Wednesday, February 29, 2012

“Is the New York Times Awakening to Reality?”

Sydney M. Williams

Thought of the Day
“Is the New York Times Awakening to Reality?”
February 29, 2012

Not likely. However, it is interesting that two pieces appeared in yesterday’s New York Times, in apparent unawareness of one another; both focused on the oncoming tsunami of underfunded government pensions. This is a problem the Times’ editorial staff has chosen to downplay, as it blindly has taken the side of profligate unions against their more realistic opponents.

On the front page, Danny Hakim, in a commendable article, exposes some sleight of hand within the State of New York’s public pension community. He writes that the State, local governments, and other public employers are collectively borrowing $750 million this year and at least a billion dollars next year to help fund their pension obligations. And, they are borrowing the money from the $140 billion pension fund to which they owe the money! It is an act of such foolishness that it could well have been an article in The Onion.

The other piece, an editorial on pension reform, praised Governor Cuomo’s pending pension reforms, while omitting the fact, as reported by Mr. Hakim, that the State is borrowing $575 million from its own retirement fund this year, and plans to borrow another $782 million next year. Some reform! The editorial, in true “Onion” fashion, suggests the State of New York learn from the examples of Illinois, New Jersey and Vermont, at least as it pertains to lifting the retirement age and increasing worker’s contributions. According to the PEW Center on the States, Vermont has minor funding problems, Governor Chris Christy has taken some tough, but necessary steps, but Illinois? PEW ranks the state dead last, in terms of funding its pension liabilities. “Publius Forum”, a self-described “freedomist blog”, reported yesterday that Governor Pat Quinn, in last week’s budget address, made only passing reference to overhanging pension reform: “Once again,” the blog noted, “Governor Quinn has failed to lead the charge for pension reform.”

But to return to the incredible subject of the loans: Is it fiscally prudent for the board overseeing the $140 billion fund to lend hundreds of millions of dollars to its most profligate members? If these municipalities were in sound financial shape, there would be no need to borrow from themselves; thus, are not these risky loans? Why should the prudent support the imprudent? What are the consequences, in both economic and moral terms? If this is not kicking the can down the road, I don’t know what is! This is not robbing Peter to pay Paul. This is robbing Peter to pay Peter. The absurdity reminds me of Christopher Buckley’s 2007 novel Boomsday, in which Cassandra Devine suggests, tongue-in-cheek, that baby boomers be given incentives to kill themselves at age 70 – an idea that gains wide acceptance, not only among millions of citizens (including some baby boomers), but on the part of Presidential candidate, Senator Randolph Jepperson who plans to ride this “voluntary transitioning” all the way to the White House.

This is a subject on which I have written many times, most recently on February 8, 2012, “Retirement & Pension Plans – A Wake-up Call.” In that piece I quoted a Wall Street Journal article of a year earlier, which stated that underfunding at state and local levels was a trillion and a half dollars. Meredith Whitney may have been early in predicting the bankruptcy of hundreds of municipalities, but I find it hard to believe that her general thesis is not correct. Imagine what the costs of this debt will be when interest rates – which they will – revert to normal! Harrisburg, PA; Jefferson County, AL; Vallejo, CA, and Central Falls, RI have all filed for bankruptcy in the past couple of years. Unless the economy recovers strongly, property prices increase dramatically, or interest rates decline further there will likely be further bankruptcies.

California faces a pension deficit that analysts put anywhere from $300 million to $500 million, a number that grows each year. Governor Jerry Brown has proposed a twelve point plan to address the concerns, a plan that includes sensible proposals like raising the retirement age for public employees (other than police and firefighters) from 55 to 67 and the introduction of 401(k) plans. It would also end absurd practices like “spiking” (the giving of pre-retirement employees’ raises to boost pensions) and “air time” (the ability of employees to buy credits for years they have not worked.) In the end, what the unions have done, with their excessive demands, is to hurt the very people they purport to protect. And, most Democrats and mainstream media have gone along with this hoax.

Politicians can pretend the problem will go away, and keep the promises coming to ensure their re-elections; newspapers like the Times can ignore the tough and unpleasant truths; union leaders (and members) can live in their Walter Mitty worlds of make-believe, but the people – the taxpayers – are beginning to realize that what was promised by politicians and union leaders, in terms of health and retirement benefits, is not much different than the assurances Bernie Madoff gave his investors.

For twenty-eight years Stephen Reed served as mayor of Harrisburg, PA. He bears most of the responsibility for the ruin in which the city finds itself, though those who voted for him can’t avoid responsibility. Jason Smith, who ran against Mayor Reed in 2005, commented recently on the ugly end they are facing, but the necessity of it. “We can’t,” he said, “live in delusion forever…at some point you have to say what is reality.” No. The New York Times doesn’t get it; at least their editorial staff does not.

Tuesday, February 28, 2012

“Will Gasoline Prices Derail President Obama’s Re-election?”

Sydney M. Williams

Thought of the Day
“Will Gasoline Prices Derail President Obama’s Re-election?”
February 28, 2012

A 95% increase in gasoline at the pump since Inauguration Day won’t help. But it alone will not derail Mr. Obama’s re-election chances. While there has been a lot of talk recently about gas prices, the latest AP-GfK Roper poll indicates that the level of concern regarding gasoline prices, while high, is exactly where it was a year ago

Nevertheless, it is an issue that has the President’s attention, and one which he and his campaign staff decided to jump in front of before Republicans picked up the cudgel. Mr. Obama addressed the issue at the University of Miami last Thursday. Curiously, when talking of the need to drill and look at alternatives, he, without attribution, borrowed a line from his nemesis, George W. Bush: “We need a sustained all-of-the-above strategy.” He mocked Republicans, impugning they were gleeful about higher gasoline prices – “You pay more; they’re licking their chops.” In his speech, he took credit for increased production from shale formations on private and state-owned lands, despite the fact that neither he nor his policies played a role in the development of that acreage. There was no mention of the aborted Keystone-XL pipeline, or of the cancellation of leases on federal lands in Utah and off the coast of Virginia. Nor did he mention the suspension of leases in Montana, the delays in Colorado, or the “slow-walking of approvals in the Gulf of Mexico.

Over the past forty years, Americans have become inured to oil “shocks”. Since Nixon, every President has had to contend with sharp, at times very short, bouts with price changes or product shortages. The October 1973 embargo was the first manifestation that OPEC had a strong hand, and was willing to play it. The catalyst was President Nixon’s decision to re-arm the Israelis during the Yom Kippur War, but it was Mr. Nixon’s decision two years earlier, in August 1971, that set the stage. That was when the U.S. went off the Gold Exchange Standard. The effect was a declining dollar and, since oil is priced in dollars, OPEC members were receiving a depreciated (and depreciating) currency.

The reaction of consumers was shock, as supplies dropped and prices at the pump doubled. Long lines developed at gas stations. The federal government’s response made things worse by regulating the price and allocating the product, restrictions that would not be lifted until late 1980 – early 1981. The people were requested not to put up Christmas trees, for fear of power surges! The embargo finally ended in March 1974, following negotiations led by Secretary of State Henry Kissinger. But prices continued to rise, offsetting inflation that resulted from a depreciating dollar. Republicans lost the White House in 1976, but that had as much to do with the Watergate scandal that forced the resignation of Vice President Spiro Agnew in October 1973 and President Nixon in August 1974.

The second oil crisis in 1979 occurred in the wake of the Iranian revolution, with production curtailed and exports suspended. Once the new regime was in place, production and exports resumed, but at lower volumes. President Carter’s order of cessation for Iranian imports added to the panic. In 1980, following the outbreak of the Iran-Iraq War, oil production in Iran nearly stopped and Iraq’s production was severely cut. Mr. Carter took to wearing sweaters and encouraged people to turn down their thermostats, When Khomeini’s regime took 52 Americans hostage in November 1979 and held them for 444 days it sealed Mr. Carter’s loss to Ronald Reagan.

While there were periodic bouts price increases, oil markets embarked on a twenty-year decline in crude prices. In the early 1990s, there was a short, but dramatic price increase, which did not help President George H.W. Bush, but prices (of both crude and gasoline) in 1999 were lower than they had been in the early 1980s. Prices began rising in the early 2000s, along with other commodities like gold and silver, reflecting expanding deficits and relatively low interest rates. We all remember the summer of 2008 – with credit markets nervous, housing in decline and equity and High Yield bonds in a funk – when the price of crude spurted to $140 a barrel. It was a temporary blip, fueled by speculators and ultimately squelched when the reality of the economic consequences of the credit crisis became glaringly apparent. Nevertheless, it did John McCain’s candidacy little good.

Current increases in crude and gasoline prices do not owe their gains to economic fundamentals. U.S. demand for crude products is running 6% below where it was a year earlier. Europe’s economic heart is barely beating and China appears to be slowing. More likely the current price rises are due to events unfolding in Iran with the fear that the Straits of Hormuz could be closed and also the unrest in Nigeria. Oil is an international product whose price is influenced by geo-political events as well as by economies. And, it is still priced in a depreciating currency – dollars.

Minus external events, oil prices should be weaker. U.S. crude production is up, based on drilling on private and state lands in places like the Bakken in North Dakota. Canada has excess production. Demand is lower, based on conservation, but more importantly on an economy that seems iffy at best. (The Economic Cycle Research Institute – ECRI – indicates that the U.S. economy is slowing, not reviving.) The Citigroup U.S. Economic Surprise Index closed at 58 in February – still positive – but down 34 points since January. Europe is a mess and, as mentioned above, China appears to be slowing.

President Obama, in his Miami speech, said the American people are not stupid. They are not. (We all remember the wisdom of William Buckley when he said he would rather be ruled by the first hundred names in the Boston phone directory than the entire Harvard faculty.) And that is why this issue will be monitored closely by both sides, each looking for an advantage. It is far too early to determine whether high gasoline prices will derail Mr. Obama; it will depend on the economic impact.

Monday, February 27, 2012

“FERAL”

Sydney M. Williams

Thought of the Day
“FERAL”
February 27, 2012

While the concept of FERAL (Full Employment via Ridiculous Acts for Lawyers) is a spoof, it is based on the consequences of increased regulation (think EPA, healthcare and financial services) and lawsuits filed against such formerly august institutions like Fannie Mae and Freddie Mac. There is no unemployment for lawyers in the Beltway. In fact, Washington has become a city of lawyers gone wild. When lawyers create a problem, lawyers must solve it. The Capitol is a feeding trough for lawyers.

The federal government has always been dominated by lawyers. When the First Congress met in New York City in 1789 more than half the delegates were lawyers – not surprisingly, as many had been charged with helping to write the Constitution. Twenty-six of forty-four Presidents have been lawyers. One of them, William Howard Taft, explained it: “And I still insist that it is the law and the lawyer that make popular government under a written constitution and written statutes possible.” Nevertheless, some of the great ones – Washington, Theodore Roosevelt, Eisenhower and Reagan – were not; whereas Franklin Pierce and Richard Nixon were, and as Barack Obama is. Thirty-four of fifty-five signers of the Constitution in 1787 were lawyers. In the current Congress, 202 of 535 members are lawyers. Lawyers comprise about 13% of Washington, D.C’s population, but represent about one half of one percent of the population of the Country.

Lawyers dominate our government in a way no other profession does. Lawyers have a tendency to protect and provide employment to one another. In her 2004 novel, The Falls, Joyce Carol Oates writes presciently about today’s Washington: “How lawyers make work for one another! You’re all priests, worshipping the same god. No wonder you adore one another.” For example, the current issue of The Economist notes that the EPA estimates that complying with new mercury standards will cost businesses $10 billion a year, much of that in legal fees.

I realize that lawyers are necessary, not only because of the litigious nature of our society, but because we are a nation of laws. I have no objection to lawyers getting rich, but I do when they are paid with my dime. According to the Bureau of Labor Statistics (BLS) the median wage for a lawyer working for the federal government is 14 percent higher than the median wage for an attorney in private practice.

What prompted this diatribe was an article by Gretchen Morgenson that appeared last week in the New York Times, headlined “Legal Fees Mount at Fannie and Freddie.” Ms. Morgenson, who is one of the best investigative journalists in the business, wrote that, in the three years since taxpayers rescued the two mortgage giants, taxpayers have forked over $50 million to defend men who were instrumental in nearly bringing the country’s financial system to its knees. If one goes back to 2004 when Franklin Raines resigned due to accounting irregularities, the amount we taxpayers, according to Ms. Morgenson, have paid to defend what have to be some of the slimiest creatures that ever worked in Washington is $160 million. And, of course, the two members of Congress who did more to permit the miscreant behavior by Freddie Mac’s and Fannie Mae were both lawyers – Senator Chris Dodd of Connecticut and Representative Barney Frank of Massachusetts. Jonathon Laing, in last weekend’s Barron’s, confirms Ms. Morgenson’s numbers.

Mr. Raines, who would have had a hard time pleading ignorance (he was a Rhodes Scholar and is a graduate of Harvard Law School), was accused of “accounting irregularities” that allowed him to pick up $90 million in bonuses. A settlement with the government allowed Mr. Raines and two other executives to pay a fine of $3 million. He also agreed to give up $5.3 million in “other benefits”, to “donate” $1.6 million and to “give up” worthless stock options that had been valued at $15.6 million when issued. It used to be that if one wanted to get rich, Wall Street beckoned; now it’s Capitol Hill, ‘K’ Street, or even the White House – think Bill Clinton and Al Gore! Whatever happened to the concept of service? Lawrence Lessig, professor at Harvard Law School asks: “Lawyers rarely test their power, or the power they promote, against this simple pragmatic question: Will it do good?”

Now, I understand that the legal costs, in the case of Freddie Mac and Fannie Mae, are the responsibility of taxpayers because of contracts struck by the companies before they collapsed. The contracts, however, were drawn up by lawyers for lawyers. What chance does the taxpayer have in such negotiations? The whole sorry saga is indicative of what is wrong with Washington. Traders at large publically owned investment banks fell victim to the same malady – when the money is not yours, it’s treated differently. Congress, as keeper of the purse, has a fiduciary responsibility to the millions of taxpayers who have entrusted them with their money. There is no sense of accountability. The President names a new Czar, Congress makes a new budget allocation; the money is not theirs – who and where is the fiduciary? Over the years, both the President and Congress have totally abrogated their responsibilities to taxpayers.

To a large part these concerns explain the popularity of the Tea Party and Ron Paul’s candidacy. There are no grown-ups in Washington. My mother used to say, when denying me a new toy, that money does not grow on trees. It does not. Governor Mitch Daniels, in his book Keeping the Republic, wrote that when he first became Governor of Indiana he had to remind Indiana state workers that they work for the taxpayers, not the other way around.

But, it has provided a feeding frenzy for lawyers. Since the defendants, in the case of former executives at Fannie Mae and Freddie Mac, are not footing the bills, the lawyers rack up the hours and no one represents those who are paying for this circus – the taxpayers. It is a scam that should be publicized and one that should be halted.

Friday, February 24, 2012

"The Internet - The UN and Regulation"

Sydney M. Williams

Thought of the Day
“The Internet – The UN and Regulation”
February 24, 2012

In 1988, Ronald Reagan was in the White House; the economy was humming; stocks were in their sixth year of what would prove to be an eighteen year bull market; inflation had been halted; the bond market was six years into what would prove to be a thirty-year bull market; the Soviet Union was teetering; Eastern Europe was, like Lazarus, about to rise from the dead, and 114 countries had gathered in Geneva for the UN–sponsored International Telecommunication Union (ITU) to work out an agreement to deregulate the international telecommunications industry, a move that proved to be instrumental in allowing the internet to develop and flourish.

Now, twenty-four years later, Barack Obama is President; the economy is struggling; equities are lower than they were twelve years ago; there are incipient signs of inflation; the bond market is being artificially supported by an accommodative Federal Reserve; China and Russia are flexing their muscles; the expansion of democracies is stagnating, and next week a diplomatic process will begin to consider establishing international regulatory control over the internet by the UN-sponsored ITU through a re-writing of the 1988 Treaty.

The 1980s were a time of de-regulation. The 2010s have seen regulation tighten, especially in the U.S. healthcare and financial industries. Sitting at the center now is the fate of the internet.

A “must read” piece on this subject was an op-ed by Robert McDowell that appeared in the February 21st edition of the Wall Street Journal. Mr. McDowell is a commissioner of the FCC. His thesis, as he writes, is that a “top-down, centralized international overlay is antithetical to the architecture of the NET, which is a network of networks without international borders.”

The fact that Russia and China are the principal proponents of establishing international control should raise our suspicions. The decision as to whether regulatory controls should be imposed will be based on a majority vote of the 193 UN members, meaning that 97 countries are needed to win. Mr. McDowell estimates that the proponents, who he argues are for more energized than the dissenters, already have 90 countries lined up. Where does the United States stand in this debate? We don’t know, because, as Mr. McDowell notes, the U.S. has yet to name a leader for the treaty negotiations that begin on Monday. A final verdict is expected in December.

There is no question that the pervasiveness of the internet poses a potential threat to individual privacy. Most of our privileged information – Social Security numbers, bank account and credit card information, birth certificates, photographs, inane comments we may have made on e-mail, Facebook, YouTube, or Twitter – exists somewhere in the netherworld that is the internet. Security safeguards are critical, not only to us, but to legitimate businesses that operate on the Web; for a violation of security threatens their business. In that regard, it is self-regulating. (However, the White House is proposing a “bill of rights” for consumers, something about which I would be skeptical, as the information would still exist on line, but now would be in government’s dubious and slippery hands.) Does not our information already exist in paper files? Yes. Are there frauds operating on the internet? Of course. If government or an international entity were to control that information and use it to monitor our activities, would you feel any safer? I didn’t think so.

Since 1995, the number of people around the globe using the internet has risen from 16 million to 2.267 billion, a compounded annual growth rate of 34%; so that today more that a quarter of the world’s population spends some time on-line. The internet has changed the way we communicate, the way we bank and how we buy and sell goods. It has allowed people all over the world to get college degrees from thousands of accredited universities. It has changed the way we conduct research and it provides access to virtually any publication, at any time, anywhere in the world. It has permitted those living in virtually enslaved conditions under tyrannical leaders to let the world know what is happening. The internet has been a job creator, not a job killer. Mr. McDowell quotes a McKinsey study that found that for every job lost because of the internet, 2.6 new jobs were created.

Are there downsides? Of course. On-line games can be addictive. Child pornography is too easily accessible. People can hide behind false profiles on social networks. Hackers threaten our privacy and “phishers” prey on the vulnerable. Work that might be done domestically can be sent overseas. But every new technology involves risk. Life involves risk.

As with all technological advances, as Joseph Schumpeter so correctly pointed out seventy years ago, creative destruction is a natural process. The bottom line is that the internet has raised living standards around the world; it has lifted millions from poverty; it has given the aspirational in the developing world opportunities heretofore unknown, and it has provided the potential for liberty for millions. It has made us smarter. It has allowed voices to be heard that otherwise would have been silent. And, it has done so largely because it is unregulated. The internet requires a sense of responsibility, and it does not appeal to those who prefer dependency, or to those political leaders who prefer their subjects to be reliant rather than self-reliant. It thrives on freedom. It is a threat to tyranny. It is unsurprising that Russia and China are advocating for regulatory control. It is, however, surprising that the United States seems so cavalier about these negotiations, with the possibility that an internationally internet will be the outcome.

Next week when the talks begin in Geneva, it will behoove us to follow developments closely. Success by the proponents for international regulatory control would mean a threat to freedom, a boon to tyranny, and a step backward for the fortunes and futures of millions of people.

Thursday, February 23, 2012

"Moving, and 'Stuff'"

Sydney M. Williams
February 23, 2012


Note from Old Lyme
“Moving, and ‘Stuff’”

“What we call the beginning is often an end. And to make an end
is to make a beginning. The end is where we start from.”
                                                                                      “Little Gidding”, 1942
                                                                                        Four Quartets
                                                                                        T. S. Eliot (1888-1965)

“Where does stuff go when it dies?
Does it go to stuff heaven?”
                                                                                         George Carlin (1937-2008)
                                                                                         Comedian and Social Critic

Buried beneath the miscellanea that are the contents of my bedside table were eight fingernail clippers. They symbolize my squirrel-like nature, upsetting to those who lead more orderly lives, like my daughter Linie whose house in Rye is a temple to beauty and organization. It is a trait that I unfortunately inherited from some loony ancestor who never threw a bone away when it could be used to make soup, or a stirrup if it could be turned into a cup. Of course, amidst all the rubbish there were some interesting finds, like the sales slip for a pair of end tables bought on December 5, 1965 from Nathan Liverant of Colchester, Connecticut for $300.00. My son Sydney has become their guardian. And then there was the un-cashed check for $100.00 from my son Edward dated 1987 found in the back of the drawer of an antique shaving mirror. I suggested to Edward that he place the check in the back of his daughter’s dresser, so that she might find it years from now.

Last Thursday, we moved out of our 900 square foot, one bed room apartment on 64th Street in New York, after seventeen years. Even if we had not moved, we should have pretended to have done so. The amount of stuff one accumulates over a few years is amazing. A thorough house cleaning is cathartic. Dust balls the size of small mice behind two bookcases and my grandfather’s desk; debris an inch thick beneath radiators that I am sure predated our time in the apartment. But most of the accumulation was my own. Rain would bring another umbrella, to be dumped in the closet alongside its predecessors, until there were a dozen or more. Gloves seemed to appear on their own, as though immaculately conceived. Each coat (and there was an abundance of those) housed its own pair.

Besides the gloves and umbrellas, there were eighty-two ties, thirty-three belts, seven surge protectors, fifteen pairs of shoes – I become exhausted just thinking of all that stuff. Even my seven-year old grandson, George, when he saw innumerable boxes in the library in Old Lyme, asked, “How much ‘stuff’ do you have, Pop Pop?”

Packing up books (700), paintings (40 hung on the walls), photos (innumerable) and papers (countless) is endlessly fascinating, as I kept coming across something I had forgotten. A project that should have taken a few hours, consumed days. Instead of packing boxes, I found myself looking closely at pictures, leafing through albums and papers, and skimming through forgotten novels. But, as George intimated with his question, I have too much stuff. There are those who suggest that apartments and houses should periodically be emptied. But Caroline and I are both collectors; so I doubt that is a route we are likely to take, at least willingly. Nevertheless, I did feel good putting old or unused items outside for the janitor to remove, but wondering, as did George Carlin: where would it go. My stuff, I am sure, has little chance of going to Heaven.

When the last box had been removed and the van finally loaded, Caroline and I walked through the two rooms, our footsteps echoing off the empty walls; we were reminded of the first time we saw the place in January 1995, and the excitement we felt of getting an apartment in New York (to go with our house in Old Lyme) after twenty-five years of living in Greenwich. Part of me was sad, as our departure marked the end of one era, but another part was pleased and I looked toward the future. As T.S. Eliot wrote, “And to make an end is to make a beginning.”

While most of the “stuff” ended up in Old Lyme, the furniture is now in the homes of our children where we can see it, as often as we (and they) choose. So the end is not really even an end. I will continue to write Thoughts of the Day and the more sporadic Notes from Old Lyme, and I will be in New York, at least a few days every week, though now residing at the University Club where I don’t have to worry about my supper or making my bed. Their library exceeds anything I could imagine, and when I walk out of my room I simply shut the door.

But my home will be Old Lyme, a beautiful New England village where our house overlooks the marsh and the tidal flats of the Connecticut River, as it empties into Long Island Sound. This is where Caroline has spent most of the last seventeen years. There is an old saying that says, “Absence makes the heart grow fonder,” but when one reaches a certain age, flickers of mortality pass before half-dimmed eyes, and there appears less wisdom in that adage. I would rather think of Mr. Eliot’s concluding lines: “The end is where we start from.”

Wednesday, February 22, 2012

“Washington’s Birthday”

Sydney M. Williams

Thought of the Day
“Washington’s Birthday”
February 22, 2012
Until I was thirty, this day was celebrated as a national holiday, honoring the birth date of our first President, George Washington. For eighty-five years it had been a federal holiday. In 1968, Congress passed the impersonally named Uniform Holidays Act, which changed the holiday to the third Monday of February, to take effect in 1971. The holiday has become known as President’s Day, lest any former or sitting President take umbrage.

George Washington was born under the (old style) Julian Calendar, on February 11, 1731, the calendar which was in use by Great Britain at the time. The Gregorian Calendar (new style), adopted by England in 1752, moved the date of Washington’s birth to February 22, 1732.

Washington is worth remembering not just for his having led a be-draggled, poorly fed, ill-equipped Continental Army to victory over the most powerful nation the world had known, and for being our first President, but for his sagacity in terms of ensuring the powers of the executive, while limiting the reach of the office. He understood, perhaps better than any of his peers, that everything he did as chief executive of the newly formed United States of America set a precedent. Despite his republican (though patrician) Virginia roots, his sympathies lay more with New England federalists. He instinctively understood the importance of a central government, in terms of foreign affairs and the necessity of funding those efforts, whether for purposes of commerce or defense. He thought big. He assumed the small country (3.9 million people in 1790) of which he was President was destined for greatness.

Washington was noted as a good listener, but he was also decisive, never second guessing his decisions. He respected the dignity of the office, but avoided the trappings. He recognized that the office was bigger than the man. After the Revolution, he could have assumed any office, including that of king. Instead, he chose the more humble title of President. He was the only man ever to receive 100 percent of the Electoral College votes. He despised political parties, yet had to contend with and manage the strong, conflicting personalities of his Secretary of State, Thomas Jefferson and his equally capable Secretary of Treasury, Alexander Hamilton. The former became the head of the Jefferson Republican Party, while Federalists orbited around Hamilton. Jefferson (at least until he became President in 1801) was an advocate for states’ rights. Hamilton, with bills to pay, championed the need for a central bank and for the ability of the federal government to assess taxes.

While Washington was brought up among the gentry of Virginia, he was not wealthy. He had little formal schooling, something he always regretted. He was unusually tall for that age, at a little over six feet, and his early military training gave him a presence beyond his years. Lord Fairfax, the only British Peer then living in the Colonies, was a distant relation. And it may have been that Washington wanted to make a good impression on that family who took him under their wings that got him to write down the 110 Rules of Civility before he turned sixteen. Whatever the reason, he abided by those rules and they served him well. Those simple, commonsensical rules are missing in contentious Washington today. They should be required reading for anyone serving in Washington, or, for that matter, we should all abide by them.

While a President’s Day appeals to our frivolous side – extended weekends are more fun than a single day off in the middle of the week, and are far more efficient to businesses – in not celebrating the actual day, we lose something in terms of how we think of our past. And a country’s past is an essential ingredient of the glue that binds us as a people. When I was a child we also celebrated Lincoln’s birth date on February 12th. Every child knew the date. At school, we studied the men and their times. It is appalling how little elementary school children today know of the great American men and women who led our country, the deeds they did, and how they helped forge the nation we are all so privileged to live in.

Washington was remembered, at the time of his death in 1799, as “First in War, First in Peace and First in the Hearts of his Countrymen.” Whether your family arrived here via Ellis Island in 1908, or whether you snuck across the Rio Grande in 2008, or whether you came here as a slave or indentured servant three hundred years ago, we all owe a great deal of thanks to the man born this day two hundred and eighty years ago.

The 110th (and final) Rule of Civility reads: “Labour to keep alive in your Breast that Little Spark of Celestial fire called Conscience.” It is a rule, during these disharmonious times, worth reciting and maintaining.

Tuesday, February 21, 2012

“The Rending of the Fabric of America”

Sydney M. Williams

Thought of the Day
“The Rending of the Fabric of America”
February 21, 2012

While intentions may have been honorable, the consequences of President Kennedy’s Executive Order 10988 in 1962 and the social welfare programs of President Johnson’s Great Society in the mid 1960s have been an increased dependency and a loss of personal responsibility. The effects of those acts, and the manner in which they have altered our society over the past four or five decades, have become the focus of groups ranging from the Tea Party to Wall Street Occupiers. Tea Partier’s concerns have been the growing tentacles of an increasingly pervasive government. Occupiers have been focused on widening income gaps, an untenable situation that erodes traditional relationships and makes less fluid the steps up and down the economic ladder.

Both protestors are concerned with crony capitalism, with Occupiers placing most of the blame on Wall Street, while those in the Tea Party see politicians as the principal villains. There are others who place blame for a changing America on globalization, by which American consumers have benefitted, but which has sent many manufacturing jobs offshore. A few blame technology, as the principal beneficiaries have been the most talented and best educated.

Whatever the cause, the net effect has been the loss of a common culture that for decades bound our nation and differentiated us from the rest of world – a republic of people who perceived themselves as middle class citizens living in relative harmony, in which individual liberty stood paramount, and the state secondary. Rich and poor, especially in more rural America, attended the same churches and the same schools. It bred a spirit of community. While differences existed both socially and economically, they were less pronounced.

It is a subject that has attracted academics like political scientist, James Q. Wilson, columnists like David Brooks and Ross Douthat, historians like Robert Kagan and Francis Fukuyama and politicians like Mitch Daniels, Bobby Jindal, Chris Christie and Scott Walker, and recently the subject of a book by Charles Murray, Coming Apart. Mr. Murray’s focus is on white Americans, aged 30 to 49; he contrasts mores in 1960 and 2010. His findings show a widening gap in four categories – marriage, industriousness, crime and religiosity – between those in what he terms the “upper middle class” and those in the “working class.” Surprisingly, his studies find that the upper middle classes, by and large, live by the same values they did fifty years ago, while the working poor have seen their standards deteriorate. In part, he blames the “nonjudgmental” attitude of the elite, upper classes who do not preach what they practice.

The fact that social conservatism is more of a working class phenomenon would seem at odds with Charles Murray’s finding that declines in marriage and church attendance and increases in illegitimacy have characterized that group over the past five decades. However, Jeffrey Bell, in Saturday’s Wall Street Journal, explains that apparent paradox by arguing that social conservatism as being “aspirational, driven by a sense in Middle America that the kind of cultural atmosphere we have…is something that needs to be pushed back.”

In the January/February issue of Foreign Affairs, Francis Fukuama writes: “From the days of Aristotle, thinkers have believed that stable democracy rests on a broad middle class and those societies with extremes of wealth and poverty are susceptible either to oligarchic domination or populist revolution.” We are seeing the effects of both in our country today – the crony capitalism that exists between Washington and business leaders (think TARP and banks, General Motors, AIG and Solyndra) and populist movements, whether it be the Tea Party or the OWS. In my opinion, protest movements are not the problem. Over reach by government is.

There are other examples of a fraying of the fabric that is America. Many see it as inevitable that the 21st century belongs to Asia, and particularly to China. Robert Kagan, in his recent book, The World America Made, argues that there is no assurance that a decline in America’s global influence would leave untouched modern history’s glide toward democracies, free markets and free trade. Would a mercantilist China treat its trading partners as fairly as has the United States? It is a question worth pondering, Mr. Kagan asserts, as so many politicians and intellectuals view a decline in America’s influence with equanimity.

Last week the Senate passed a bill (75-20) authorizing the FAA $63 billion to purchase up to 30,000 drones by the end of the decade for use in the United States for civilian purposes. If the House approves, the President is expected to sign the legislation. Law enforcement officers support the bill, but the risk of them being used to spy on Americans brings to mind visions of George Orwell’s Animal Farm and 1984.

For decades, President’s have assumed increased powers, but the seizure of power by the current administration is frightening, with “Czars” now numbering 45 according to Judicial Watch, many of which are unconfirmed by the Senate and are largely unaccountable to Congress. These appointments are, as Judicial Watch asserts, “at odds with republican, limited accountable government.” Political certitude has replaced a concept of moral absolutism. And, concomitant with that increased power, an increasing number of people come to rely on government.

Ironically, so-called liberals and main-stream media support this power grab on the part of the White House (except when it occurs under Republicans.) A concentration of power in Washington further degrades the fabric that has enveloped Americans since its founding, as it erodes a sense of personal responsibility. The division between economic classes has increased at the same time as government has increasingly expanded its reach. Is there a connection? The split between the economic classes has been aggravated by those who give to government and those who receive. In 1944, Friedrich Hayek wrote: “To be controlled in our economic pursuits means to be controlled in everything.”

Can the trend be reversed? Nobody knows. But there is reason for hope, as signs that a self-correcting mechanism is underway. Traditionally Democratic states like New Jersey, Indiana, Louisiana and Wisconsin have elected Governors who seem intent on returning power from the state and vested interests to the people. Representatives like Congressman Paul Ryan of Wisconsin and Senator Mark Rubio of Florida give hope that common sense might prevail in Washington, with a return toward personal responsibility and less dependency on entitlements. 2012 has the potential to be a watershed year. Over the next few months we will see if a trend is developing: the Supreme Court decision regarding the Affordable Care Act, possibly as early as July; the recall election in Wisconsin, at some point during the summer, and the Presidential and Congressional elections in November.

Wednesday, February 15, 2012

“The Dollar – Don’t They Care?”

Sydney M. Williams

Thought of the Day
“The Dollar – Don’t They Care?”
February 15, 2012

While I have worked in the financial industry for forty-five years, when it comes to currency markets I feel like a novice. My simplistic approach has been to use common sense, which tells me we are on a dangerous, downward path that is accelerating. In general, my attitude has been governed by two beliefs: 1) A strong currency is better than a weak one; its strength should be encouraged, and 2) Buying currencies in which one has no obligations is speculating.

Nevertheless, the long term loss in value of the dollar has affected all Americans. And, since the dollar functions as the world’s reserve currency, a declining dollar affects the entire world. Against a basket of currencies, the dollar has fallen by 20% in the thirty-nine years since the Dollar Index was created in 1973. During those same years, inflation, the silent and insidious tax, has caused an 80% decline in the purchasing power of the dollar. “For forty-seven years,” Warren Buffett wrote on February 9th in a piece entitled, Why Stocks Beat Gold and Bonds, “the implicit inflation ‘tax’ was more than triple the explicit income tax.” It is the over-abundance of a commodity that keeps prices low; as long as supply exceeds demand, prices will stay cheap. And money has been in abundant supply and cheap for most of the past decade, especially since mid January 2009 when the Federal Reserve pushed Fed Funds Rate to a range of 0.00%-0.25%.

Three and a half years ago we were in the midst of the worst financial crisis in the postwar years. The TED spread in early October, 2008 had widened to about 480 basis points, from a more normal 25 basis points. Fed Funds, at the time, were 2%. Reacting rather than anticipating, the Fed lowered the Funds Rate to 0.25% in December after the TED spread had already narrowed to less than half of what it had been in October. In January 2009, with the TED spread about 100, the Funds Rate was lowered to a range of 0.00% to 0.25% where it remains to this day. (By September 2009, though, the TED spread was 16 basis points, lower than it had been at the end of 2006.) And, if Mr. Bernanke is to be believed, Fed Funds will remain at this level until early 2014.

Additionally, three rounds of quantitative easing have kept the short end of the Treasury curve low. Through Operation Twist the Fed has bought anywhere from 58% to 91% of all gross issuance of Treasury bonds dated six years or longer, since its announcement last September, according to Chris Martenson, author of The Crash Course. A cheap commodity is a boon to those who use it as a raw material. The dollar is cheap. For bankers and speculators, money is their raw material. Before the crisis it helped banks facilitate reckless lending to marginal home buyers in the U.S. and peripheral sovereign nations in Europe. There is little doubt that banks needed saving three and a half years ago, and granted there is interconnectedness among banks. Also, banks did not act in a vacuum; they were encouraged by politicians, while serving consumers with little sense of personal responsibility. But aren’t we now favoring some of those who helped precipitate the problem? Their thanks to voters is to get exercised over the Volcker rule. It’s hard to feel much sympathy for them.

Despite the fact that the dollar has declined over many years, consumers have been protected from its more negative effects, due to imports from newly industrialized, emerging nations operating with cheap labor. Inexpensive imported soft goods, electronic products and appliances have acted as governors on inflation, allowing consumers to continue the binge that began in the aftermath of World War II. A thirty-year decline in interest rates has only encouraged the embracement of consumption over savings, and made consumers, until very recently, fearless of debt.

Iran, with the third largest oil reserves in the world, is getting into the act of dollar bashing. According to London’s The Telegraph, the Iranian oil bourse will start trading oil in currencies other than the dollar beginning on March 20th. It presents an interesting challenge, not only to the U.S., but to a Europe that imports 500,000 barrels a day from Iran, imports that are scheduled to end on July 1st, when the trading ban with Iran is expected to go into effect. Iran is now aggressively looking toward Asia as a market for their oil. Europe may have to look to its nemesis – Russia.

Things are changing. The golden age for American consumers is coming to an end, if it has not already done so. A continuing weak dollar coupled with higher prices for imported goods will raise costs for consumers, at a time when unemployment remains high and pressure on wages creates the potential for a period of stagflation. With baby boomers reaching retirement age at the rate of 10,000 a day, and with retirement coffers relatively slim, the government is going to have to encourage saving and investment if they don’t want poverty to spread. Interest rates that benefit the prodigal at the expense of the prudent will only make more expensive the cost of retirement. A dollar that buys less each year works against those nearing, or in, retirement. Making more complex an already too-complex tax code, coupled with higher taxes on capital gains and dividends for average Americans are exactly the wrong prescriptions.

There are those who worry that the United States is headed toward a period of Japanese-style deflation. But there are significant differences between the countries. We are a pluralistic society whose population continues to expand. We are aging, but a lower rate than any other nation in the developed world and substantially slower than Japan. Federal debt in Japan is high, but most of it is owned by their people. And, over the past twenty years, in spite of stagnant growth and a stock market that remains more than 50% below where it was twenty years ago, their currency has rallied 40% against the dollar.

The fundamental cause of the dollar’s weakness is the rapid growth in the nation’s debt. When an individual or business sees their debt expand faster than their income, they know they are headed for trouble, as millions learned to their dismay during the housing collapse and as sovereign states in Europe are learning today. The same arithmetic applies to our federal government, the difference being that Washington has access to printing presses, while counterfeiting by individuals is a crime.

Beginning in the 1970s, federal debt began increasing at a rate faster than growth in GDP. In 1970, GDP was about $1.040 trillion and federal debt was about $375 billion. Today the respective numbers are about $14.9 trillion and $15.2 trillion. During the past four years, the nation’s income has grown at 1.1%, while our federal debt has expanded 59%. If this trend does not reverse itself – if GDP growth does not begin to expand at a rate faster than the growth in debt – we are doomed to a fate like that now infecting Greece.

Tuesday, February 14, 2012

“Valentine’s Day and American Foreign Policy”

Sydney M. Williams

Thought of the Day
“Valentine’s Day and American Foreign Policy”
February 14, 2012

Valentine’s Day evokes images of young (and old) lovers, of chocolates, flowers, and of an estimated one billion Valentine’s Day cards, but also of Al Capone’s gang wasting the competition in a Chicago garage. It was Chaucer who turned two martyred Italian Saints into symbols of romantic love in 1382, with his “Parlement of Foules”, written for Richard II and Anne of Bohemia on their engagement. Prohibition, which was the cause of the gunning down of the unfortunate members of the Moran gang, was a manifestation of unforeseen consequences of government meddling where it ought not.

While ‘love’ is never a consideration in dealing with other nations, foreign nations should know whether they are considered our ‘friend.’ The Obama foreign policy seems to have confused friend from foe. Since the War of 1812 came to an end one hundred and ninety-eight years ago, England has been our oldest and most dependable ally. Yet, it was on this Valentine’s Day three years ago that President Obama returned to the jilted English the bust of Winston Churchill. The U.K. had loaned the bust to this nation in sympathy following the attack on 9/11, which killed 68 British citizens. When British officials offered to let Mr. Obama hang onto it for another four years, the response, according to London’s The Telegraph, was “Thanks, but no thanks.”

Staying on message, the Administration sent newly appointed Secretary of State Hilary Clinton to Moscow the next month. She carried with her a large, red button labeled “reset.” The letters were in English. The United States had enjoyed good relations with Russia in the aftermath of the collapse of the Soviet Union. However, the war in Kosovo (1998-1999) and the United States’ decision under President George Bush to support the pro-democracy uprisings in Georgia and the Ukraine in 2003 and 2004 were seen by Moscow as interference in their internal affairs. An expanded NATO and the decision by Washington and Warsaw to build a European-based missile defense system in the former Soviet satellite nation of Poland were viewed by President Vladimir Putin as acts of aggression; thus Mr. Obama’s opinion that he had to reset the relationship.

Whether one looks at the Middle East, Asia, Latin America or Europe, there is no sense that America is more highly respected today than it was five years ago, despite the unwinding of the wars in Iraq and Afghanistan. As for the above anecdotes regarding England and Russia, it could be that the President is a disciple of Chinese General Sun-tzu who 2500 years ago said, “keep your friends close, but your enemies closer.” Or it could be that he made a mistake. The rebuff was aimed at our century’s oldest ally; the “resetting” of relations was with a nation whose political philosophy is antithetical to ours and which continues to frustrate us and our allies in our relations with Syria, Iran and North Korea. Was that sensible, in an ever-changing and fragile world?

What prompted these ramblings was a provocative piece by Robert Kagan, entitled “Why the World Needs America” in last weekend’s edition of the Wall Street Journal.

Mr. Kagan begins by acknowledging that world orders, including ours, are transient. And as they rise and fall, the economic systems they support also rise and fall. He traces empires from Rome, to Britain, to the present American-dominated order. When the Roman Empire collapsed, “culture, the arts, even progress in science and technology, were set back centuries,” he writes. While the collapse of British and European orders in the 20th century did not usher in a new “dark ages”, it might have done so had it not been for the presence of the U.S., and the defeat of Nazi Germany and Imperial Japan. He argues that while the assumption that America is in decline may prove true, that is not a good thing and should not be encouraged. The policies of Mr. Obama appear based on the expectation that America will have to share hegemony with rising autocratic powers such as China and Russia and emerging democracies like India and Brazil, with a return of the multipolar systems that dominated Europe in the 19th century and culminated in the two world wars of the past century, that left millions dead.

While there have been scattered wars around the world, the almost seven decades since the end of World War II have been among the most peaceful in world history. Mr. Kagan writes: “There is little reason to believe that a return to multipolarity would bring greater peace and stability than it has in the past. The era of American predominance has shown that there is no better recipe for great-power peace than certainty as to who holds the upper hand.”

The era of American power will decline at some point. “It will,” as Robert Kagan writes, “last only as long as those who favor it and benefit from it retain the will and capacity to defend it.” History teaches us that there is nothing inevitable about democracies. Just because it is, as Churchill said years ago, the best form of government devised by man does not ensure their survivability. They must be championed and defended.

So on this Valentine’s Day, despite outrages from OWS protestors, and dictators from Venezuela, Syria and North Korea, it is worth remembering that – and which should never embarrass us – a world that is richer and freer is due in large part because of American hegemony. We should also never forget that the survival of a liberal economic order depends on open trade, free markets and a powerful military presence. In capitalist societies such as the United States, wealth is diluted and, thus, so is power. In contrast, states like Russia and China that are strengthening their militaries are mercantilist nations whose goal is to preserve the rule of their respective political parties via the control of wealth, and the power that wealth brings. Fareed Zakaria writes optimistically in his recent book The Post-American World that rising powers, like China, Brazil and India will choose to live within the framework of the current international system. Perhaps they will. But more likely not. The current system exists, as Mr. Kagan notes, because it has been dominated by one country – the U.S. The rise of any other nation upsets what is a fragile balance. We have no way of knowing whether that change would be good or bad, or if things would remain the same.

Whether the partners of these other nations, in a multipolar world, would benefit to the extent ours have is an unknown – a concern worth pondering. At a time when cynicism has replaced trust from Washington to Wall Street, at least for a day I hope

This day more cheerfully than ever shine
This day which might inflame thy selfe old Valentine.




Monday, February 13, 2012

“Death by a Thousand Cuts”

Sydney M. Williams

Thought of the Day
“Death by a Thousand Cuts”
February 13, 2012

Few things incense me as much as the stupidity and injustice that is taking place in Europe, in the name of equality and fairness. And few things worry me so much as watching our country travel the same road toward so-called social justice, which requires a larger state, massive borrowings and promises to the electorate that are impossible to keep, and which serve only to keep unions in power and incumbents in office. The early morning vote today in Greece’s Parliament, which needs approval of EU finance ministers, only prolongs the agony. It will not solve the problem. For the problem in Greece is not genetic; it’s political.

Blame begins with the proliferation of Socialism, a blissful concept, perpetrated by politicians seeking power; for it provides immediate comfort to citizens and helps keep incumbents in office. But it imposes burdens for future generations, as it substitutes dependency for responsibility and ignores the basic principal that everything in life must be paid for.

Obviously blame lies with the Greek government that employs about 25% of the workforce and whose pension plans are considered the most generous in the European Union. A law introduced in 2002 to make provision for private pension funds (defined contribution plans) has largely been ignored. While the cause of the problem in Greece is easy to understand – a function of promises that exceed abilities, the cure involves pain (and already has.) Unemployment is running in the country at 21% and GDP fell 11.3% in December from a year earlier. When Greek Prime Minister Lucas Papademos says, as he did Saturday night, that failure to accept a tough new austerity package would result in bankruptcy, he was ignoring reality; Greece is bankrupt. The question now must be: How to return to solvency? Government spending represents about 32% of GDP, with healthcare and pensions accounting for a third of that third. There is no easy way out. With Europe’s troika demanding a debt-to-GDP ratio of 120% by 2020, implementing austerity measures mean that the denominator in that ratio declines.

Blame, in my opinion, also lies with the Germans who have done everything to keep alive a currency that is flawed. It is flawed in the sense that a monetary union was established ten years ago without political and fiscal authority. Of the 23 countries that use the Euro, the principal beneficiary has been Germany. The country spent the previous two decades merging their east and west, and then addressing their economy – reducing their debt ratios, alleviating demands of their entitlement obligations and improving their manufacturing. They entered the Euro from a position of economic strength and have become stronger. For them the currency is cheap. For most of the others, it is expensive, especially for those countries along the Mediterranean who spent the past decade irresponsibly expanding social services. Greece, Portugal, Italy, etc., have had to function with a currency whose strength does not reflect the reality of the facts on the ground.

Greece needs a growth strategy, which would involve a change in cultural attitudes and a dramatic reduction in government-sponsored entitlement programs? It means providing incentives to the private sector. Tax evasion in Greece is ubiquitous (a “national pastime” as described last July in the New Yorker.) For example, since pools are prevalent among the wealthy in Greece and are taxed, the sale of green, grass-like pool covers have been brisk. However, is it not possible that one reason for cheating on taxes is that many ordinary citizens are simply disgruntled as to how their tax dollars are spent? Like many socialist governments, Greece relies heavily on a VAT, an insidious and stealth-like means of raising revenues. Its chief attractiveness to believers in big government is that, once instituted, it is an easy tax to increase. Nominal upticks are absorbed with little pain and less opposition. It is, though, highly regressive. Recently Greece raised their rate from 16% to 22%, further penalizing the people at a time of high unemployment and reduced wages, simply to support out of control government spending.

In my opinion and as I have written for a year, Greece needs to quit the Euro. Willem Buiter, chief economist for Citigroup, disagrees. He said back in November that “the bottom line of an exit for Greece is financial collapse and an even deeper recession – or even a depression – with significant collateral damage to the rest of the Euro zone.” But the country is bankrupt. It has a solvency problem, not a liquidity one. Death has been slow and painful. It is agonizing to read of the suffering of the people in Greece, while their leaders negotiate in Brussels or Berlin, each time returning to Athens with more austerity and no plans for growth. A quotation from Emanuel Derman’s new book, Models Behaving Badly, seems appropriate: “In physics you’re playing against God, and He doesn’t change his laws very often. In finance, you’re playing against God’s creatures.” And we all know the value of ephemeral opinions. Greece needs a shock. Would immediate default be worse for the citizens? They need to restart. And the sooner that occurs the better. Former Greek Prime Minister George Papandreou, in a quote in Sunday’s New York Times has it exactly wrong when he said, “We’ve gone too far to turn back now.” The country has gone too far; they have to head in a new direction. For an alcoholic the answer is not another drink.

The reality is that government spending on social services is what created the problem. They have created a culture of dependency. A system of responsibility and accountability must be restored. The question during this time of hardship cannot be how to best preserve the status quo – a socialist system, but how to revitalize the spirit of entrepreneurship and stimulate economic growth. A new and lower valued currency would help spur both tourism and exports.

Dutch Finance Minister Jan Kees de Jager recently said he sees much fewer risks from Greece leaving the euro zone than a year ago. European Commission Vice President Neelie Kroes echoed the sentiment: “It’s not the end of the world if someone leaves the euro zone.” They will eventually and the sooner they do, the sooner they can begin recovery.

In the early 1990s, Canada had got themselves into a fiscal mess with out-of-control spending. By 1993 they were spending $0.36 of every tax revenue dollar on interest on federal debt. Three years later the country was in surplus. Their success could be attributed to Finance Minister Paul Martin. He laid three principles: 1) Focus on spending cuts, not tax increases - $7.00 in cuts for every $1.00 in taxes. 2) Focus on short term goals that are realizable. 3) Assume the low end of all economic forecasts. Greece needs an equally radical response that serves the interests of the Greek people, not the Germans. They have suffered enough.

A treatment of symptoms is well and good, but the penultimate solution will only be found in addressing and fixing the cause – socialism, which breeds dependency and slothfulness and destroys aspiration. Greek history goes back thousands of years. It is impossible to believe that a nation with such a glorious past and that has contributed thousands of immigrants to our shores who have achieved success in the arts, business and politics cannot be a success in the future of their own country. As I wrote earlier, the problem is not genetic; it is political. They need a bold leader, willing to stand up to those that have led them down this primrose path and to their new masters in Berlin.

The United States has put itself on a trajectory that leads in the same direction. A graph on the front page of Sunday’s New York Times is telling. Over the past fifty years, while inflation adjusted increases in spending in defense, education, transportation and interest have been relatively modest, those in entitlements have skyrocketed to $7,448 from under $1,000 for every man, woman and child in our country. The most significant question for Americans today is: what kind of a country do we want? Are we willing to forego economic growth, which will serve to lower everyone’s standard of living, or are we willing to face the fact that we cannot be all things to all our citizens? It is easy to give and to promise, as Mr. Obama does as he campaigns. But that route leads to perdition. We must recognize that all the riches we have as a nation (including all the money Mr. Obama is so freely spending) is because of the initiative, creativity and entrepreneurship of risk-taking individuals. It is not because of a paternalistic government that encourages dependency. The choice is ours.

Friday, February 10, 2012

“The Primaries – What if there is no Winner?”

Sydney M. Williams

Thought of the Day
“The Primaries – What if there is no Winner?”
February 10, 2012

The real news was not so much the Lazarus-like rise of Rick Santorum on Tuesday with his three-state victory, as it was a vivid manifestation of Romney’s greatest weakness – an inability to connect with ordinary people, a lack of charisma or approachability, call it what you will.

Ron Paul is proof that a politician can spend three and a half decades in Washington and not be tainted by the odor that emanates from the collusion between Capitol Hill and K Street. But his very directness is odd, and suggests he will not be the nominee. If we put him aside, admittedly unfairly, as he appeals to people because of his honesty, directness and libertarian views, we are left with three “B” team players – Gingrich, Santorum and Romney.

Newt Gingrich is generally conceded to be a highly intelligent, politically savvy man, but one who comes across as having a nasty streak. It is telling that very few of those who served with him in Congress have chosen to endorse his candidacy. Mr. Gingrich, naturally, has used that silence to argue he is the anti-establishment candidate.

Mr. Santorum’s working class background helps him identify with middle class families, but the stunning margin (17.4%) in the loss of his Senate seat in 2006 raises questions as to his electability. While he appeals to social conservatives, he comes across to more traditional Republicans as an Old Testament Prophet, emphasizing why those who disagree with his God are destined for eternal damnation, rather than speaking optimistically of the opportunities afforded by a pluralistic society, in a country where individual initiative and less intrusive government allows aspirational men and women to succeed or fail based on merit.

And then there is Mitt. He looks Presidential – the right height, hair graying at the temples, slender. He is obviously bright – a BA from Stanford, and two graduate degrees from Harvard, business and law. Though he is the scion to a wealthy and politically connected family, he has been successful on his own, as a founder and head of Bain Capital. He is obviously endowed with the gene common to frugal, hard working people. There is little question that he is more than technically capable to be President and would, in my opinion, be superior to what we have. But he is missing what is known as “the common touch,” the ability to be comfortable while out on the campaign trail. It is still my guess that he becomes the Republican nominee, but perhaps not.

The race to become President is typically one of a very long distance – far longer than a marathon. It begins shortly after the previous November election night. It costs hundreds of millions of dollars. In fact, President Obama has suggested his re-election campaign may require a billion dollars. Mitt Romney, in fact, has been campaigning since before the 2008 election.

From my perspective, Presidential campaigns are far too long, much too expensive and attract second rate talent. Attempts to limit spending do no good. It is not unlike our overly complex tax system; well paid clever people figure ways to circumvent the rules. Public financing of political campaigns would be a violation of free speech. The only answer is something George Bush proposed in 2000: require the full and timely disclosure of all contributions. Failure to comply should result in fines and/or jail time. Sunshine is the best disinfectant.

Nevertheless, it is the system we have today; so what happens if 2286 Republican delegates arrive in Tampa on August 27th with no candidate having the 1144 delegates necessary to win?

For one thing, such an event just might work in Republican’s favor. While I characterize those now competing to be the “B” team, there are plenty of Republicans that easily qualify for the “A” team – Mitch Daniels of Indiana is at the head of the pack, in my opinion. Paul Ryan from Wisconsin has done more to address the inequities embedded in our entitlement programs than anyone from either party. Bobby Jindal, the first Indian-American governor in the U.S., and a Rhodes Scholar, has used the devastation caused by Hurricane Katrina (2005) to re-build the New Orleans school system, transforming what was one of the country’s worst systems into one of the nation’s best. In every election he has entered, he has won by an ever-widening margin.

New Jersey’s Governor Chris Christy assumed responsibility for a budget that was mired in debt and a bureaucracy ladened with corruption. He has put the state on a path toward a sound financial footing. Governor Scott Walker of Wisconsin incurred the wrath of union bosses and corrupt politicians when he exposed the symbiotic relationships that kept both in office for decades – money for votes, ignoring the burden with which they were oppressing the next generation. He is facing a recall election that should take place prior to the convention. Mark Rubio, newly elected Senator from Florida is another rising Republican star. There are others. The point being that the Republican Party is not bereft of talent.

The last time the outcome of the nominating process was decided at a convention was 1976, when incumbent President Gerald Ford was nearly toppled by former California Governor Ronald Reagan. The majority of the delegates who will show up in Tampa will be pledged to a specific candidate, at least on the first ballot. (It is a pledge, not a legal requirement.) If none of the candidates has the delegates necessary to win, the process will require additional ballots, and at open conventions anything can happen, including the possibility that someone from the “A” team could be nominated.

National conventions came into being in 1832. Earlier, members of Congress selected their respective party’s standard bearer. The first binding primary was New Hampshire’s in 1952. That year General Eisenhower, who not once campaigned in the state, defeated long time U.S. Senator and favorite of the Republican establishment, Robert Taft. At the Convention in July, Eisenhower, after some bartering, won on the first ballot, and went on to a landslide victory in November.

Republicans need someone about whom they can get excited. The individual would have to be willing to suffer from the slings and arrows of a Democrat machine that will expose and demonize every detail of their personal lives. Voters are becoming used to such trash, where there are no holds barred and everything is fair game. Unlike President Obama, who for some reason has been shielded from such scrutiny – college buddies, grades, girlfriends, etc – Republicans should expect no such deference on the part of the press, or the opposition.

If the Republican nomination does get decided at the Convention, it won’t necessarily be a bad thing; if an “A” team member is chosen as nominee, and is willing to withstand the scrutiny and onslaught, it would be the Republic that would benefit.

Thursday, February 9, 2012

“The Middle East and the Fed”

Sydney M. Williams

Thought of the Day
“The Middle East and the Fed”
February 9, 2012

“I have come here to seek a new beginning between the United States and Muslims around the world;” so spoke newly elected President Barack Obama on June 4, 2009 at Cairo University. Three days ago, Egyptian officials published a list of 43 people, including 19 Americans (including Sam LaHood, son of Transportation Secretary Ray LaHood), accused of interfering in Egypt’s internal politics. In recent Parliamentary elections, the Muslim Brotherhood, an anti-Western Islamic group that had been banned under former President Hosni Mubarak garnered 47% of the vote. Al Nour, a hard line Islamic organization won 25% of the seats. The secular liberal group, Egyptian Bloc picked up 9%. Egypt looks to be becoming an Islamic state. Kamal Ganzoui, Egypt’s current Prime Minister, said he will not halt his government’s crackdown on protestors. It would be hard to argue that relations with the Muslim community have improved.

Iran continues toward nuclear capability, undeterred and unrepentant. They ignored the United States’ tacit support for the country’s demonic regime during the “Green Revolution” that began nine days after Mr. Obama’s speech in Cairo, a ‘revolution’ that followed the dubious re-election of President Mahmoud Ahmadinejad on June 12, 2009. Videos of demonstrators being bludgeoned and shot did not soften the heart of the Administration in Washington. The death of twenty-six year-old Neda Agha-Soltan, shot in the heart on June 20, was videoed and put up on YouTube. It has been described as “the most widely witnessed death in human history.” Washington stayed aloof. This past Monday, in a bid to head off a possible strike by Israel, the U.S. imposed new penalties and sanctions on Iran – the seventh announced sanction since the first in December 2006. Thus far, sanctions have had little effect. The Iranian government has persisted in their pursuit of a nuclear bomb and, should the West persist, they have threatened to shut down the Strait of Hormuz, through which pass 20% of the world’s crude production.

Since the uprisings began in Syria just over a year ago, an estimated 5400 Syrian civilians have been killed, according to UN reports. Just as the carnage was commencing in Syria a year ago, the United States reinstated diplomatic relations with the appointment of Richard Ford as Ambassador, six years after President Bush recalled Ambassador Margaret Scobey in 2005. Finally, early this week, President Obama recalled Ambassador Ford.

Eleven years after United States Special Forces, in Operation Enduring Freedom ousted the Taliban from Kabul, Afghanistan, they have returned. It was the Taliban, in control since 1994, that permitted Al Qaeda to set up the camps that trained the terrorists who killed more than three thousand – knocked down the World Trade Center towers, crashed into the Pentagon and caused the deaths of forty passengers aboard UAL Flight 93 in a field just north of Shanksville, PA. While there has been much criticism of Afghan President Hamid Karzai, he has been far fairer to women than had the Taliban who forced women to wear Burqas, prevented them from going to school and had them stoned to death for minor infractions. Now the Taliban have returned. A week ago, a leaked U.S. military report suggested that once NATO-led forces withdraw from Afghanistan, Pakistan backed Taliban would move back in. The country is in turmoil, and we are leaving.

The situation in Iraq has been deteriorating since U.S. troops were moved out at the end of last year. Yesterday the New York Times reported that the U.S. plans to cut its embassy staff by half. Americans, according to the Times, were frustrated by what they see as Iraqi obstructionism and “are largely confined to the embassy because of security concerns, unable to interact with ordinary Iraqis to justify the $6 billion annual price tag.” Seven years ago, Iraqis held their first election in their country’s history. Five years ago, the United States began the “Surge”, a military operation unpopular in planning, but successful in execution. By the end of that year (2007), it appeared that the situation was improving. Two years ago, in 2010, Iraqis held their second election, with a voter turnout of 62%, better than we get in many elections. It would be a shame should Iraq drift back into secular violence, after so much time, money and blood was spent ridding the country of its dictator and establishing the principles of democracy.

The Middle East is, as Winston Churchill once described Russia, “a riddle wrapped in a mystery inside an enigma.” It is a place the United States has been involved with for generations. Sometimes in good ways; other times not. By far the most important exports we have are the principles of democracy. While I disagreed with the OWS protestors in Zuccotti Park last fall, others argued with Tea Party demonstrators in 2009, but none of us disagreed with their right to protest. Leaders of countries have accused the United States of interfering in their affairs, but almost always the people in the streets want democracy. No matter how unpopular the Iraq War had become at home by 2008, the principle of helping a people establish democracy was honorable and millions of Iraqis are better off today for our sacrifices of yesterday. Demeaning his predecessor, as Mr. Obama did in Cairo that June, 2009 day was wrong.

The birth of a democracy is never easy. In totalitarian regimes a small number of people have all the power and control all the money. They are not the “one percent”; they are the one-tenth (or one-hundredth) of one percent. Authoritarians never give up easily; they have too much at stake. The concept of sharing, inherent to democrats, is abhorrent to autocrats. Attempts at building democracies, so popular following the fall of the Soviet Union, have become criticized. In part that is because of the success of China and in part because of failures of democracies like Greece. Vladislav Inozemtsev recently wrote a piece in the American Interest, “The Cultural Contradictions of Democracy”. He writes of the European Union facing an existential crisis and of the United States running out of arrows “in its economic quiver.” “The patina of best-practice democracy,” he writes, “is not what it was two decades ago.” I think that is shortsighted. The principles of individual rights of liberty, and of governments of, by and for the people are ageless. There is, in my opinion, another issue that confuses some advocates of democracy and that is the building of a socialist democracy, the dream of many Europeans. That carries risk. As the state assumes additional responsibilities, tries to transform the nation, arguably for the well being of its citizens, it assumes more power. That, in turn, diminishes individual liberties…and democracy.

The issues that consume the Middle East are indeed serious – nuclear weapons in the hands of a regime that has vowed the destruction of one of their neighbors and has threatened to close oil’s lifeline must be taken seriously. Islamists seizing power in Egypt will not be helpful for our relations in the region. Those two countries represent the two largest populations in the Middle East. Iraq sits strategically between Iran and Syria. The demise of its democracy would be a setback in the region.

Markets, like politics, are a continuum. There is no beginning and no end. They may change direction, tacking 20 degrees south or 15 degrees west. But they persist. The world is never without risk. There are times when risk seems more obvious, as it does today. There are those who argue that Mr. Bernanke is keeping rates low – “sedating investors” was one headline – because of macro risks, images of which flit across our screens minute by minute. And those risks are real. But the most dangerous times are those that arrive unexpected, like the near credit collapse of 2008 – the most frightening time I have known in forty-five years on Wall Street. And, in that case, we were saved by men who many of us criticize today. I worry more about monetary policy and its consequences for savers and borrowers, than I do the Middle East. I note that the Euro has held up well against the dollar and speculate that it is not because of Europe’s inherent strength, but because of U.S. monetary and fiscal policies that are causing our currency to depreciate. I worry about politicians trying to transform our democracy. These are risks to the fundamentals of our liberty, and to our markets.

However, few of these worries have gone unnoticed in equity markets. The S&P 500, despite its 20% rise since October, is still where it was thirteen years ago. On the other hand, U.S. Treasuries are to be found in that rarified air that was last seen during the Great Depression. Thus, it seems obvious that if there is a bubble we know where it lies.

Wednesday, February 8, 2012

“Retirement & Pension Plans – A Wake-up Call”

Sydney M. Williams

Thought of the Day
“Retirement & Pension Plans – A Wake-up Call”
February 8, 2012

Personal and government debt remains too high. The number of unemployed continues to pain individuals and harms economic growth. Monetary policy has kept interest rates at record lows, benefitting borrowers, but harming the prudent and the elderly. Above this scenario hovers a retirement prospect that is dismal for all but the wealthy and those protected by governments’ pensions – promises made by bureaucrats to government employees and paid for by taxpayers. Aggravating the situation, is the fact that defined benefit corporate-sponsored retirement plans, for those that still have them, continue to use unrealistic expected return numbers of 7.5% to 8.5%, with most plans grossly underfunded.

For two decades, outsized returns to both bond and stock funds kept the beast of reality at bay. Through 2000, twenty-year compounded annual total returns for the S&P 500 approximated 18%. Returns to bond funds were similar. It was widely assumed that while such returns may have been somewhat above average, they were not abnormal. As it turned out, of course, they were. For the past twenty years, the price return to the S&P 500 has been a far more modest 6.3%. Price returns for the years 1992-2002 were 10.4%; for the last ten years, 2.0%. It is not just the volatility, but the abysmal returns over the past ten years that have chased investors from stocks and that have wrecked havoc with pension plans. In a January 19, 2012 article, Reuters reported that the pension plans of S&P 500 companies hit a record underfunding in 2011 of $458 billion. The Wall Street Journal noted a year ago that pension fund deficits at state and local governments was three times that of corporate plans. For investors, taxpayers, unions and Washington, this should be a wake-up call.

Coming off the highest interest rate levels in a hundred years, U.S. Treasuries have rallied for thirty years. Anyone who bought and held a million dollars worth of a Thirty-year US Treasury in September 1981 received as compensation annual interest of $146,800. After reinvesting his original million dollars at the end of last September, his annual income would have dropped 80 percent to $29, 210. That is an extreme example, but that is what has been happening to savers and the prudent among us. Treasuries may continue to rally, with yields continuing to fall, but even the most aggressive bull has to admit that most of the gains in the bond market are behind us. When rates do rise, bond prices will collapse.

Relatively low stock prices and high volatility – now low, but high in last year’s second half – have created a problem for defined benefit pension plans investing in equities, as mark-to-market rules have chased money from equities into lower yielding bonds where assets and liabilities can more easily be matched.

The principal advantage of mark-to-market accounting is that they keep financial statements realistic, allowing shareholders to determine the viability of a company, or its pension plan. The disadvantage is that money gets forced from long duration assets, like equities, at the worst possible time into low yielding, but safer Treasuries. Short term downdrafts in equity markets can cause managers to react foolishly, despite a liability against which those assets are deployed that may be several years in the future.

Most studies of investment returns over very long periods of time give an edge to stocks over bonds. However, that has not been true for the last couple of decades – a combination of a flat dozen years for stocks and an historic bond market rally. For ten years the S&P 500 compounded annual total returns at 4% versus 6.3% for the PIMCO Total Return fund. Of course, ten years ago the yield on the U.S. Ten-year was 5.78%; today it is 1.97%, and the multiple on the S&P 500 was about 18X; today it is closer to 13X. Extrapolation of recent history often causes investors to do exactly the wrong thing at the most inopportune moments.

Besides the risk of driving investors from historically higher-returning stocks into lower yielding bonds, there are other aspects of pension accounting that are bizarre. Because defined benefit plans do not use current market results when determining the cost of a pension plan (as an individual would), they use an “expected long-term rate of return,” typically between 7.5% and 8.5%, as mentioned above. Among the reasons that “expected returns” have been kept at what seem to be elevated levels is that accounting rules allow stated returns to be added to the company’s net income. For example, (according to the same Reuters article cited above) if a company borrows $100 million at 4% to help fund its pension plan and uses an expected return of 7.5%, the company might add $3.5 million to its net income line, even in those instances where the plan’s assets declined and the company’s unfunded obligations rose. Also, when interest rates do go up, the value of the bond portfolio will decline, but because rates are higher, companies will use a higher discount rate when estimating future contributions to the plan, thereby lowering the amount they must pay in.

Government employee pension funds total about $4 trillion, paid for by tax payers and managed by Wall Street. Unless pension reform is instituted, taxes will rise to make up for any shortfall between what has been promised by government and union leaders, and what the managers of the fund have delivered. All of this means that the world will inexorably continue to move toward defined contribution plans, leaving most people woefully ill equipped to provide for their retirement needs.

We find ourselves in this unpleasant place in large part because of arcane pension accounting rules that appear irrelevant to the need of long term investors, because equity markets overextended in the 1990s, because of interest rates which have been kept at artificially low rates for too many years by the Federal Reserve, because of a federal government that encourages dependency at the expense of personal responsibility, and because of a culture our society has fostered that encourages consumption over savings. Reversing this trend will not be easy. Government can help, but that will require of Washington a 180 degree turn from the direction we are now heading.

Ironically, for investors though, a need for increased savings and personal investment for retirement should offset the natural outflow from riskier investments by retiring baby boomers and that, over the longer term, should be good for stocks – a silver lining in an otherwise darkening cloud.

Tuesday, February 7, 2012

“Is the President Beatable?”

Sydney M. Williams

Thought of the Day
“Is the President Beatable?”
February 7, 2012

A sitting President has an enormous advantage over contenders. He has free access to the airwaves and campaigning can be camouflaged as work – and paid for by taxpayers. The office exudes power. When things get dicey at home, he can head overseas, as all Presidents have done in the modern era, and where the press is almost always favorable. And, in this instance, Mr. Obama has a significant edge in terms of money. But the single most important criteria in a Presidential election is the economy and how people feel now, versus how they felt four years earlier. (i.e., Ronald Reagan in 1980: “Are you better off today than four years ago?”)

Despite recent economic numbers improving, according to the Bureau of Labor Statistics (BLS) there are 5.6 million fewer people working today than when the recession began in 2007. And three million more have entered the work force since the last election. Mr. Obama, though, is nothing if not deft. As Daniel Henninger pointed out in his last Thursday’s column in the Wall Street Journal, the President has been distancing himself from his own economy, proposing (“with a straight face”) a new direction: “An Economy Built to Last.” If that is what he is now considering, what has he been doing for the past three years?

Away from Washington and out on the hustings, the President’s campaign is remarkable, utilizing a L├ęger de main, empathy, demagoguery and outright falsehoods. At the same time, Democrats have raised $139,526,000 for Mr. Obama’s campaign versus $57,113,000 for Mr. Romney, and Mr. Romney may not secure the nomination for another three or four months. Republicans have been attacking one another and appear to be playing defense when it comes to Mr. Obama. However, that is not unusual at this point in the campaign. So, all may not be lost. In late 1950, during the Battle of Chosin Reservoir, the most decorated Marine general in history, General Lewis “Chesty” Puller found himself surrounded. He sent back a message: “We’ve been looking for the enemy for some time. We’ve finally found him. We’re surrounded. That simplifies things.”

Will Republicans be able to exploit weaknesses in Mr. Obama’s armor, as General Puller did the Chinese? Will disjointed Republicans be able to decide on a message that is simple to explain and arouse emotions as well as intellect? The next few months will tell.

As a general observation, Democrats always have it easier in political campaigns than Republicans. It is easier to promise entitlements than it is to educate voters as to why those same entitlements, left as they are, risk bankrupting the country. It is easier to stand up and declare that fairness means the “rich” should pay their fair share, than it is to explain that the “rich” are now paying the largest percentage of federal tax receipts in the country’s history and that almost 50% of people pay no federal income taxes. It is easier to give than to ask.

Mr. Obama’s vulnerability lies with Independents. Independents today comprise about 40% of the electorate and in 2008 he won their vote by eight points – roughly the margin by which he won the election. In 2008, Democrats represented about 36% of registered voters, Republicans, about 27% and most, but not all, of the difference were Independents. About 120 million people voted in that election. Since the 2008 elections, according to a December 22, 2011 article in USA Today, 2.5 million people have left the Democratic and Republican parties, while the number of Independents continues to grow.

It comes as no surprise, therefore, that Mr. Obama has moved toward the center in recent campaign appearances – ignoring those programs he so vigorously pursued in his first two years – those he passed and those he proposed, but did not pass. He is now advocating (or claiming to) policies more acceptable to fiscal conservatives. Republicans, once they decide on a candidate, will have to do the same, move toward the center. No one, Democrat or Republican can win the Presidency without attracting independents, a group that one might characterize as socially liberal and fiscally conservative – and in this election fiscal concerns will rank highest; though recent turmoil in the Mid East, supposedly one of Mr. Obama’s strong suits make him susceptible in matters of foreign policy.

However, as Republicans battle for the nomination, each candidate trying to out-do their competitor in terms of how conservative they are, become less attractive to the Independents they will have to woo in order to win the general election. As a result, many pundits and observers have become increasingly convinced that Mr. Obama is bound to win re-election, perhaps by a wide margin. I am not convinced, though. The election is still nine months away, and a lot can happen.

To win the election the Republican nominee must tack toward the center, but he must remain fiscally responsible. He (for good or bad, the candidate will be a man) must seize the initiative and run a positive “can-do” campaign. He should not run against what the President has done, but explain simply and positively what he will do to get the economy growing faster. He must address the fact that one third of our federal debt – $5 trillion – has been added in the past three years with little to show. He must restore a sense of individual responsibility and halt the move toward dependency. He must have a comprehensive, but simple tax reform package. He must be unafraid to take on the public sector unions, including the teacher’s unions, and call them what they have become – self perpetrating mechanisms for keeping their leaders, and their Democratic supporters, in power. He must start with education and recognize the vitality of the global world in which we live and suggest ways to adapt, not retreat. He must address the issue of unemployment and be prepared with a plan to address it. Correcting it will not be easy, either to do or to explain, but people are intelligent. They get it. The problem needs to be honestly and clearly explained and understandable options for solving must be offered. People can live with temporary pain if they sense that solutions are on the horizon and that they will stimulate growth. And, he must do all this while exuding a sunny, but confident demeanor.

Is President Obama beatable? I believe he is. He has taken the country down a path toward increased dependency and less individual responsibility – a path at whose end lies European socialism. The electorate should not be taken in by his late swing toward the center. Unlike President Clinton, Mr. Obama has a far clearer and more ambitious agenda. But, it will be no walk in the park. Fortunately the economy shows signs of gradual improvement, something that will help the incumbent. But the American people are an intelligent, industrial and independent lot. The right candidate with the right message, articulated in a positive manner can win the day. It will take courage and conviction. Mr. Obama can be defeated, but the job will not be easy.