fall Off The Chart!
This action and the increased interest rates in following years is credited by many to have caused  Congress and the President to eventually balance the budget and bring back some sense of fiscal integrity and price stability to America.  As the debt from the Vietnam war and soaring oil prices became institutionalized we moved on. Interest rates slowly dropped and the budget came under control. In recent years spending has again started to grow and at the same time taxes have been cut. This has slowly occurred over years and been ingrained in the system.

The path has again become unsustainable and many people will be shocked when the reality hits, this is not the way it has always been. Today many Americans feel just as frightened and angry as Simon did so many years ago. America has kicked the can down the road, failing time and time again to face the tough decisions, and failing as well to take action. Part of the problem is the amount of dept has grown so large that we can no longer imagine or put a face on it. The day of reckoning may soon be upon us, how it arrives is the question. Many of us see it coming, but the one thing we can bank on is that after it arrives many will be caught totally off guard.

Footnote; This post dovetails with many of my recent writings, for more I might suggest reading the article below. Other related articles may be found in my blog archive, thanks for reading, your comments are encouraged.