Monday, April 8, 2024

Advancing Time: A bad debt is a bad debt is a bad debt

Advancing Time: A bad debt is a bad debt is a bad debt: Seriously, when will people begin to understand that a bad debt is a bad debt? There is a saying, "You can't get blood out of a tur...

A bad debt is a bad debt is a bad debt

Seriously, when will people begin to understand that a bad debt is a bad debt? There is a saying, "You can't get blood out of a turnip." This idiom strongly emphasizes the impossibility of obtaining something from an inherently lacking source. This phrase is often used in financial contexts but can also apply to other affairs where efforts are likely fruitless.

In short, this is its core meanings:

  • "You cannot get blood from a turnip" refers to the impossibility of extracting something from a source where it is not available.
  • It advises someone against wasting time and energy on an unfruitful endeavor.
  • It highlights the unfeasibility of obtaining funds or resources from someone who doesn't have them.

A fool willing to make a loan to an idiot or someone who most likely will be unable to pay it back is trying to pick up pennies in front of a steamroller. Years of easy money and low-interest rates are coming back to haunt the greedy souls and concerns that chose to discount the potential risks and drawbacks of making such loans. Charging a high-interest rate doesn't guarantee great returns.

It seems this "stupid lending"has not only been going on for a long time but we may be reaching the place where it becomes apparent how much this activity has been going on. This is because more and more of those owing this money are defaulting on their obligations. the depth of this problem may have been papered over due to all the helicopter money that big government showered down upon the masses in recent years. 

It could even be argued this unprecedented growth in free and easy money acted as a fertilizer fostering a whole slew of bad loans. The idea and moral hazard of "too big to fail" added fuel to the flame and did little to deter this. So I ask, who are the parties making such loans? The answer is, more people, institutions, and governments than we would like to admit. We see them in student loans, credit cards, and more. Sadly when all is said and done some of the cost for these bad loans will be passed on to society in general.

Debt Is On The Rise And Much Of It Will Never Be Repaid

Years ago I wrote a piece titled, "Where Bad Debts Go To Die." Also, another posting that spills over into this area is one warning of the danger of dealing with "bad people" and how they will muck up your life. As for the motivation for this post, it flowed from a pop-up ad from a fella promoting a seminar that was "coming to a town near you." It promised he would show you how to make an oversized return on your money by investing or buying tax sale liens. This could be called a loan to the local government with the property as collateral. This is another area of high risk for the inexperienced or unsophisticated investor.

Companies and businesses in general play by a set of rules that can boggle the mind. Other than not meeting their payroll a situation that is immediately noticed, they can bob and weave in a series of moves to hide their true financial situation. Bringing in a new investor, or shafting a current supplier after a big order can extend the life of a dying business. Such a business can claim it is still solvent and reorganizing will set everything straight. If done legally, the top management can collect paychecks the entire time this unfolds.

The current risks of debt defaults are being massively discounted. A great deal of our economic system is about debt. It is important to remember not all debt is created equal. The current risks of debt defaults are being massively discounted. It is important to remember all debts and obligations do not come due at the same time and when a bill is not paid or defaults it often starts a long and drawn-out legal battle. This so-called collection process may extend for years without harsh consequences.

Companies and businesses in general play by a set of rules that can boggle the mind. Other than not meeting their payroll a situation that is immediately noticed, they can bob and weave in a series of moves to hide their true situation. Bringing in a new investor, shafting a current supplier after a big order are just a few ways to extend the life of a dying business.  By stalling on paying bills a business can claim it is still solvent and reorganizing will set everything straight. If done legally, the top management can collect paychecks the entire time this unfolds. 

Gone are the debtor prisons and much of the shame associated will not paying your bills. Still, debts unpaid are more than a transfer of wealth it is theft. This is the reality of modern life and the bottom line is that you never want to find yourself in the position of having to decide whether to most throw good money after bad by taking legal action against a debtor in the hope of recovering even part of what you are owed. 

 

(Republishing of this article welcomed with reference to Bruce Wilds/AdvancingTime Blog)

Monday, April 1, 2024

Advancing Time: Stock Buyback And Flash Crash Risk (Part 2)

Advancing Time: Stock Buyback And Flash Crash Risk (Part 2): Equities Could Fall And Not Come Back! A question lingering on the minds of thoughtful individuals is how "do we get ...

Stock Buyback And Flash Crash Risk (Part 2)

Equities Could Fall And Not Come Back!

A question lingering on the minds of thoughtful individuals is how "do we get there from here?" The fact is that events happen and generally not in a controlled way. Recency bias or our tendency to overemphasize the importance of recent experiences when estimating future events. Recency bias often misleads us to believe that recent events are an indication of how the future will unfold. An interesting mental exercise is to imagine what some of us might consider the unimaginable, a market "flash crash" from which the market does not recover. 

The fact is most investors believe that even if the stock market drops they will be smart enough to get out after taking only a minor hit or simply ride it out. Others simply think no way exists for these markets to fall sighting a lack of investment alternatives and what they see as the "Fed put" having their back. Don't forget, the reason we talk about the "too big to fail" is that they did fail.

As we look at a bull market long in the tooth, a global economy that is rapidly slowing, and debt exploding across the world, it seems any opportunity to panic the bears is not going unexploited. It is against this backdrop that one allows optimist fellas to think, this time is different. The thing many investors are not taking into consideration is that if the market falls like a flash crash on steroids they could be trapped. Investors have been assured that can't happen because circuit breakers have been put in place to arrest panic-style moves, however, imagine a market that falls, trade is halted, and the market simply does not reopen for days or even weeks. As remote as this might seem remember Japan's stock market has only just recently taken out the high it made decades ago.  See the 1980 to 2015 chart below.


It Has Taken Decades For Japan's Nikkei 225 To Take Out The 1980 High


Also, please take a moment to consider the possibility and the far-reaching ramifications of stocks falling from grace. Not only would active stock market investors get hammered but pensions, 401 plans, and most other investment programs would be devastated unleashing a wave of contagion. While you are imagining this scenario remember that America's stock market is the gold standard and consider how less stable global markets would react in countries like China and Brazil.

I continue to contend that we have never recovered from the Great Recession or corrected the many problems that haunt our financial systems such as derivatives and collateralized debt obligations. By printing money, imploding interest rates, and exploding the Federal Government's deficit we have only delayed the "big one." These two quotes on macroeconomic stabilization and crisis speak volumes. First, from Macresilience;


    "As Minsky has documented, the history of macroeconomic interventions post-WW2 has been the history of prevention of even the smallest snapbacks that are inherent to the process of creative destruction. The result is our current financial system which is as taut as it can be, in a state of fragility where any snap-back will be catastrophic."

And next from Nassim Taleb (author of The Black Swan);

    "Complex systems that have artificially suppressed volatility tend to become extremely fragile, while at the same time exhibiting no visible risks. In fact, they tend to be too calm and exhibit minimal variability as silent risks accumulate beneath the surface. Although the stated intention of political leaders and economic policymakers is to stabilize the system by inhibiting fluctuations, the result tends to be the opposite."

These quotes suggest an analogy with ideas about forest management when natural fires are suppressed. If random fires do not periodically clear away forest underbrush, we see a build-up of flammable material sufficient to power a massive conflagration. I certainly think an equivalent truth applies to financial markets. The longer it has been since a painful collapse, the greater the willingness to pile on leverage and complexity, such that the next crisis becomes unmanageable. The "Too Big To Fail" and other policies implemented since 2008 have distorted markets across the globe and laid the groundwork for "The Big One", or what we will someday look back on as the mother of all sell-offs.

Over the years not only have we witnessed many cases of government overreach and many rule changes to protect the system at the expense of the people. What happened in Cyprus years ago should serve as a warning to anyone who thinks money in the bank is safe. A bad haircut, in this case, means you have been robbed. That may be the case if the government reaches in over a long weekend and steals money from your bank account. This is a horrible precedent to set, and the worst part may be how many people accept it saying it is OK as long as it is only on the larger accounts and only impacts the savings of someone else!

By not taking steps to correct many of the ills lurking in our financial system we have made things worse. Absent are actual structural changes necessary for our economy to become sustainable. Instead, we have put band-aid upon band-aid, upon band-aid while what was necessary was the amputation of a diseased limb. After all the threats that this market has avoided, and sidestepped, some investors have come to think of it as invincible. This market has overcome a struggling euro, the financial cliff, the end of Greece as we knew it, a trade war, and a global pandemic.
 
While Knowing such a market meltdown is highly unlikely we should consider the possibility. Remember, none of the oil traders foresaw the oil contango  that occurred in 2020 and shook the oil industry to its core. As far as the surge in financial assets, the Fed should be tickled pink by the fact so much money continues to flow into financial instruments rather than hard assets. This has resulted in far less inflation than we would have otherwise experienced.  In short, things could get quite bumpy for financial assets if wealth decides to shift into hard assets
 
Footnote; This is the link to part one of this article which focuses on the danger created by stock buybacks. https://brucewilds.blogspot.com/2024/03/stock-buybacks-and-flash-crash-risk.html
 
 
(Republishing of this article welcomed with reference to Bruce Wilds/AdvancingTime Blog)

 

Sunday, March 31, 2024

Advancing Time: Stock Buybacks And Flash Crash Risk (Part 1)

Advancing Time: Stock Buybacks And Flash Crash Risk (Part 1): Two older postings that appeared on AdvancingTime in recent years have grown in importance as the markets have exploded upward. One of the a...

Stock Buybacks And Flash Crash Risk (Part 1)

Two older postings that appeared on AdvancingTime in recent years have grown in importance as the markets have exploded upward. One of the articles focused on the dark-side of stock buybacks and how for years they were illegal. The other asked readers to consider, no matter how remote, the possibility we could at some point witness a flash crash so devastating that we see markets fall like they are on steroids. If such an event occurred the damage might be so severe that trading would be halted and traders trapped. These subjects intersect with other factors and events taking place over the years that have thwarted true price discovery. The widening disconnect between the financial sector and the real economy increases the risk of a major economic setback in the future. 

An example of price manipulation is how over the years the BOJ's buying of ETFs has bolstered the Japanese stock market. This could be viewed as a path to nationalizing Japan's debt. In some ways, the actions of Japan's central bank could be considered nothing more than a new model of "stealth nationalization." Two enormous problems flow from such a policy, the first is while giving the appearance of economic growth, the higher valuations are not based on any real quality and the second even bigger issue is that under this policy eventually the central bank will control or pretty much own everything at a distorted value they determine best suits their narrative or purpose. With Japan's stock market now making new all-time highs this is of course no longer considered an issue or moral hazard. Still, it stands as a monument to the massive manipulation used to convince investors all is well.

The subject of growing market fragility and manipulation was recently addressed in a piece put out by "Thoughtful Money." It commented on how algorithms, often trading overnight, give the big boys an unfair advantage. It then dove into how stock buybacks are playing into equities and skewing valuations. This centered on how many corporations are starting to enter the blackout period preventing them from buying back their stock until they've released their quarterly earnings and how this temporarily removes a huge amount of important buying support for shares. While the video rolls on for well over an hour, the first 26 minutes hit the hammer on the nail in how stock buybacks mainly benefit those at the top and destroy true price discovery.

Financial engineering rather than making money plays a huge role in how markets are valued. Before the Great Depression share buybacks and margin lending were a huge factor in lifting stocks to an unsustainable level. This is why for decades stock buybacks were illegal because they were considered to be a form of stock market manipulation. They were legalized in 1982 by the SEC and since then have become a tool for companies and management to boost share prices. Buybacks have been described as "smoke and mirrors," because when a company buys back shares of their stock they reduce the "share float" and increase earnings per share. This often creates a dangerous illusion that draws less sophisticated investors into a market that is not nearly as strong as it appears. Orders to buy back stock are insensitive to price and are set to purchase on any weakness. 

 

During the Trump era, the tax law that lowered corporate taxes also encouraged the repatriation of cash that had been stored overseas. This fed fuel into the share buyback frenzy. It is important to remember that much of the buyback craze taking place prior to Trump’s tax changes was financed from debt raised by selling corporate bonds with interest rates at historic lows. Another kick came from the Fed's massive injections of money due to Covid-19. 

 

This is where I remind you it is major investors that sit on the board or hold executive positions and the same CEOs and other top managers that have received much of their compensation over the years in stock options reap  the largest benefits of stock buyback programs. Also, these insiders have the advantage of being able to create a well-constructed exit strategy allowing them to get out of or hedge their positions before reality sets in and prices fall back to earth. 

 

Stock Buybacks - Financial Engineering 
All this reinforces the argument that Trump's tax bill was strongly tilted towards rewarding America's wealthy. The bill was not about real reform and has only added to the trend of growing inequality. Trump's tax reform may have boosted earnings per share growth by more than twice what U.S. economic growth would have but, has generated little in the way of real or new economic growth. Only by accumulating debt have many laggards been able to afford the buybacks necessary to keep stock appreciation stable. 

It should be noted that corporations tend to retreat from buybacks at times of market uncertainty. Share buybacks proliferate when the market is rising but evaporates when the market collapses. In many ways, the decision way back in 1982 to again allow stock buybacks may highlight the true meaning of the phrase. "Been there, done that, learned nothing." The problem with this is many leveraged companies will not have the money to keep their stock flying if markets fall and stocks get hammered. 

 

Footnote; Part two of this article which focuses on the possibility of a flash crash has now been published. https://brucewilds.blogspot.com/2024/04/stock-buyback-and-flash-crash-risk-part2.html

 

(Republishing of this article welcomed with reference to Bruce Wilds/AdvancingTime Blog)

Sunday, March 17, 2024

Advancing Time: The Plumbing Of The Financial System We Don't See

Advancing Time: The Plumbing Of The Financial System We Don't See: There are a lot of parts or plumbing in the financial system that we don't see. It is important to note the financial system and the eco...

The Plumbing Of The Financial System We Don't See

There are a lot of parts or plumbing in the financial system that we don't see. It is important to note the financial system and the economy may intersect but are not the same thing. Ignoring this fact, as many people do, will come back to haunt us. 

This is why AdvancingTime has pounded away at the idea that where and what we buy has a major impact on the future of both communities and countries. I just finished watching "Thoughtful Money (with Adam Taggart) Good news!" The Zero Hedge team put this special Thoughtful Money's debate on the fate of the US dollar on the YouTube channel. This was a deep-dive discussion of over three hours.  

This important video did nothing to change my mind about where the world is going. In short, I liked Brent Johnson's line, "certainty is death." He claims he is not certain about anything. The footnote under the discussion title makes it clear that Investing in stocks, bonds, exchange-traded funds, mutual funds, and money market funds involves risk of loss. Loss of principal is possible. Also, some high-risk investments may use leverage, which will accentuate gains & losses. Foreign investing involves special risks, including a greater volatility and political, economic, and currency risks and differences in accounting methods. In short, it underlines Johnson's uncertainty.  

The Financial System Is Built Like This

More than one economist, big wig CEO, and Fed watcher have admitted the problems haunting the financial system have very deep roots. These people often contend governments and central banks have not fully rectified the problems causing the great financial crisis of 2008. Instead, they have merely papered over our failures by printing money and flooding the system with liquidity.

 

In truth, the financial system is a rickety cobbled-together mess of poorly fitted pieces. Overall, the financial system is not a well designed machine. Instead, it is glued together in a haphazard way to get the job done. To make matters worse, this system is greased by the greed of those who benefit from stealing a little from here and there. 

 

In the real world, things are usually not intentionally designed to be complicated but the reality is that they just are. Part of getting a clear picture of where we are headed stems from the reality this is not all about economics but politics plays a major part in our future. Recessions have always had the effect of cleansing the economy of weak noncompetitive companies to clear the way for new stronger companies. The efforts of those in charge of such things to remove recessions from the economic cycle has created a new hazard.

An excellent example of "hidden plumbing" is the Japanese carry trade. An article by Bloomberg reporter Masaki Kondo that appeared on Zerohedge on February 1st titled, "Aozora Delivers Grim Reminder Of Japan Carry-Trade Risk" details some of these issues. It details how Japanese investors as a whole have boosted their overseas investment since the BOJ expanded monetary easing in 2013. This includes Japanese banks. This puts them at risk if the cost of borrowing in yen should rise. He point out this could trigger an unwinding of Japan's massive carry trade. 

While many people have focused on the losses US banks have incurred on long-term US bonds and American Banks' exposure to commercial real estate, little attention has been paid to Japan's exposure to these items. Not only could Japanese banks take a hit on both these investments but Japan's exposure to the downturn and losses in China is another area for concern. Yes, it is possible that China's economic problems will spill over and negatively impact Japan. Still, this is an area many financial gurus claim is an opportunity for Japan to expand into and exploit, in short, they claim economic chaos in China is a plus. 

We should be aware that clogs in the system could create liquidity issues and even a change in the velocity at which money moves through the financial system could cause problems. The "slowing in the velocity of money" is rooted in where it is being placed. The speed at which money flows through the economy in some ways is tied to the speculation about the future of inflation. 

Behind the scenes, a lot of things are occurring that we don't recognize as important until they are unveiled as being so. Trade deficits, reshoring of manufacturing, changes in how taxes are accessed, man made and natural disasters, and more all flow into this mix. This translates into "nobody really knows what the future holds." The so-called, often self-proclaimed experts, included.

Another thing we should be worried about is "financial one-offs" These are one-time events that may prove unable to propel the financial system forward over the long haul. In a world void of financially nutritious content, an individual has to really go out of their way to become educated in the way to avoid ending up as financial road kill. The less you know may increase your feeling all is well but does little to ensure your financial future.

 

(Republishing this article is permitted with reference to Bruce Wilds/AdvancingTime Blog)

Sunday, March 3, 2024

Advancing Time: America's Immigration Crisis, Due to Biden's Faile...

Advancing Time: America's Immigration Crisis, Due to Biden's Faile...: CNBC just put out a video on the problems migrants are causing as cities struggle to deal with new immigrants being dropped on their doorste...

America's Immigration Crisis, Due to Biden's Failed Policy

CNBC just put out a video on the problems migrants are causing as cities struggle to deal with new immigrants being dropped on their doorsteps. Even many of the cities that opened their arms to welcome these people want the government to halt the inflow. Coupled with this are calls for Washington to send money to help these cities out. Today, major cities like New York, Denver, and Chicago are finding themselves under extreme financial pressure and not getting the federal funding or assistance needed to cope with the inflow. All this has many Americans saying, enough is enough. The big question is how and when will this end.

 Even some of those formerly advocating the loosening of immigration standards and open borders are coming to a place where they are untenable. Sadly, with the flow of more immigrants has come a slew of problems. Part of the problem is that many of the people streaming over our borders are not workers, this inflow includes people needing expensive healthcare and criminals. Yes, with the good come the bad unless restrictions are in place. More people are not the answer to crafting a strong economy, quality is far more important than quantity.

Remember, this immigration fiasco is occurring while American citizens are forced to stand in long lines with passports in hand. Anyone who has traveled knows you can't just walk into any country without any questions asked. All this highlights the fact that immigration has been an issue for decades and not properly addressing it 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 political pawns.

America's Immigration System Is Broken

The debate over immigration, processing new arrivals, and addressing millions of undocumented immigrants, receives plenty of press but most of our immigration problems lurk below the radar. The point is that we should be careful what we wish for. In our complicated world, there are often pros and cons for every issue. The ongoing migrant crisis is unprecedented and is hitting countries across the world. Here in America, it is impacting not only the border states but is reaching deep within the country.

Even small businesses in my state, far from the border, are 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 people they have known since birth, but that's the law. The comment section of the CNBC video is full of opinions on how opening the border is impacting America. Since these people are flooding to cities, that is where most problems are apparent. Several of the themes revolve around things like, "As a Chicagoan, my city is being ruined." People from New York and Denver are also echoing the same message and crying about what Texas has dealt with 100 times over.

Trump's Politically Divisive Border Wall  
Immigration is the crux of the issue and Trump's so-called wall became an emotionally divisive symbol that took our eyes off the real problem. America's immigration policy is a costly mess. Like it or not, those in charge of such things as controlling our borders are letting immigration reshape the world. This is happening far faster than most people can imagine. Let's call a spade a spade, immigration mainly benefits those entering a country and not the country's current residents. Otherwise, countries would have to pay people to come rather than build fences to keep them out.

Washington has been playing games and politics with America's immigration policy for years it has been a political football. The immigration system is badly broken and fixing it is easier said than done. A huge part of the problem stems from the fact most people can not agree on exactly what kind of immigration system we should have. To many Americans, the key issue is how open the borders should be and who should be allowed to enter. Now Washington's inaction is coming back to haunt us.  

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 function better even in its current poorly crafted form.

A lot more of our political attention should be focused on the broken bureaucratic apparatus that comprises our current immigration system. While we spend hundreds of billions of dollars on this and that in overall cost the wall Trump proposed now seems a rather puny amount. This is confirmed by figures that show merely doing away with making and handling the penny America would save enough to pay for a border wall. Of course, none of this is a solution to the Deferred Action For Childhood Arrivals (DACA) situation. 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.

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. In the overall scheme of things considering America's multi-trillion dollar budget, the 5.7 billion dollars requested for the wall is peanuts. In truth, 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, as we did during the last government shutdown.

 

Footnote; The article above contains several links due to the fact parts of this issue have been the focus of prior AdvancingTime posts. It is important to understand that immigration policies determine the future of a country and its "way of life."

 

(Republishing of this article welcomed with reference to Bruce Wilds/AdvancingTime Blog)

Thursday, February 29, 2024

Advancing Time: The Dreadful "C" Word - Conserve!

Advancing Time: The Dreadful "C" Word - Conserve!: An article I wrote years ago remains as relevant today as when I wrote it. The subject delved into how candidates shy away from the dreade...

Sunday, February 25, 2024

Advancing Time: Austerity Appears To Be An Idea Long Dead

Advancing Time: Austerity Appears To Be An Idea Long Dead: A word nobody has mentioned for a long time is austerity. The term that would take us down the path to sustainable spending has been tossed ...

Austerity Appears To Be An Idea Long Dead

A word nobody has mentioned for a long time is austerity. The term that would take us down the path to sustainable spending has been tossed into the dustbin of history. Today the concept of government restraining spending is considered a bad idea. Those who oppose austerity often cling to the idea that a major reduction in government spending will change future expectations about taxes and future government spending. These are factors that encourage private consumption and propel forward overall economic expansion.

Since 2017 when an article by James McCormack titled, "The Quiet Demise of Austerity" was published on Project Syndicate, the idea of austerity has become toxic. Government spending has gone over the moon. It is a reach to blame it all on governments' response to the Covid pandemic. Still, the fact is that since then America's national debt has soared from roughly 21 trillion to over 34 trillion dollars. In short, austerity seems to have been forgotten just when it is needed most.

In his article, McCormack pointed out that debates about the potential advantages of using stimulus to boost short-term economic growth, or about the threat of government debt reaching such a level as to inhibit medium-term growth, have gone silent.  It is as if the whole world has capitulated to the idea that we can spend our way out of the debt. Other arguments center on the idea that it really doesn't matter and that we will deal with the issue when we have to.

There is no doubt that economic growth tends to mask a multitude of problems. In economics, austerity refers to cutting spending often by lowering and reducing the number of benefits and public services.  Austerity policies are often used by governments to try to reduce their deficit spending. Spending cutbacks are sometimes coupled with increases in taxes in an effort to demonstrate long-term fiscal solvency to creditors. 

Austerity Is Often Seen As Heaping Misery On The Poor
It is easy to point at measures taken to reduce runaway or wasted spending and blame them for creating a reduced spending spiral but that is unfair. Please note that while it is important to control rising budgets and how much is spent, where it is spent is just as important. 
 
In the article I cited McCormack wrote; Objections to austerity were understandable after the 2008 financial crisis when growth was languishing below 2% and sizeable negative output gaps suggested that overall employment would be slow to recover. But now the merits of austerity seem to have been forgotten just when it is needed once again.

It is true that government spending financed by deficits does support economic growth when consumers and businesses are unable to do so. When the private sector is unable or unwilling to consume at a level that increases GDP and employment sufficiently, Keynesian economists claim governments should spend more, and not less. This tends to be a slippery slope that is difficult to exit. Adding to this problem is that the government sector tends to be the least productive part of the economy. Larger government often leads to more regulation which strangles productivity in the private sector. What we are witnessing today is spending more and more in order to achieve economic growth. 

Austerity has been given a bum rap, blaming it for the problems we face is akin to blaming the medicine taken after someone becomes sick for the illness. Austerity measures have been associated with public protest and claims of a significant decline in the standard of living. The argument by contemporary Keynesian economists that budget deficits are appropriate when an economy is in recession bolsters this movement. They claim it reduces unemployment and helps spur GDP growth, and that in an economy one person's spending is another person's income. If everyone tries to reduce their spending, the economy can fall into what economists call the paradox of thrift which results in a reduced spending spiral and a fall in the GDP.

Austerity measures are typically taken in extreme situations where there is a threat that a government cannot honor its debt liabilities.  Such a situation may arise if a government has borrowed in foreign currencies that they have no right to issue or if they have been legally forbidden from issuing their own currency. In these cases, banks and investors may lose trust in a government's ability and/or willingness to pay its obligations and either refuse to roll over existing debts or demand extremely high interest rates.

Often the typical goal of austerity is to reduce the annual budget deficit without sacrificing growth. Part of the goal of these policies is generally to reduce the overall debt burden, as the economy grows. Unfortunately, most efforts by central governments to prop up asset prices, bail out insolvent banks, or "stimulate" the economy and deficit spending make stable growth less likely.  

People often look for someone or something to blame for the troubles we bring upon ourselves. This is especially true when austerity is introduced as a way to bring out-of-control government spending back in check. Austerity has negative connotations because it is often painful. Still, blaming austerity for the blowback from governments living beyond its means is more than unfair. 

Common logic would dictate at all times governments operate with responsible reigns on spending. If a government spends and runs its business in an austere way the issue of when to start cutting or tightening should never surface. There is no doubt that economic growth tends to mask a multitude of problems. In economics, austerity refers to cutting spending, often by lowering and reducing the number of benefits and public services.

Simply put, such cuts are very unpopular and painful to the people and the voters as social spending programs get targeted for cuts and taxes are raised. Also, retirement ages may be raised and government pensions reduced. Even port and airport fees, train and bus fares, and a slew of other cost usually increase. Please note that while it is important to control rising budgets and how much is spent, where it is spent is just as important.

The problem we face today is the wild spending post-Covid never stopped. Every dollar wasted on political pork, fraud, and poorly considered infrastructure makes the country's fiscal situation even worse. Those opposing austerity argue that, in periods of recession and high unemployment, austerity policies are counter-productive, because reduced government spending can increase unemployment. Also, reduced government spending reduces GDP, which means the debt-to-GDP ratio examined by creditors and rating agencies does not improve. 

At some point, the present and the future intersect, it is not just about the deficits of today but the promises you make coming due. These promises and how they affect the financial landscape must be factored in. The bill for overspending does eventually come back to haunt you. That is why we would be far better off if the concept of austerity was replaced or renamed sustainable spending. I suspect that by the time cutting spending is again in vogue, we will be in real trouble.


(Republishing this article is permitted with reference to Bruce Wilds/AdvancingTime Blog)

Friday, February 9, 2024

Advancing Time: What Data Should Investors Believe? It Is All Skewed

Advancing Time: What Data Should Investors Believe? It Is All Skewed: Where are these "consumers are confident" stories coming from? Recent Michigan consumer confidence numbers are up. This comes at a...

What Data Should Investors Believe? It Is All Skewed

Where are these "consumers are confident" stories coming from? Recent Michigan consumer confidence numbers are up. This comes at a time when the New York Fed's Empire PMI kicked off the January data cycle by plunging. Yes, much of the economic data shows the economy is slowing.

It seems that many consumers are convinced the Fed will soon drastically drop interest rates and it will be a big boost to the economy. To many younger people, decades of lower interest rates are the only thing they have ever known. The problem here is that lower rates do not necessarily lead to a stronger economy.  

Part of the problem is that we are seeing the best of this data being revised downward month after month. This news is generally not highlighted on the front page but buried where it is less noticed. What could go wrong in a system where the President has been declared so mentally impaired that he cannot be held responsible for handling documents related to our security and safety?

While Americans seem unable to stop spending, signs are rising that we are reaching the point where lenders would be foolish to extend more credit to them. Today credit card debt is at an all-time high, car repos soaring, commercial real estate is close to crisis mode, and consumer savings rates are very low. All these trends point to trouble ahead. 

Adding to these woes is that inflation is not done, residential housing affordability is terrible while the fed deficit soars and unfunded debt obligations are creeping up. In some sense, it is pathetic that some investors' bright hopes are centered on history's record of Presidential collection years as being positive for the stock market. This is clouded, of course, by something we have heard a lot about, and been warned about, recency bias.

This is our tendency to overemphasize the importance of recent experiences or the latest information that we have witnessed when estimating future events. Recency bias often takes us in the direction of thinking that recent events are more of an indication of how the future will unfold than they really are. Considering the direction of the stock market for decades, recency bias paves the way to thinking other than a few short-lived pullbacks it is always up, up, and away.

Still, some of the data coming out is concerning. If you take a close look at job creation numbers you will find that as of late an explosion in the number of new jobs being created in the government and its money-funded healthcare sector. This is not good news, a healthy economy needs private sector growth. There is evidence we may soon start to see private sector layoffs soar as companies try to remain profitable when they are forced to refinance debt at higher interest rates. 

The Bureau Of Labor Statistics (BLS) birth-death model may be skewing much of the current employment data. Part of this is due to the increased use of Employee Identification Applications also known as EINs. The need to have an EIN is tied to getting a 1099 tax form which in 2000 was dropped from 20,000 dollars to 600 dollars. 


This has promoted many new applications for the easy to apply for EIN. However, these are not new businesses or increasing employment simply moving existing commerce into another part of the economy. Here it is important to remember, that many new businesses don't amount to diddly-squat. Most close within a year often leaving behind unpaid bills. Unpaid debts may create jobs but not the productive kind the economy needs.

When trying to get a handle on where the economy is headed, it is also important to consider data showing the personal savings rate has collapsed. Data reports indicate for many people, real income is down. This means many people are living paycheck to paycheck. In short, people do not have discretionary income to save even with a record number of people working more than one job.

Also telling is that the BLS has sharply slashed the number of estimated hours that everyone was working, from 34.3 to just 34.1. This is a big drop. The last time the workweek was this low was when the economy was shut down during covid.  Other than the covid lockdowns, we have to 2010 to find such a short workweek. that was this anemic.

Some economy watchers argue we have been in a rolling recession and we are closer to the end of it than the beginning. Still, if we return to the idea the main factors holding up the American economy are growing debt and government spending we have a problem. It does not help that America's yearly trade deficit just came in at a staggering  $773.4 billion. The article in this link, spins this a positive development, after all, it is a huge decrease from the prior year.  

Other factors feeding into the economic picture are also fogging reality. For example, a boom in the construction of manufacturing plants started in mid-2021. Last year companies plowed an annualized $220 billion into this sector, which is up by 170% from December 2019. This will have long-term ramifications for the economy as does the fact that this surge in construction will not continue forever.

I would like to end this post by circling back to the issue of jobs. An article that appeared on Zerohedge gives us something to ponder. It called the last jobs report the most ridiculous in recent history. Based on the numbers, it claims that all the job creation in the past four years has gone to foreign-born workers, but there has been zero job-creation for native-born workers since July 2018! 

In addition, the Zerohedge article points out that while in January the BLS claims 353K payrolls were added, the Household survey found that the number of actually employed workers dropped by 31K. Those of us who believe economic cycles cannot be eliminated only kicked down the road where they wallop even a bigger punch than if allowed to occur see a lot of reasons to question where the economy is headed. 

 

 (Republishing this article is permitted with reference to Bruce Wilds/AdvancingTime Blog)

Sunday, January 28, 2024

Advancing Time: Economic Transition Should Be A Natural Progression

Advancing Time: Economic Transition Should Be A Natural Progression: In the Beginning, Everything Is New Economic transition should be a natural progression less altered by government intervention. This ...

Economic Transition Should Be A Natural Progression

In the Beginning, Everything Is New

Economic transition should be a natural progression less altered by government intervention. This thought is reinforced by the history of government intervention which reveals the failings of government to be efficient. I had to go deep into the archives of AdvancingTime to find this piece. It looks at the natural transition and progression in the economy that takes place when allowed. It is important to revisit this concept of economic evolution to understand what may be the best path forward.  

The goal of this updated piece is to focus on  how we might view a developed country versus one that is in its early stages of economic development. To do this, it might be helpful to think of a country in the early stages of development as a newly planned development on the edge of town. In the early stages of development, a great deal of money is spent on building the infrastructure necessary for the planned community, this includes roads, bridges, utility lines, and moving dirt. All this may go on for many years as homes and commercial buildings are constructed, all this creates jobs and new investment opportunities.

At Some Point, Focus Moves Towards Repair And Restore

At a certain stage of development, we reach a tipping point and a change takes place in the nature of how we spend our resources. As developments mature over time a larger percentage of outlays are spent on things like maintenance, updating, and upgrading existing buildings and infrastructure as needed, windows and roofs weathered by nature are replaced and parking lots are repaved and sealed. Rather than pouring money into strictly new construction, we find as an economy matures its rhythm changes and the focus should become sustaining what has been created to maximize our prior investment and extend its use. 

An example of the natural transition that takes place over time is how during the early 1900s just after the automobile became popular among the masses garages began to appear in cities. These replaced the structures built for horses. In the neighborhoods being built at the time garages were constructed for one car and fairly narrow to accommodate the cars of the time. When cars became larger and families started owning more than one automobile these garages were no longer adequate and had to be enlarged. This example is used to highlight the fact that as lifestyles change neighborhoods change and evolve to better fit our needs and desires. 

Over time with each new invention, we alter our homes and the economy as well as a way of adapting to the new realities life fosters upon us. In a perfect world, we would see developed areas not only continue to be maintained but steadily evolve and move forward. Construction tends to reflect the lifestyles of those living during the planning and building phase. Rather than bulldozing these buildings, I contend it would often be better to upgrade and preserve the best characteristics unique to the era in which buildings were conceived and do so in a way that makes economic sense. When it comes to buildings this means things such as adding insulation, replacing windows, or upgrading electrical panels.

Much of mankind has adopted mantras such as "move forward or die" and "newer is better." These often repeated sayings tend to be short-sighted and discount what those before us have brought to the table. Failure to recognize this economic transition and reflect upon the natural progression of society ushers in conflicts and even war. Part of this comes from shortsighted politicians trying to produce the ever-growing growth we have been told the majority of voters want. This shortsightedness helps to explain why here in America we never hear politicians on the national scene call for conservation unless it is during an emergency. Consumers conserving, reducing waste, and any talk of government austerity usually conflicts with the goals of lobbyists hell-bent on creating growth at any cost.

War Is Wasteful And Disrupts The Natural Progression

The idea that the way to grow is to increase our population is flawed. Simply adding mouths to feed and efforts to merely add new workers to replace those retiring creates additional demand but is flawed and shortsighted and ignores many other problems. Just getting bigger is not always better and we must recognize even trees do not grow to the sky. At some point, we must face reality. War is often the byproduct of such growth and war has proven to be a poor answer to creating a better world. The bottom-line is we should focus on a transition toward a future that is sustainable over the long term.

When it comes to the economy, the pathway of natural transition means finding new ways to manufacture and deliver goods. Unfortunately, the shift from a growth economy to one that is sustainable over time is very difficult to make for many countries. Change can create a slew of social as well as economic problems. Sadly, we find that today the trend, often driven by governments trying to stimulate growth, has become to encourage a total remove and replace. This is seen in the way new regulations make things  obsolete. 

While ending the life of structures and systems prematurely may create jobs it also creates a lot of waste. Such waste is not new. We witnessed a huge amount of waste years ago when America rapidly switched its broadcast system from analog to digital, and hundreds of televisions were dumped into landfills. It seems that today this is again happening as we are pushed into electric vehicles.

The world of tomorrow will create many new challenges as automation reduces the need for workers. This will cause us to struggle with creating jobs that make people feel useful and create lives that have a purpose. The toxic mix of big predatory companies and big government interrupts the natural transition and overpowers individual choice.

When discussing such things it is easy to extend the conversation to things like income inequality and even more interesting issues. Such as, what do people deserve from society merely because they are born? Do individuals have an obligation to give back to society and not simply take and make demands upon it? These are questions we will continue to grapple with going forward and most likely the correct answer is embedded in reflection and thought.

 

(Republishing this article welcomed with reference to Bruce Wilds/AdvancingTime Blog)

Wednesday, January 17, 2024

Advancing Time: Stimulus Can Flow From Monetary Or Fiscal Policy

Advancing Time: Stimulus Can Flow From Monetary Or Fiscal Policy: Since 1982 whenever the economy has gotten into trouble the Fed has cut rates, often hard and fast. This has created a huge reliance on mone...

Stimulus Can Flow From Monetary Or Fiscal Policy

Since 1982 whenever the economy has gotten into trouble the Fed has cut rates, often hard and fast. This has created a huge reliance on monetary stimulus. This is the handle the Fed has taken to controlling economic activity over the last several decades. It is also one of the main reasons markets are expecting lower rates going forward. 

The other way to kick the economy to a higher level is through government spending or fiscal stimulus. This is also known as government money printing. The national deficit has exploded in the last fifteen years which indicates both types of policies are being overused. Unfortunately, expanding government fiscal policy often results in money being poorly spent, or flat out wasted, while leading to high government deficits. 

This comes across as a MMT answer to economic growth which potentially leads to high inflation. An ugly often discounted fact is that it also results in a "bigger" government with a larger footprint. To be clear, since the beginning of 2022, spending on manufacturing construction has soared. It is difficult to tell when this government fiscal spending will run out of juice and slow. Much of this construction is due to a combination of companies re-shoring supply chains as well as government spending. 

When the spending from government fiscal policy slows the economy will most likely also slow. This is especially true if the new manufacturing plants are highly automated and do not create a lot of new jobs. Another factor we face is the cost of products flowing from them may also be higher than those America had been importing from low-cost countries.

These policies are two distinctly different animals. It is important to remember that the growth generated from low-interest rates also has some drawbacks. This takes us to the issue of where is the stimulus coming from. It is very likely that stimulating the economy through monetary policy and stimulus from fiscal spending have different long-term implications for inflation. 

Inflation, disinflation, and deflation are often misunderstood terms and so are the reasons driving them. Part of this comes from the confusion generated by government numbers versus real inflation. Real yields matter, and the government uses a method that tends to promote lower inflation figures or underestimate what we really face. It is only over the long term we can see how different and how bad these trends have become. 


Republishing this article is permitted with reference to Bruce Wilds/AdvancingTime Blog)

Thursday, January 11, 2024

Advancing Time: "It Will All End Badly" This All Points To A Massi...

Advancing Time: "It Will All End Badly" This All Points To A Massi...: While the economy and financial system chug forward, the idea we have charted a course that will end in ruin remains. Looking down the road ...

"It Will All End Badly" This All Points To A Massive Reset

While the economy and financial system chug forward, the idea we have charted a course that will end in ruin remains. Looking down the road the numbers do not work. When they are not jockeyed, jerked around, and falsified numbers tend to tell the truth. This was the message voiced by the late, Allen Meltzer. Born in 1928, Meltzer was viewed by many economists as America’s foremost expert in monetary policy even though he was little known by the masses. 

Recognized for his wisdom and achievements in economics, Meltzer was a professor of political economy at Carnegie Mellon University and a visiting fellow at the Hoover Institution. He authored the three-volume “A History of the Federal Reserve” and for over 25 years he chaired the Shadow Open Market Committee, a group that meets regularly to discuss the policy of the Federal Reserve.

Allen Meltzer On YouTube (click to start)

To say Meltzer was not a fan of the economic policies that unfolded since 2008 is an understatement. “We’re in the biggest mess we’ve been in since the 1930s,” he was quoted as saying, before he went on to claim that, “We’ve never had a more problematic future.”

In a Wall Street Journal opinion piece on June 30, 2010, titled "Why Obamanomics Has Failed" Meltzer wrote about some of the biggest enemies facing future economic growth. He went on to say that the administration's stimulus program failed. Two overreaching reasons explain the failure of Obamanomics. First, administration economists and their outside supporters neglected the longer-term costs and consequences of their actions. Second, the administration and Congress have through their deeds and words heightened uncertainty about the economic future.

A few years later, in May of 2014, Allen Meltzer penned a piece that appeared in the Wall Street Journal. His opinion was highly valued, not only because it is based on his long-developed work and studies, but because of his age, he had far less motivation to lie than many of those currently involved in forming policies today. In the article, which is copied below, Meltzer gave his take on where the economy was headed. The fact he died in 2017 does not lessen his insight. Meltzer wrote;

     The U.S. Department of Agriculture forecasts that food prices will rise as much as 3.5% this year, the biggest annual increase in three years. Over the past 12 months from March, the consumer-price index increased 1.5% before seasonal adjustment. These are warnings. Never in history has a country that financed big budget deficits with large amounts of central-bank money avoided inflation. Yet the U.S. has been printing money—and in a reckless fashion—for years.

    The Obama administration has run huge budget deficits every year, which, together with the Bush administration, amounted to $6.7 trillion from 2006 to 2013. The Federal Reserve financed almost $3 trillion of these deficits by purchasing Treasury bonds and notes. The Fed has also purchased massive amounts of mortgage-backed securities. Today, with more than $2.5 trillion of idle reserves on bank balance sheets, there is enormous fuel for greater inflation once lending and money growth rise.    

To avoid the kind of damaging inflation the U.S. experienced in the 1970s and early '80s, the Fed could raise interest rates, including the interest it pays banks on reserves, inducing banks to hold most of the $2.5 trillion of reserves idle. But interest rates high enough to discourage borrowing and lending would likely send the economy into another damaging recession.

    Fed Chairwoman Janet Yellen recently admitted that the central bank doesn't have a good model of inflation. It relies on the Phillips Curve, which charts what economist Alban William Phillips in the late 1950s saw as a tendency for inflation to rise when unemployment is low and to fall when unemployment is high. Two of the most successful Fed chairmen, Paul Volcker and Alan Greenspan, considered the Phillips Curve unreliable. The Fed's forecasts of inflation ignore Milton Friedman's dictum that "inflation is always and everywhere" a result of excessive money growth relative to the growth of real output. 

    The Fed focuses far too much attention on distracting monthly and quarterly data while ignoring the longer-term effects of money growth. The country's present dilemma originated in 2008 when the Fed properly and forcefully prevented a collapse of the payments system. But long before idle reserves reached $2.5 trillion, the Fed didn't ask itself: What can we do by adding more reserves that banks cannot do by using their massive idle reserves? The fact that the reserves sat idle to earn one-quarter of a percent a year should have been a clear signal that banks didn't see demand to borrow by prudent borrowers. 

    The Fed's unprecedented quantitative easing since 2008 failed to lead to a robust recovery. The unemployment rate has gradually declined, but the main reason is that workers have withdrawn from the labor force. The stock market boomed, bringing support from traders, but the rise in asset prices of equities didn't stimulate growth by inducing investment in new capital. Investment continues to be sluggish. 

    And some side effects of the Fed policies have had ugly consequences. One of the worst is that ultra-low interest rates induced retired citizens to take substantially greater risks than the bank CDs that many of them relied on in the past. Decisions of this kind end in tears. Another is the loss that bondholders cannot avoid when interest rates rise, as they have started to do.

    Accumulating data from the sluggish loan market and the weak responses of employment and investment should have alerted the Fed that the growth of reserves and the low interest rates haven't been achieving much. Similarly, the Fed should have noticed in recent years that instead of a strong housing-market recovery, not many individuals were taking out first mortgages. Many of the sales were to real-estate speculators who financed their purchases without mortgages and are now renting the houses, planning to resell them later. 

    Most of all the Fed years ago should have recognized that the country's economic problems weren't arising from monetary factors. Instead of keeping interest rates low to finance deficits, the Fed should have explained that costly regulation, increased health-care costs, wasteful spending, and repeated threats to raise tax rates were holding back the recovery. 

    Broadly speaking, the Obama administration has pursued a course the opposite of that taken by the Kennedy and Johnson administrations in the 1960s (and the Reagan administration in the 1980s). Kennedy-Johnson enacted across-the-board tax cuts: Promoting growth came first, redistribution later. By putting redistribution first and sacrificing growth, the Obama administration got neither. Ironically, despite often repeated demands for increased redistribution to favor middle- and lower-income groups, the policies pursued by the Obama administration and supported by the Federal Reserve have accomplished the opposite. 

    When the president campaigns in the midterm election, he will talk about the relative gains by the 1%. Voters should recognize that goosing the stock market through very low interest rates, not to mention the subsidies and handouts to cronies, have contributed to that result. We are now left with the overhang. Inflation is in our future. Food prices are leading off, as they did in the mid-1960s before the "stagflation" of the 1970s. Other prices will follow.

The point of this post is to clarify that just because we have muddled along putting band-aids on our economy does not mean that we have accomplished a great deal. The Trump economy was a continuation of deficit spending and the Biden economy has been even worse. Both have postponed the day of reckoning but most likely made it far worse. Allen Meltzer was a true old-school economist who understood this. 

The time the Federal Reserve bought for the country to come to terms with its many problems post-2008 has been squandered at a great cost. While many people claim the American economy was great before covid-19 hit, others like me who work on Main Street beg to differ. For years, an ugly reality has been masked by easy money and deficit spending. 

Rather than being trapped in the here and now, economists might be wise to reflect more on history. We can learn much from the failings of those who lived before us. If Meltzer was still with us it is very likely he would be appalled at the state of things today.While it is difficult to time when our false economy will finally give up the ghost, it is clear this will all end badly. Today, the biggest question before us is when.

 

(Republishing this article is permitted with reference to Bruce Wilds/AdvancingTime Blog)