Sunday, February 17, 2019

China Continues To Prop Up Its "Unpropable" Economy

China's Debt Soared After 2008 (click to enlarge)
Near the end of 2017, Zhou Xiaochuan, the governor of the People’s Bank (PBOC), spoke of “fierce market reactions” and a possible Minsky Moment, the tipping point when credit cycles break and euphoric booms collapse under their own weight. Mr. Zhou told China Daily that asset speculation and property bubbles could pose a “systemic financial risk” made worse by the plethora of wealth management products, trusts, and off-books lending taking place throughout the country. Today China continues to prop up the unpropable, and yes, while no such word exists, when it comes to China's economy it should, for "unpropable" describes the financial collapse that can only be postponed but not stopped.

A recent article published by ZeroHedge contends that in the brief period since the financial crisis Chinese bank assets (and by implication liabilities) have grown by an astounding $15 trillion, bringing the total to over $24 trillion. In other words, China has expanded its financial balance sheet by 50% more than the assets of all global central banks combined and that today China's debt has become the biggest wildcard for the stability of the global financial system. Continuing along this "one-way path," in January, Beijing injected a staggering $685 billion in new credit into its financial system, greater than the GDP of the 21st largest country, Taiwan.

Many of us are drawn to a good illusion and in some ways, it could be said that our culture has become obsessed with avoiding what is real. With this in mind, we must remember that politicians and those in power tend to go to extreme efforts to avoid taking responsibility for the problems they create. History shows that one way a country can kick their gross domestic product higher is to build a false economy based on infrastructure or war. China's version of this is apparent in its "ghost cities" but when a country gorges at the trough of deficit spending that generates a big temporary boost in its GDP it also quickly creates a wall of debt. One of the best examples of building an economy on a foundation of military might or a massive move to militarization was demonstrated by how Germany was turned into a war machine during the 1930s.

China watchers, economists, and investors have been forming battle-lines for years as they debate the true strength and sustainability of China's economy and its role as a global player. Those of us that paint a picture of future collapse and a day of reckoning are often accused of spreading "doom-porn" because the Chinese have masked over the dire situation by continually expanding credit. It is important to note that over the years each new wave of money has begun to lose its impact as the efficiency of stimulus waned and more and more of the credit was absorbed in supporting existing debt, the fact is few good investment opportunities currently exist. This also translates into more and more money leaking across the border and inflating asset bubbles in other countries.

 China Is A Small Player (click to enlarge)
Much of what is occurring in global currency markets is getting scrubbed away by our complex financial system that tends to soften the edges of any harsh move until it can no longer be hidden. This may seem wildly unlikely to many people that think such things move and unfold in a logical way but viewing the currency market as a manipulated scheme by central banks to create the illusion of stability makes sense. For a long time, I have maintained the view that currencies are trading in a false paradigm created by the coordinated collusion of the major central banks which busy themselves sheltering currencies from a storm of volatility. The central banks know a strong hint of weakness in any of the world's four major reserve currencies could destroy the myth that major currencies are immune to the same fate that has haunted so many currencies throughout history.

It is important to understand that in our modern world wealth is mostly contained within a rather closed system.system of fiat money which includes laws and rules that by their nature discourage freedom of movement into tangible assets. History shows that when the nations granting a currency have proven unable to control their budgets and are crushed under the weight of debt bad things happen. The rubber will meet the road as more countries that export to China begin to solidly question the value of the Chinese currency and demand payment in another form. The rumors we hear of central banks and countries buying gold may be the canary in the coal mine and a warning that investors should get ready for a rude awakening because we are about to see a huge shift in wealth due to changes in currency values.

Saturday, February 16, 2019

Washington Has Again Diverted Our Eyes From Deficit

The Ugly Reality Of Our Spending
By linking recent budget talks to the controversy over building a wall Washington has again diverted the eyes of our nation away from the wild deficit spending taking place. After telling reporters that he was "not happy" with the compromise border-security bill which reportedly included only a small amount of the funding he requested for "a barrier," President Trump set aside his dissatisfaction and stated he would sign the bill anyway in order to avert another shutdown. Then, in rapid fashion, Congress passed and the president signed the pork packed deal by the Friday deadline so all the players could take their victory laps and claim democracy works.

The bipartisan agreement puts less money towards border security than Trump requested but, sadly, added to most other line items in the budget. The new appropriations package which combines seven different spending bills allocates $328.6 billion in discretionary spending a huge $54 billion increase from the White House's 2019 budget request. While some conservative members of Congress think the agreement spends too much the spending package which will fund the government through September 30th is nevertheless expected to be passed with overwhelming support from both Republicans and Democrats.

Remember in the overall scheme of things and the amount America spends each year the 5.7 billion Trump requested for wall construction is peanuts also it is fairly easy to make a case that America will get a good economic return on money spent on a barrier that will work 24/7 year after year. Most taxpayers, if asked, would see this as a far better investment than paying government workers to stay home week after week as we did during the recent partial government shutdown. 

While the president demanded $5.7 billion for his border wall, the deal reached includes just $1.375 billion for the wall, this means the President will carry through with his threat, or promise, depending on how you feel about the wall, of declaring a national emergency and pulling money from different areas of the budget. Speaker Nancy Pelosi has already warned this will prompt a lengthy legal challenge. This will cost the taxpayer even more money and continue to divert eyes and time from far more important issues and problems facing our nation.

Senator Rand Paul one of the very few politicians in Washington concerned about wild government spending and things such as border security wrote;  

    I’m disappointed with both the massive, bloated, secretive bill that just passed and with the president’s intention to declare an emergency to build a wall.
    I, too, want stronger border security, including a wall in some areas. But how we do things matters. Over 1,000 pages dropped in the middle of the night and extraconstitutional executive actions are wrong, no matter which party does them. 

The fact is the wall issue has taken our eyes off the deeper immigration problem of fixing a costly inefficient immigration system that the American Action Forum (AAF) found cost American business close to $30 billion in annual regulatory compliance costs, it has also pulled our eyes away from a soaring budget deficit. these and many other important matters are busy cutting away at the future of our youth. The bottom-line is that Washington has become a hostile and unfriendly environment for those interested in good governance.

Sadly, it is only massive this massive unsustainable deficit spending that is driving our economy forward. We are in the midst of a "false economy" and it is only by the grace of this huge deficit spending that we are not languishing at the bottom of a deep economic pit. The budget deficit is set to widen significantly in the next few years and in 2020, is expected to top $1 trillion even with healthy economic growth, according to new projections from the nonpartisan Congressional Budget Office. This means the national debt of around $22 trillion will soar to more than $33 trillion in 2028.

A trillion dollar deficit translates into America spending $3,333 more than it takes in for every man, woman, and child in the country. To clarify, this is each year and every year but also fails to include State and local deficits as well as a slew of "off book" promises and spending that are also being made. This spells big problems going forward if we do not begin to face up to reality and get in front of our problems we will soon find ourselves solidly behind the eight-ball. Today late cycle indicators are on the rise, moderating growth, tightening credit, declining earnings, the peak of consumer confidence, rising inflation and more. 

History shows government spending is a poor substitute for the free market when it comes to allocating capital to where it is most effective and it is not economic growth but simply a method of creating a false economy by borrowing from the future. Deficit spending is not a silver bullet without consequences and with each step forward we get closer to the end of the road. Does this mean we should be thankful for a dysfunctional government in Washington? I think not.    

Wednesday, February 13, 2019

Tesla Is Rapidly losing Its "Cool Factor"

While Tesla's stock price continues to hang on what seems to be continuing signs of the company's demise continue to leak out. The company already slashed its Model 3 price twice this year to stimulate demand but it is still too high compared with models being produced by its competitors. The $35,000 Model 3 that CEO Elon Musk promised in 2016 remains only a promise with the least expensive Model 3 still sporting a price tag of $42,900. This, when coupled with the federal tax credit of $7,500 being cut in half to $3,750 at the beginning of the year after Tesla’s EV sales rose past the 200,000-threshold in 2018 has cut into sales.

It is estimated that over 100 different electric cars are expected to hit markets by 2025. This translates into the fact that the problems before Tesla are about to become overwhelming. Many of these "Tesla crushers" are months away from hitting showrooms. These new introductions into the rather small electric car market add to the long list of the problems nibbling away at Tesla's credibility and affecting future sales. An article published by Reuters tells of how when Tesla Inc announced last month a second round of job cuts to rein in costs, the automaker more than halved the division that delivers its electric vehicles to North American customers. Some 150 employees out of a team of about 230 were let go in January at the Las Vegas facility that delivers Model 3s into the hands of U.S. and Canadian buyers, this could be a sign the company expects deliveries to significantly slow in the near term.

Two sources, from among those let go, claim that deliveries that have plunged from the pace in the fourth quarter last year. This does not come as a surprise to many Tesla skeptics that claim the company is skating on thin ice and cite issues such as numerous software updates and fixes in response to a number of accidents involving Autopilot, it now appears that the software may not be as innovative, safe or autonomous as Elon Musk has led them to believe. One such example occurred on Monday when a driver in North Brunswick, New Jersey wrecked his Tesla on a highway while the vehicle was in Autopilot mode. According to a report published by News 12 New Jersey, the driver said that the vehicle "got confused due to the lane markings" at a point where the driver could have stayed on the highway or taken an exit. The driver claims that Autopilot split the difference and went down "the middle", between the exit and staying on the highway.

Tesla Crashes Have Drawn Much Media Attention
Tesla naysayers say they have had enough about Tesla being valued at worth more than Ford and all the other automobile producers that have many times its market share. Current supporters of its value even go so far as to claim it is really a tech company masquerading as an automobile company.  As far as the Model 3, Tesla has repeatedly tried to lower expectations and reiterated that it is a downgrade from the model S but many of those buying the car seem to not fully comprehend exactly what this means.

Do not rule out the possibility that once the aura surrounding Tesla leaves, reality may wash over those so eagerly awaiting their new toys and a main driver of sales vanish. Nothing tarnishes a brand faster than producing a lemon or product that becomes synonymous with failure. I hate to tell Tesla lovers that owning a Tesla could rapidly become uncool as the Model 3 fails to live up to the high expectations many of those placing orders have for the car. In a world where few cars sporting the Tesla nameplate exist the car remains a novelty that garners the owner a bit of notoriety. So far the attention gained has been positive, however, if it were suddenly to turn negative not only would many owners lose a bit of bounce in their step but the value of their cars could drop like a stone.

Model 3 Has Left Many Buyers Underwhelmed
As the actual car fails to tantalize buyers and leaves them underwhelmed we are moving to a place where it could be all over. There's a sucker born every minute" is a phrase closely associated with P. T. Barnum, Buying stock in Tesla or one of its cars is the same as going to a casino, it will end with the buyer most likely being a goat rather than a hero. In the back of our minds it would be wise to remember the companies Musk is involved with have been on the government dole and that usually is not a sign of vitality.

Like many high-flyers before him, Elon Musk has a history of promising more than he can deliver which investors and the market has chosen to ignore. I have written several articles about Musk and Tesla not because I'm wowed by either but because they are both poster children of a market which I feel has decoupled from reality. Do not be surprised if looking back someday in the future we view Tesla's stock which continues trading at incredibly high multiples as a reflection of our historically low-interest rates and the luck of being in the "QE moment" rather than the company's financial success. Bears and those that doubted if the company could hold together ironically have pushed up the stock adding to the image that Musk lives a charmed life.

In the past, I and many others have pointed out the uphill battle Tesla is fighting and the many obstacles that could derail its success. In May of 2015 David Stockman wrote; In a world saturated with excess automotive capacity and dominated by some of the most formidable engineering, manufacturing and marketing organizations on the planet—Toyota, BMW and Ford, to name just three–There is no way that an amateurish circus barker like Elon Musk will ever make a profit selling electric vanity cars to the 1%. Stockman went on to state, You might describe Tesla as $30 billion of capitalized hopium, but that would be too generous. In an honest free market, Tesla would have long ago been carted off to the chapter 11 junk shredder.

As a reminder of how sweet and challenging the auto industry is, and how like a fickle mistress it has those in its grasp always on their toes or they will suddenly find themselves crushed by their overconfidence I present the marvelous example of how Ford in the 1950s ambitiously rolled out the car everyone was waiting for. Unfortunately, their ambition gave birth to the Edsel, whose name became synonymous with abject corporate failure and while the nascent brand was killed in 1959, its legacy lives on. The Edsel's short history makes a fascinating cautionary tale for anyone in business–not just the car industry. In the end, the name of Elon Musk may be added to a long list of bold men herald and declared to be "gods gift to business," only to find they flew too close to the sun only to crash and burn.

Footnote; The link below is a recently updated article written since Musk started talking about taking Tesla private and an overview of Elon Musk and Tesla Motors. It gives some of the background stories behind their rise to prominence.

Sunday, February 10, 2019

Inequality Is A Growing Pox Upon Our Economic System!

A More Recent Chart Hard To Find! (Click To Enlarge)
Unfortunately considering current trends we should not expect improvement in economic equality. In America, wealth inequality has soared in recent years and now stands at the worst it has been during the entire U.S. post-war period. Studies show that the U.S. middle class has been more “hollowed out” than originally thought in terms of income by manufacturing jobs and any gains made by the lower-middle class were sharply reversed after 2007. Using certain data we get the picture that racial economic-equality disparities are as bad as they were before the civil rights era. The fact is, driving a decent car doesn't make a person middle-class or economically equal, especially if they are up to their eyeballs in debt to do so. 

Economic inequality is not only a profound social and economic issue but flows into forces that affect financial-market stability. The saying "Talk Is Cheap" comes to mind when we search efforts to address the growing level of income polarization because while many people voice concern this thorny emotional problem is neither easy to solve or correct. A huge part of the problem is that those who really wield the power to bring about change, in reality, are often sheltered from the pain it causes and out of touch with what many people are forced to go through every day. Because of this, in truth, they see it as a low priority, consider other matters as always being more important or simply do not understand the nature of this beast. The fact it is so difficult to easily locate current charts, such as the one above, speaks volumes as to how this remains a back-burner issue.
In a piece titled; "The Morass That Swallowed the Middle Class" Matthew Shaw delves into how much of the inequality debate focuses on the gains of “the 1%,” and less attention has been paid to the economic well-being of what is broadly termed the middle class, which is all too often just lumped into the other “99%.” Of course, much of this centers around just how out of touch our "professional elite" are with the population and this spills over into the economy. By our professional elite, I refer to those who make the rules and their minions, their aids, the academics, the financial institutions, economists and the media, all of which have tied their wagon to the status quo. Conflict and corruption also enter into this picture as we often find that even those setting the rules also tend to want a bigger piece of the pie.

Controversial "To Say The Least"
The danger we as a society face, is that many voters encouraged by a bias media tend to reach for an easy answer to cure our economic ills and inequality. These are often proposed by those labeled, progressives, liberals, or simply left of center. To this point, fiery class-war populists, such as Elizabeth Warren, Bernie Sanders, and rising Democratic star Alexandria Ocasio-Cortez are making it exceedingly clear that they are socialist and promising voters a bigger piece of the economic. This is quite frightening considering the cost of these programs are unaffordable and any one of these people could, at some point, become our next president. If not one of them it will be a new media creation sporting a charismatic persona and claiming a "clear" path forward. 

The problem with socialism is that it doesn't work, all countries that have attempted to institute it have miserably failed leaving their economy's in ruins. Still, a great weakness in the democratic system is that even a motivated minority can overwhelm an unmotivated majority, and promises of generous programs have proven to be a great motivator. ABC 7 Chicago recently reported that a select number of Chicago families could start collecting a $1,000 check every month with no strings attached, according to a new proposal from a task force created by Mayor Emanuel. The pilot program proposed by the "Chicago Resilient Families Task Force", which is the latest incarnation of the "basic income and helicopter money" utopia that has gripped America's left in recent months is another example of our search for easy answers and completely ignores the already devastating financial Armageddon facing Chicago and the state of Illinois.   

While supporters of the program say by giving 1,000 struggling Chicagoan's $1,000 a cover unexpected emergencies, increase their savings and improve their health. Experiments in several countries have demonstrated that basic income simply does not work to boost overall living standards or break the cycle of poverty, however, do not expect the argument to end here. Much of the misery the poor and even the 99% suffer is often self-inflicted or as a result of bad government policy gone astray. This is very evident in housing where government housing cherry-picks the best of the low-income renters providing them with very low rents and nice apartments while dumping the rest on the private sector. This drives up rental prices on everyone else. 

If the predictions of a set back in the economy unfold as many economists predict we may well see inequality surge because during such times it is the masses that suffer most during a financial collapse because they have little in the way financial reserves. History shows that a few of what we know as the .01% will take a hit but even after losing a great deal of wealth most will remain wealthy and basically unscathed while the same cannot be said of the average man or woman on the street. This is because if you view the economy as an economic battlefield, the rich and powerful carry an M16 while most of us are armed with only a stick. This translates into how the lack of investment options that many people have leaves them extremely vulnerable when an economic crisis does occur. 

Another factor still ready to upset the apple cart is the effects of robots displacing humans in the workforce. Robots are here and more are being deployed each day, soon this will prove to be a big deal. The topic of our future and culture always circles back and is directly linked to the issue of jobs vanishing as automation and an army of robots march into our workplace. Rest assured when push comes to shove those displaced from the job market will find they are only given enough to scrape by and ensure they remain docile and behave. If and when this becomes an issue conflict and violence will arise it is possible that someday they will be brought to heel by an army of robots designed to keep them under control. 

The reality that a vast majority of people face diminishing prospects is a concerning trend which was recently highlighted by the IMF in a report focused on data showing how middle-income households have continued moving down, rather than up, as income distribution in the United States has shifted since the 1970s. Part of the problem is that this trend of income inequality is also growing across the globe and no magic or silver bullet exists to address the conundrum brought about by the concentration of power and wealth. One thing is certain and those opposed to such solutions will rapidly testify that whatever actions society takes, those on the receiving end will complain that "It ain't enough."
                                                                                 This blog is not written for money
                                                                                 or profit but as a way to share ideas
                                                                                 and thoughts. If you liked this post
                                                                                 feel free  to E-mail it to a friend
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Footnote; This is one of several articles planned that argues, "Socialism would be great but it doesn't work." While we can embrace the idea of sharing more freely the simple fact is that many people are more willing to err on the side of receiving than giving and this makes it is incompatible with human nature. Man is often motivated by the fruit of his labor and the vision of creating something good.

Sunday, February 3, 2019

Deficit Spending Main Driver Of American Economy!

Deficit Spending Main Driver Of Economy!
Wake up America! It is only massive and unsustainable deficit spending that continues driving our economy forward. This is why the President's fixation on the stock market and not the real economy represented by Main Street does a great disservice to Americans. While Trump may have been correct in pinpointing many of America's economic ills his prescriptions for a cure leave much to be desired. How we react to money and the economy is often rooted in our past experience and Trump has never shown himself to be shy to taking on debt to propel himself forward. This is why when the stock market started to wobble months ago President Trump increasingly ratcheted up his attacks on Fed Chairman Jerome Powell for"ruining the party."

The budget deficit is set to widen significantly in the next few years and in 2020, is expected to top $1 trillion even with healthy economic growth, according to new projections from the nonpartisan Congressional Budget Office. This means the national debt of around $22 trillion will soar to more than $33 trillion in 2028. A trillion dollar deficit translates into America spending $3,333 more than it takes in for every man, woman, and child in the country. This is "each year" and does not include State and local deficits or a slew of "off book" promises and spending that are also being made. This money "percolates" several times through every part of the economy as food stamp recipients buy groceries and government agencies pay their workers and buy new equipment. 

The bottom-line is that we are in the midst of a "false economy" and it is only by the grace of this massive deficit spending that we are not languishing at the bottom of a deep economic pit. When a country gorges at the trough of deficit spending it can easily manipulate a big temporary boost in its GDP.  In the past I have written about how a country can kick their gross domestic product higher and build a false economy based on infrastructure or war, both these methods of producing economic growth are the result of deficit spending. Ever since the 2008 financial crisis deficit spending has been on a torrid pace that has created the longest bull market in history but no matter what, the economic cycle will end as we are forced to face the massive debt we have created and a slew of bad investments brought upon us because money has been so cheap.

Investors would be wise not to accept America's recent GDP as verification the economy is hitting on all cylinders. In 1962 Kuznets, the father of the GDP formula emphasized that we must keep in mind the difference between quantity and the quality of growth. While economic growth appears robust and a solid GDP number can result in a feel-good moment building consumer confidence it can also mask growing weakness in various parts of the economy. Quantity simply does not make up for poor quality, we are talking about two totally different animals. The false narrative that simply growing the size of an economy by adding more people into the mix or using deficit spending undercuts the importance of a solid economic and the long-term stability of the financial system.

It is important to note that countries all over the world are playing the same game and spending like drunken sailors and the money being created and poured into the economy has to go somewhere. Often it flows to paying interest on debt already in force or to fill in the hole resulting from endless defaults that occur each day. Needless to say, government debt is building up in many forms including promises that will never be fulfilled but with politicians excelling in perpetuating a short-sighted view of the future and the ability to continually kick the can down the road it is not surprising to see them being complicit or even encouraging central backs to continue down this treacherous path. 

Much of what we see today is the result of the so-called "everything bubble" which has allowed loans to be stacked upon other loans because rising water floats all boats. Whether it is intentional misdirection, a case of economic fraud or people simply getting caught up in wishful thinking and euphoria, history shows this is often the forerunner of disappointment and generally results in a hard landing. The fact is, the money we have created and poured into the economy had to go somewhere and we find that it has not only inflated asset prices but it has also inflated promises that tomorrow will be left unfulfilled. These "promises" will prove even far more sinister than the former in that they represent the most pain but are well hidden away in times yet to come. 

While we were told tax reform would mark a major shift in companies deciding whether to keep jobs here or even bring them back to America that may not happen. This narrative that helped to win passage of the legislation and the many assertions made by politicians and their allies in the world of economics will not in itself lead to more investment. Several reasons exist for jobs not to come rushing back to America. The structural issues that haunt America's competitiveness far outweigh the benefits brought forth from Trump's tax bill and lower taxes. The ugly truth is American companies have little reason to bring jobs home, the logic that lowering corporate income tax will create a massive flow of jobs to our shore is flawed. 

Corporate investment decisions are based upon the cost of capital and the prospective equity returns that new investment can generate, not how much capital is available and in our current cheap and easy money, environment capital is basically free. The problem is not funding new investments, but finding endeavors in which to deploy this capital. The economists who largely control the major central banks in the industrialized nations may be able to manipulate markets and cancel excessive debt through open market operations, but they cannot manufacture attractive investments. Sadly for several reasons stock buybacks has been moved to the front the list of corporate priorities joining other investments that are not productive investments.

Click Here To Visit The Active Debt Clock
The deficit spending propping up our economy has gone far past anything we might have envisioned just a decade ago and now the path forward appears even more difficult as auto sales fall and companies admit they will no-longer manufacture cars in North America. Housing also is a problem with much of the construction now flowing into high-end apartments rather than affordable units. This is the result of government policy and laws that discourage anyone from wanting to invest or deal with housing for the poor. These are two big sectors of our economy but even they have become tired.

Indirectly this deficit spending by our government also fuels our trade deficit, an area in which we have miserably failed in recent years, this is not only evident by our massive trade deficit with Asia but the United States huge trade deficit with Mexico which becomes even more disturbing when you begin to understand even that money quickly passes through Mexico and flows to Asia. It could be argued that when all is said and done we are still transferring our wealth to the far east only by the scenic route. The idea we will reach a quick fix to the trade problems facing America and is a myth and oversimplifies the problems before us in achieving a sustainable trade balance. Reaching a reasonable solution posses a major difficulty in that China is so entrenched in its ideology it most likely will refuse any change that will throttle back its plans of domination.

History has proven that while government spending can supplement the economy, over the long run government spending is a poor substitute for the free market in allocating capital to where it is most effective. Deficit spending is not economic growth but borrowing from the future. Today late cycle indicators are on the rise, moderating growth, tightening credit, declining earnings, higher interest rates, the peak of consumer confidence, rising inflation and more. The crux of this post is to point out deficit spending is not a silver bullet without consequences and with each step forward we get closer to the end of the road. While those embracing Modern Monetary Theory may argue otherwise Econ 101 teaches that such actions as we have seen always lead to a very bad place.   

                                                                                 This blog is not written for money
                                                                                 or profit but as a way to share ideas
                                                                                 and thoughts. If you liked this post
                                                                                 feel free  to E-mail it to a friend
                                                                                 using this link. E-mail to a friend

Footnote; Please note the slightly shaded areas in the above post. They are links to previous related articles or research papers.

Tuesday, January 22, 2019

The Partial Government Shutdown Is An Expensive Farce

Trump's Wall Is Politically Dividing America
The partial Government Shutdown is an expensive farce and an example of unbridled stupidity run amok by a group of well-paid politicians unaccountable to reality. Even those taxpayers annoyed and frustrated by big government who claim they are "pleased to see government shutdown" should garner little joy from the current circus playing out in Washington. Since most government workers will likely be granted retroactive pay for their time off, politicians are stupid or silly if they think paying government workers to stay home over a few billion dollars in a 4.4 trillion dollar budget makes any sense.

In a prior article, I pointed out that by simply calling for the end of the penny the President could pay for his wall. getting rid of the penny would save America billions of dollars. This article, however, is not about how much a worthless penny cost business every year but to point out how Washington has created a lose-lose situation out of an issue that does not merit being elevated to such a level. Being no fan of stupidity I find it hard to applaud any of the parties that have become willing participants or have embraced this charade.

Those we have sent to Washington should get back to work solving real problems instead of just grandstanding and playing to their base, it is little wonder much of the world appears to have lost faith in America's ability to lead when we have allowed the country to be held hostage over such the mundane issue of a wall aimed at reducing illegal immigration. The fact is walls are a barrier and barriers impede easy access. While such a barrier is not the answer or solution to immigration it is a tool that can be used to help limit and direct how people illegally enter the country. It is a bit ironic that American citizens stand in long lines with passports in hand while long parts of our borders go unprotected. The fact is anyone who has traveled knows you can't just walk into any country without any questions asked.

America's Bureaucratic Apparatus Is Broken
A lot more of our political attention should be focused on the broken bureaucratic apparatus that surrounds our current immigration system. Immigration has been an issue for decades and not addressing it in a proper way will not make it go away. A reasonable solution to solving our immigration problems has eluded both Republicans and Democrats time and time again and reduced those caught within the system into being political pawns. The debate over immigration, processing new arrivals and addressing millions of undocumented immigrants, receives plenty of press but much of our immigration problems lurk below the radar.

Tens of billions of dollars are wasted each year on this costly inefficient system according to an article published by the American Action Forum way back in April of 2015. The article explored the cost of a broken immigration system on American business. The fact is that when the American Action Forum (AAF) analyzed the total costs of the immigration system, they found close to $30 billion in annual regulatory compliance costs. It hardly takes a rocket scientist to determine that reducing the number of people "illegally" entering the country would save billions of dollars and allow the system to operate better even in its current poorly crafted form.

Examining paperwork requirements by way of the Office of Information and Regulatory Affairs (OIRA) the AAF found there are 20 requirements dealing specifically with the labor implications of hiring an immigrant worker. Of this, there were seven paperwork burdens that specifically applied to employers. AAF used agency estimates on the amount of time for each requirement, the number of forms, the length of applications, and the number of applicants. When an agency failed to provide a cost for the paperwork burden, AAF used the Department of Labor’s estimate of “Real GDP Per Hour Worked:” $60.59 and assumed $180 per hour as a reasonable cost for an immigration attorney.

Immigration also takes a toll on American employers, these burdens increase the cost of doing business and place a barrier to firms wishing to hire qualified workers. AAF found that a hypothetical firm hiring an immigrant would have to manage up to six federal forms, totaling 118 pages, and at a cost of approximately $2,200 per firm, per hire. Even small businesses in my state, far from the border, is required to confirm a worker is legal to work, this is a bit ridiculous for small firms with only a few workers, all from their own family, and these are people they have known since birth, but that's the law. 

Another article in The New York Times from September of 2016, titled; “The Economic and Fiscal Consequences of Immigration” cites a 509-page National Academy of Sciences Study that reinforces the fact this is a very controversial issue. The report allowed interest groups on both the left and the right to claim it vindicated their positions. America’s Voice, a liberal advocacy group, declared from the pro-immigration side it "confirmed immigrants benefit America." while conservatives calling for more restrictions on immigration read the same report but had a very different interpretation saying it showed "workers and taxpayers lose, businesses benefit.”

Washington should step away from the "emotional" aspects of immigration such as flowery debates about the rights of people and what they "deserve" and focus on the key issues of restoring a functioning government and getting on with real immigration reform. Even those of us who find big government distasteful should be able to see that paying workers to stay home is not a solution to the Deferred Action For Childhood Arrivals (DACA) situation. Also, loading millions of people on buses and deporting them will never happen. At the same time, those wanting more open borders should realize the current situation does not work either.

By assigning Trump's modest request in the overall scheme of thing as a "non-starter" immigration supporters are shooting themselves in the foot. This is akin to an "America first supporter" denying any type of foreign aid in a situation where it will obviously have big benefits for America. In theory, those opposed to Trump should be ecstatic about Trump's offer to extend DACA and protection to some 300,000 immigrants for three years. If immigration advocates are confident their numbers will grow and Trump will not win a second term, they would then have the opportunity to knock the ball out of the park and resolve the whole immigration issue strongly in their favor.

Remember in the overall scheme of things and the amount America spends each year 5.7 billion is peanuts and it is easy to see how America will get a good economic return on money spent on a barrier that works 24/7 year after year. Most taxpayers, if asked, would see this as a far better investment than paying government workers to stay home week after week. It is about time we end this shutdown and allow those we have sent to Washington to get back to work solving real problems instead of just grandstanding and adding to our ills.

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Monday, January 21, 2019

Yellow Vest Protest Add To Euro-zone Economic Misery

The Yellow Vest Has Become A Symbol Of Unrest
The Euro-zone faces huge social and economic problems before the Brexit issue is even factored in but with so many other events taking place throughout the world this slow boiling pot of trouble often is placed on the back burner where it is ignored and allowed to fester. The social issues tend to play into the economy because when people are unhappy work gets disrupted and productivity drops. This is one of the reasons Daniel Lacalle, Chief Economist at Tressis GestiĆ³n, during a recent interview with CNBC warned that Mario Draghi’s successor at the ECB will face enormous challenges managing the Eurozone’s monetary policy.

Before going deeper into that let's look at two very real problems. First, reports are that despite freezing temperatures and rain, tens of thousands of "Yellow Vest" protesters still took to streets across France on Saturday in the tenth consecutive week of anti-government demonstrations. They have ignored attempts by President Emmanuel Macron to channel their anger into a series of town hall debates aimed at stopping the movement. The president's counter-offensive this week with the launch of his "grand national debate" and spending hours in rural France debating with disgruntled mayors is yielding little. The fact is many of those demonstrating are calling for Macron to step-down and we can add his latest scheme to end "the madness" to the pile of failed gimmicks already tried.

Many Europeans Reject A Tighter Union
These protests are not getting a great deal of airtime or coverage, much of the mainstream media has ignored both the size and scope of the protests, independent journalists, select foreign news outlets and others have been documenting the mayhem. This is not the first time we have seen this trend of blacking out news negative to "the state" and it is a reason for lovers of freedom and free-speech to be concerned. This fits into the idea mainstream media's role has become to feed the propaganda loop that plays a huge role in shaping public opinion and in the end continues to erode and ultimately results in the government being able to slowly hack away at our rights for what appears to be "the greater good."

The rally in Paris, as well as those in several other cities, ended in clashes where the police using tear gas and water cannons to dispersed hooded protesters who threw paving stones and bottles. Clashes were also reported in Bordeaux, Toulouse and the western city of Rennes. The only promising sign was that for the second consecutive week there was no evidence of the chaos and destruction seen over several successive weekends in the capital. An estimated 84,000 demonstrators took to the streets on Saturday, including about 7,000 in the French capital. Paris deployed 5,000 police notably around government buildings and the Champs-Elysees shopping area. About 80,000 police fanned out nationwide. Protest turnouts are now being closely watched for signs of possible fatigue in the movement as it enters its third month. According to the Interior Ministry, there were 27,000 protesters across France by early Saturday afternoon, down from 32,000 at the same time the week before.

French police have been criticized for using rubber projectiles that have caused several serious injuries to protesters. At the Invalides, protesters carrying a banner that read "Citizens in danger" marched at the front of the procession and held coffin-shaped boards in memory of those killed. "It's not normal to treat people the way we are being treated. We have injured people every Saturday," said Juliette Rebet, a demonstrator in Paris. While much of France has endured weeks of protests over economic demands by French workers and students that at times descended into violence. The grass-roots protests starting months ago over fuel taxes is a broader revolt against economic problems and the top-down ruler which many of the French is as arrogant and aloof.

Angela Merkel Has Seen Better Days
Another rift is apparent in Germany where Chancellor Angela Merkel, decided years ago, Germany and all of the euro-zone should throw open their arms and welcome in immigrants from war-torn areas. Merkel’s decision rapidly impacted all of Europe with the other countries never being allowed to weigh in. Now, we see that just last November she started offering cash to refugees to return from whence they came, and since then she has stepped up her game, now offering to pay their living expenses for one year if they return home. Billboards are appearing all over Germany making this latest offer yet more than 20,000 refugees have vanished when they were going to be deported.

One take on the current mess in Europe is that the entire refugee crisis was created by Merkel to take eyes off of Germany being viewed as the harsh enforcer of loans structured to hide what Goldman Sachs had instituted in order to get Greece into the Euro-zone. After Chancellor Merkel’s poll numbers collapsed following her refusal to yield to Greece in the debt crisis. Basically, Merkel allowed the Greek people to be strip-mined of their assets to pay for their corrupt politicians. It is said, her own poll people, which she employed to make sure she makes political decisions that keep her popular thought she could use the "open immigration" issue to rapidly change the subject from Greece to Syria.

Those touting this version of the "politics" behind the scene cite a July 2015, Time Magazine article pointing out that Berlin’s role as the enforcer in negotiations over Greece’s debt could cause lasting damage to Germany’s global image and that by welcoming refugees to Germany they could stem the damage. So, it is possible, the watershed event driving the immigrant crisis that has unleashed so much pain and grief upon Europe is rooted in Merkel's efforts to reshape her global image from that of an evil loan shark to the caring Mother Merkel. Simply put, Europe is now paying a huge the price because Merkel was concerned about her polls.

Central Bank Balance Sheets (click to enlarge)
Circling back to the Lacalle interview, he cited the fact the ECB balance sheet is 41% of GDP of the Euro-zone while interest rates are at zero. Calling the situation "insane" Lacalle noted that Draghi’s successor will find it very difficult to justifying injecting more liquidity into the system. This comes at a time when the Eurozone is likely to grow only 1% this year and not 1.6%. as expected. Like many of us that have watched the Euro-zone, he indicated many of their the problems are structural and due to the massive level of government spending, very high taxation, and obviously demographics.

The idea that the next ECB President will be given the task to "normalize" the economy while facing the negative consequences removing the current policy is going to unleash without any real tools will be daunting. The current political climate in both France and Germany will make even more difficult. Thinking Germany will be willing to assume the role of bailing out all the weak sisters of Europe by putting it's government spending at the forefront and spending like a drunken sailor will not work but is akin to asking it to take the same failed path worn bare by countries such as Spain, Italy, France, and Portugal which are still spending way above their means. While the Euro-zone governments have been spending freely southern Europe’s economy hasn’t grown since 2006 when adjusted for inflation but its government debt has ballooned 70%.

Further a dramatic plunge in German industrial activity late last year not only raises the risk that Europe’s largest economy will slip into recession. Recent data shows that production fell for a third month in November posting its worst year-on-year drop since the end of the financial crisis. It appears that weakness is creeping into all parts of the economy from consumer goods to energy, this drop has repercussions for the euro area, where separate numbers on Tuesday showed economic confidence has slipped to its lowest point in almost two years. Just last month Mario Draghi said the 19-nation economy has enough underlying momentum to justify a decision to stop adding monetary stimulus. What next you might ask, the answer is, now we wait.