Friday, March 30, 2012

“A Rose is a Rose is a Thorn, and Other Stories”

Sydney M. Williams

Thought of the Day
“A Rose is a Rose is a Thorn, and Other Stories”
March 30, 2012

Oral arguments represent the theater that is the Supreme Court. Decisions are considered and decided behind closed doors. Keep in mind, the only people who have probably read the entire 2,163,744 words of the Affordable Care Act (ACA) are those clerking for the nine justices. The media and those of us in the markets, however, deem it critical to note every word and parse every sentence, in a search for an illusive answer we hope to detect, but that nobody likely will.

The three days of oral argument came to an end Wednesday, with nobody being any wiser as to which way the justices will vote. It still looks like a 5-4 decision, suggesting, as we know, politics does play a role in matters of judicial decisions.

The first day was spent determining whether the fee to be paid by those opting out of the requirement to buy healthcare insurance was a tax or a penalty. That one appeared reasonably easy…both sides wanted the same thing…it will be a penalty – at least for the day – allowing the case to continue. Under the law, if the penalty were a tax, then no suit could be brought until January 2014 when the penalty (tax) would first be assessed. A tax is a tax, until it becomes a penalty and then, once again, a tax.

Congress and the President, you will recall, did not want to call the penalty a tax, because, one, the Affordable Care Act was supposed to save money, not cause taxes to rise and, two, because the Democratic Congress knew they would be unable to push through a bill – as controversial as this bill was – that bore a tax. Thus day two was about the mandate, the heart of the bill. The ACA “mandates” that if people do not buy health insurance, they must pay a penalty. The mandate is crucial to the success of the Act, for without those penalty payments, insurance costs would be far higher and could (would) cause insurance companies to exit the space – leaving open the possibility the government would insert a single payer, perhaps their intent all along.

Thus the debate on day two centered on the constitutionality of a mandate under the Commerce Clause, and began discussion regarding the possible severability of other aspects of the Act should the mandate be deemed unconstitutional. (Justice Ginsburg wanted to know if this was to be a wreckage or a salvage operation!) After two hours of oral debate, the general sense by most observers was that the mandate may not survive. Justice Anthony Kennedy’s statement to Obama Solicitor General Donald Verilli was telling. “Under the mandate,” he said, “the federal government has a duty to tell the individual citizen that it must act, and that is different from what we have in previous cases and that changes the relationship of the federal government to the individual in a very fundamental way.”

The cynic in me says be wary of voiding the mandate without voiding the entire bill, for if severability is allowed then law professors Richard Epstein and David Hyman may prove prescient. Earlier this month, in a Manhattan Institute brief, they wrote: “Key provisions in the law are calculated to undermine the long-term viability of the private insurance market by making existing coverage unaffordable or unavailable at any price.” The Act states that insurance companies must accept all patients regardless of preconditions. When actuaries tabulate the price they must charge the insured, without payments from the mandate’s penalty (tax), the cost may prove to be exorbitant, and thus not economically feasible.

Should the mandate be declared unconstitutional, one would suspect the entire Act to be declared unconstitutional. But I am not so certain. Cleverly, the Obama Administration allowed provisions of the bill to already begin. For example, young people under the age of 26 have been allowed to remain on their parents’ insurance. There are 2.5 million of these young adults, all of whom would be tossed off the insurance rolls. Also, disallowing those with preexisting conditions would indeed be a hardship. Resolution won’t come until the Court’s session ends at the end of June. But if the mandate is declared unconstitutional and the balance of the Act is allowed to stand, the severability issue may linger; and that could mean an eventual step toward a single payer and nationalization of the industry, the goal, I am sure, of the adroit Mr. Obama.

Day three continued on the issue of severability and the fate of Medicaid, which under the ACA will be asked to pick up an additional estimated 20 million people, with the federal government contributing about 90% of the costs, and the rest to be picked by already financially strapped states. The most encouraging thing I read – from the perspective of one who thinks the entire Act is a canard – was the defensive tone of an editorial in Thursday’s New York Times. When Justice Anthony Kennedy sensibly suggested that it would be more extreme to preserve part of the statute than to strike down the whole thing, because that would alter Congress’ intent. The Times retorted, like a spoiled child, conveniently ignoring the legal niceties with which the Justices are contending: “But if that is his worry, why not uphold the mandate to avoid having to figure out where to draw the line?”

As to the question of Medicaid and whether forcing the states to take on more expense was coercive, the conclusion of most was that that aspect of the Act would be allowed to stand, despite the threat that if states did not go along the federal government might withhold normal Medicaid funds. The term “coercive” did, however, elicit a bizarre comment from Justice Elena Kagan: “It’s a boatload of federal money for you to take and spend. It doesn’t sound coercive to me.” Her comment beautifully illustrates the problem with Washington. Money is deemed to be free. There seems little concept that whatever money government spends has its origin in the hard work of the people. It is not the federal government’s gift to the states. It is the people’s gift to the government, and those in government have a fiduciary responsibility to spend it wisely, and to remember from whence it came.

Keep in mind that I am no expert in this field (nor am I in any!) We have at our firm, in Brian Wright, an analyst who has made a career studying this issue and I would urge you to read his assessments. I simply look at the issue from a perspective of individual rights, in a world where government keeps assuming increased powers, with the effect of increasing dependency and decreasing responsibility. The risk with this Act, as it in all cases where the government overreaches, is that the rose that is freedom becomes a thorn that is tyranny.

Wednesday, March 28, 2012

“Mob Psychology – ‘The End Justifies the Means’”

Sydney M. Williams
Thought of the Day
“Mob Psychology – ‘The End Justifies the Means’”
March 28, 2012

Ochlocracy is a Greek word that means a rule by the general populous (democracy) that has been infiltrated with demagoguery: passion supersedes reason. In English, we know it as mob rule.

Often, mob movements are relatively harmless. Examples might be something as simple as football fans cheering for their team, or college students marching for some specific cause. But at times these types of activities get out of hand, as happened during the Vietnam era, when anti-war protestors led by the SDS, occupied buildings, destroyed property and disrupted classes. The Democratic Convention in Chicago in 1968, when police bloodied rioters, proved to be another example.

History is replete with examples of mobs exerting control from the Salem witch trials to Jeanne D’Arc to Adolph Hitler. In 1692 Salem, young girls began acting strangely, claiming to have seen the Devil personified in some of the women of the village. Following kangaroo-like trials, at least twenty of the women were hung or pressed to death. Jeanne D’Arc, a young peasant girl, led French armies to several victories during the One Hundred Years War. Captured she was handed over to the British, and then burned at the stake by the pro-English Bishop of Beauvais, in 1431.

Following World War I, the Allies demanded reparations of Germany that proved impossible to pay. Economic turmoil, including a period of hyper inflation, led to rising nationalism Out of those ashes rose Adolph Hitler whose manifesto would seem to have been read by Saul Alinsky. Hitler radicalized the masses by demonizing Jews, bankers, foreigners and members of the nobility. It was his way of demonstrating solidarity with millions of men and women following the ignominy of defeat and years of deprivation. He did so in a manner anticipating the “Rules” that Mr. Alinsky would lay out thirty-five years later.

In a piece posted Sunday by Victor Davis Hanson, he notes that it was a fear of “democratically sanctioned madness” that lay behind our tripartite government formed in 1789, and it was why property qualifications were initially required for voting. They were checks on the possibility of mob rule. In a perfect world, an independent and politically indifferent press would allay the fear of mob rule; but with mainstream media biased toward Democrats, and ‘Talk Radio’ generally backing Republicans, the flames of hysteria have been fanned, not doused. Social media surely will play an expanding role. Facebook, with 800 million users, can exert enormous influence, the size of which nobody now knows, but frightening in its potential.

The Occupy Wall Street Movement thrives on mob psychology, while the Tea Party Movement does to a lesser extent. It can be seen in the emotional response of both, and the manner in which the participants conduct themselves. Both march and chant slogans. But Tea Partiers are relatively orderly, respecting property, leaving their sites clear of garbage, while Occupiers destroy property, defecate in doorsteps and on cars, and leave trails of debris. They are almost studiously obnoxious.

“The role of the President,” as Mr. Hanson wrote, “is to rein in the mob, not unleash it.” But that is not Mr. Obama’s way. In the immediate aftermath of the shooting of Arizonan Congresswoman Gabrielle Giffords last July, liberals saw the incident as proof that angry white Tea Partiers were behind the shooting. President Obama reminded the nation of a need for civility: “It’s important for us to pause for a moment and make sure we are talking with each other in a way that heals, not a way that wounds.” But it turned out that the angry speech had all been on the side of the liberal media. The deranged gunman, Jared Lee Loughner, had no ideology. The killing spree was that of a lone madman.

Mr. Obama knows how to arouse his base. He spoke out notoriously before knowing the facts in the incident involving Cambridge police sergeant James Crowley and Harvard Professor, Henry Lewis Gates, Jr. three years ago and later had to eat crow with an invitation to both to share a beer at the White House – as forced a photo-op as most of us have seen. When Rush Limbaugh crudely used the term “slut” to characterize Sandra Fluke, the President jumped to her defense, telephoning her to say that such invectives were not representative of the environment in which he wished to raise his two daughters.

But he chose to overlook even worse language when Bill Maher called Fox News’ Laura Ingraham a slut and, worse, referred to Sarah Palin as a c—t, or when David Letterman suggested that Ms. Palin’s 14-year old daughter had sex in the Yankee dugout. In fact, he accepted a million dollar donation from Mr. Maher, and agreed to have Mrs. Obama appear on Mr. Letterman’s show.

The shooting of Trayvon Martin on February 26 in Sanford, Florida was an enormous tragedy, but as awful as that personal tragedy was, the response by the media and camera-chasing politicians has been worse – violating the rights of the accused with invectives more common in Afghanistan. Despite the fact that details of the case have not been made public (“There’s not enough information,” said Governor Rick Scott on Monday.), that has not stopped publicity-seeking hounds like Al Sharpton, Jesse Jackson and Spike Lee from proselytizing to their flocks of the racist views of the killer. Nor has it stopped the President from looking upon this killing has another opportunity. “If I had a son, he would look like Trayvon.”

Juan Williams addresses the issue in today’s Wall Street Journal: “While civil rights leaders have raised their voices to speak out against this one tragedy. Few if any will do the same thing about the larger tragedy of daily carnage that is black-on-black crime in America.” For example, thirteen black teenagers have been murdered in Chicago, since the Trayvon story broke; they have received very little press and have gone unmentioned by the White House.

What we do know is that young Mr. Martin was seventeen, six foot-two and had dropped out of school. The neighborhood was racially mixed. Mr. Zimmerman, despite his German name, is half Hispanic; he was authorized to patrol and to carry a weapon. Exactly what happened and what led to that tragic loss of life, at this time remains unknown. Fanning the flames of hatred has created the semblance of an old-time lynch mob.

Mr. Obama came to Washington promising to heal a nation divided by two unpopular wars and a President whom many Democrats felt “stole” the election in 2000. Instead, what he has done is drive a wedge, further expanding the divide. He is a master organizer, rallying his Party with his race-baiting, demonizing “fat-cat” bankers and “greedy insurers,” while his real target are those who believe in the creed of personal freedom. His goal, it seems certain, is a form of European socialism that treats its leaders well, but ultimately condemns its people to impoverished lives.

Saul Alinsky’s most oft quoted rule is: “Pick a target, freeze it, personalize it, and polarize it.” Mr. Obama has learned his lessons well.

Tuesday, March 27, 2012

“Economic Recovery – Where’s the Beef?”

Sydney M. Williams

Thought of the Day
“Economic Recovery – Where’s the Beef?”
March 27, 2012

One observation; one fact: Yesterday, Federal Reserve Chairman Ben Bernanke acknowledged that the economy is not growing fast enough to produce enough jobs to bring down the unemployment rate – an observation difficult to counter. Unless the President and Congress grapple with the issue of taxes in the next nine months, the United States will experience the largest tax rate increase in its history – a fact that must be addressed, if we don’t want to double dip.

Granted, the recession of 2008-2009 was more severe than any previous in the post-war period, in terms of depth and duration; though, interestingly, not in terms of unemployment. (The dubious victor of that contest goes to the 1982 recession when unemployment remained above 10% for ten months – September 1982-June 1983. In the recent recession, unemployment topped 10% only once, in October, 2009.) But, what is most notable about the recent recession has been the feebleness of its recovery. Two years after its last negative quarter of GDP (Q4 2009), the economy was expanding at 1.6%. Two years after the final negative quarters in the 1974-1975 and the 1982 recessions, the economy was growing at 4.2% and 5.6%, respectively. If the current economy were growing at rates closer to those previous periods, it would have meant dollar additions to GDP over the past two years of $700 billion to $1.2 trillion! Whatever the federal government has been doing to spur economic growth, it is not working.

No matter if one is liberal or conservative, we should be able to agree on one thing – whatever size government we want, it should be paid for. It hasn’t been, other than a few years in the late 1940s and 1950s and then again in the period 1998-2001. Last year receipts were 14.4% of GDP, while spending was 25.3%, an obviously unsustainable situation. Republicans and Democrats are both at fault. For the last three years, as a percent of GDP, the shortfall (the deficit) has been the largest since World War II.

There are areas of disagreement, but two stand out. The first is the size of government desired – most liberals suggest government should represent about 22.5% of GDP, the number being forecast by the Brookings Institute for the next five years. Most conservatives would prefer a number closer to the 19.5% that was common during the 1990s through 2007. (Waste in government spending is acknowledged by both parties, but is recognized to be so embedded that reforms seem all but impossible. In part that is because waste supports the livelihood for tens of thousands of government employees.) The difference between 19.5% and 22.5% amounts to about $500 billion in annual federal government spending.

The second area of disagreement involves how federal revenues should be generated. Liberals believe the answer lies in increasing taxes. They enthusiastically speak of raising taxes on the wealthy, yet know that to achieve their spending goals they will have to raise taxes on middle class. Conservatives believe in making the tax code more conducive to economic growth, with lower nominal rates and a simplified code embodying fewer deductions and credits – the purpose: spur economic growth, with the goal of generating more employment and higher tax revenues.

Presidents have a relatively short window in which to dramatically impact change. (Though it appears Mr. Obama feels that he will have “greater flexibility” once he wins re-election.) Mr. Obama, with control of both the House and the Senate at the time, used his honeymoon period to increase federal spending via an $850 billion stimulus that did little other than keep some union workers employed and, more impactful, signed a national healthcare plan, with the illusory name Affordable Care Act, a government managed program that will only be affordable if tax rates become confiscatory – rates so high they will destroy what feeble recovery we already have. He could have easily chosen a much more fiscally responsible path. In February 2010, a year into his Presidency, he appointed former Senator Al Simpson and Erskine Bowles to head a Commission charged with addressing the growing problem of debt – a problem that can most realistically be addressed through tax reform and deficit reduction: both recommendations of the Simpson-Bowles report, which was ignored.

The expiration on December 31, 2012 of the tax cuts enacted in 2001 and 2003 will cause rates for all five brackets to rise; the largest percent increase will be for the lowest bracket – from 10% to 15%. The highest bracket would increase from 35% to 39.6%. Currently, the death (inheritance) tax is 35%, with an exemption of $5 million ($10 million for couples.) The price for dying in 2013 is scheduled to rise to 55% on all estates over a million dollars. Investment income will be treated as earned income. The tax on capital gains will rise from 15% to 23.8%. Additionally, the Affordable Care Act includes an investment surtax of 3.8%, which means that the tax on dividends next year will rise from 15% to 34.6% for those making $80,000, and to 43.4% for those in the highest bracket. In all, the Affordable Care Act includes twenty new or higher taxes. According to Americans for Tax Reform, the Alternative Minimum Tax (AMT) will ensnare 28 million families in 2013, up from 4 million in 2011.

An increase in any tax is injurious to economic growth, as it removes a needed stimulus. The increase in dividend and capital gains taxes is particularly notable, and affects especially the elderly – the retired and near-retirees. As savers, these are people who already have been negatively impacted by the Fed’s policy of very-low interest rates. Warren Buffett has made a lot of noise regarding the “unfairly” low tax rate he pays; so has been vociferous in his support for higher taxes, including those on capital gains and dividend income – an opinion oft cited by President Obama. From Mr. Buffett’s perspective, a higher tax on dividends is no big thing; he has no dog in that fight. Berkshire Hathaway pays no dividends, so would be unaffected, and Mr. Buffett has made it clear that he doesn’t believe in selling his stock. But it will affect millions of people with much smaller net worths.

Moreover, dividends are a critical component of investor return. Data from Ibbotson Associates show that between 1926-2005 dividends accounted for over 40% of total return from stocks. And there is little question that companies will have less incentive to increase, or even maintain, dividends.

With baby boomers reaching retirement age at the rate of 10,000 a day, while retirement plans – both public and private – remain underfunded and with Social Security on life support, one would think that common sense would argue: don’t mess with dividends or capital gains! As I have pointed out on numerous occasions, there is not enough capital to pay for the needs of our aging population. (And most of the developed world is in far worst shape than are we, because they are aging at a far faster rate.) Government should be encouraging investment and capital formation, not discouraging it.

There are still five million fewer people working today than when the recession began. There are too many people subsisting below the poverty line. These people need whatever assistance government and the private sector can reasonably provide, but government must be careful that what they do today does not create far more poverty in the years ahead. Policies that focus on improving entitlements and not on the seeds necessary for economic growth will most assuredly endanger the enervated recovery we are experiencing. Where’s the beef?

Monday, March 26, 2012

"Political Sleights of Hand"

Sydney M. Williams

Thought of the Day
"Political Sleights of Hand"
March 26, 2012

Political correctness and politics as conventionally perceived are bedmates born of the same parentage. While their consequences are surely unintentional, combined they protect those who do harm, and harm those deserving of protection. Both result from what is generally considered to be progressive policies. Both are born in the womb of harmonic relationships; the repercussions of both can be the opposite of what was intended.

Two recent examples illustrate the point. The first would be the shootings in southern France that culminated with the death of Mohammed Merah, after a 32 hour stand-off outside his flat in Toulouse. The second is a piece by George Mason economist Walter Williams writing at, in which he discusses America’s poorest cities and what they all have in common.

Mr. Merah was a known factor in the world of radical Islamism. He was on a terrorist watch-list in France and supposedly tracked by the police. Following trips to Afghanistan and the Waziristan region of Pakistan, he was placed on the most restrictive list the U.S. maintains – its no-fly list. It is generally assumed he was radicalized toward Salafist jihadism while in prison.

It is remarkable that two decades after radical Islamic attacks began in earnest and more than ten years after 9/11, authorities in the U. S. and Europe still have a difficult time acknowledging the enemy we face. President Obama refused to call Major Malik Nadal Hasan a jihadist or terrorist, after he killed 13 and wounded 29 in 2009, despite Hasan’s shouting “Allahu Akbar!” as he fired. Remember when Janet Napolitano refused to refer to a member of Al Qaeda as a “terrorist”? Who would get the better treatment: Major Hasan in a U.S. court, or Sergeant Robert Bales in an Afghanistan court? Now that both are in the U.S., which will receive the stiffer sentence?

The day after Mr. Merah’s death, a teacher in France (she was later reprimanded) told her students to observe a moment of silence for the killer. French Interior Minister, Claude GuĂ©ant has said it is not a crime to be a Salafist. Perhaps it is not, but it is known that Salafists in France have been radicalized toward the most violent forms of jihadism. Nevertheless, French Justice Minister, Rachida Dati, warned that using ‘jihadist’ to describe Mr. Merah risked stigmatizing French Muslims. The Financial Times, in a weekend editorial, deplored the fact that Mr. Merah had been killed, as justice, in their opinion, was denied. As the Wall Street Journal noted in an editorial over the weekend, “…combating prejudice can’t be achieved through semantic acrobatics, much less closing one’s eyes to reality.” Who is being protected – the criminal or the victim?

When political correctness fails, as it did in this instance, the rush of officials to cover their posteriors would be humorous were it not for the despicable nature of the crime they let happen. And why should it take 32 hours and the wounding of four French police officers to roust the rat from his nest? And what about his brother Abdelkader Merah, who said he was “very proud of his brother. I regret nothing for him and approve of what he did.”

The rational behind political correctness is to prevent people from being offended, to make everyone use words that will not upset those different from ourselves. But decency, consideration and morality cannot be compelled or legislated. They must be learned, at a young age, at home and in schools. A sense of respect has been lost; so well-intentioned, but supercilious, elites feel an obligation to impose rules.

A root problem of political correctness is that it fails to distinguish between morality and rights. James Q. Wilson noted in his book, American Politics, Then & Now and Other Essays, that they arrive from different sources: “…morality arises from sympathy among like-minded persons: first the family, then friends and colleagues. Rights, on the other hand grow from convictions of how we ought to manage relationships with people not like us, convictions that are nourished by education, religion and experience.” Freedom of speech is a fundamental right. Self restraint is always preferable, but to deny such a basic right is wrong. Political correctness leads to a loss of plain speaking and, when that happens, clear thinking is denied. Pulling the covers over one’s head will not make the morning sun go away. While political correctness stems from a lack of civility, the fear of offending another person, practitioners use it to exert control. Ironically, the process is circular, in the sense that many who preach political correctness are the same who practice self indulgence, the consequences of which are a need to mandate behavior.

That perception and reality in politics are often worlds apart, one has to look no further than the nation’s poorest cities. In a recent posting on, Professor Walter Williams names the ten poorest cities in the United States with populations greater than 250,000, in terms of the percent of the population below the poverty level: Detroit (33%) and Buffalo (30%) head the list, with Philadelphia (25%) and Newark (24%) at the bottom. The other cities are Cincinnati, Cleveland, Miami, St. Louis, El Paso, and Milwaukee. All of these cities are run (and have been for decades) by Democrats, supposedly progressive liberals who profess to care about minorities and poverty. Yet their policies have only made matters worse. Are their African-American and Hispanic populations better off? Have these paternalistic governments improved the lifestyle of their inhabitants?

Republicans get blamed for being uncaring of the poor, responding only to the rich. Democrats are considered the Party of compassion. Reality is more complex. Whether led by Democrats or Republicans, the difference between the success and failure in cities – as it is for small towns, states and the federal government – are the differing views toward responsibility, accountability and independence. Cities with such high levels of poverty should borrow a page from the guidebook at Yellowstone National Park, which warns: “Don’t feed a Yellowstone animal, not even the cute little ground squirrel outside your cabin. It seems minor, but it makes them depend on handouts and unable to find their own food, eventually resulting in starvation.” Cities do not have to put rules in such draconian terms, but leaders must understand that personal success can only come when individuals substitute responsibility for dependency.

No economic system can ever be completely fair in terms of outcomes. In China, which outwardly deplores the trappings of capitalism, the children of Communist leaders live lives of unbelievable luxury, with homes in Switzerland, vacationing in France and driving Maseratis around Beijing with little regard to pedestrians. Democratic capitalism does a far better job of providing reasonable equality in terms of opportunities and, consequently, outcomes. Political correctness stifles our basic freedoms of expression, and a blind acceptance by the poor that government handouts represent their best option is demeaning and unsuccessful. Poverty becomes perpetual. Safety nets, in any civilized society, are necessary, but they are no substitute for the offering of the opportunities that capitalism provides to the fit, the able and the aspiring.

Friday, March 23, 2012

“Executive Order – National Defense Resources Preparedness”

Sydney M. Williams

Thought of the Day
“Executive Order – National Defense Resources Preparedness”
March 23, 2012

American democracy is based upon maintaining a balance of power between the three branches of government – executive, legislative and judicial. An independent press – sometimes known as the fourth estate – is charged with ensuring that power does not accrue to any one branch. Thomas Carlyle, in his book, On Heroes and Hero Worship, attributed the term to Edmund Burke, who had used the term in a 1787 debate in Parliament: “Burke said there were Three Estates in Parliament, but in the Reporters Gallery yonder, there sat a Fourth Estate more important far than they all.” The press today is overwhelmingly dominated by the Left, so is less vigilant in their duties when a liberal Democrat sits in the White House, than Edmund Burke perceived their responsibilities to be when he spoke 225 years ago. Fortunately, the internet has permitted bloggers and others to keep the flame of freedom alive, and the feet of toady reporters to the flame.

Despite the periodic expressions by Presidents who have felt constrained by the Bench , the risk of a power grab has always been with the Executive. Other than the pre-Civil War period, following the end of Andrew Jackson’s second term and Lincoln’s first, when three Senators – Daniel Webster, Henry Clay and John Calhoun – dominated Washington, Presidents have generally held their own, and sometimes more. For example, during the Civil War President Lincoln halted freedom of speech and of the press, while suspending Habeas Corpus. During World War I, when Congress refused to grant President Wilson extended power over resources, he invoked an Executive Order providing him that very control Congress had denied. During World War II, President Franklin Roosevelt interned American citizens of Japanese descent – a violation of their Constitutional rights. Ironically, those three Presidents who have done the most to curtail the rights of individuals are among those most praised.

Now President Obama has signed an Executive Order (EO), the policy of which states: “The United States must have an industrial and technological base capable of meeting national defense requirements and capable of contributing to the technological superiority of its national defense equipment in peacetime and in times of national emergency.” (The emphasis is mine.) The EO signed on March 16 expands on a prior order originally issued in 1950, and which has been amended on several occasions, giving the President complete control over all the resources of the United States in time of war and emergency.

Conspiracy theories abound, suggesting that the signing of the EO is but a prelude for the imposition of martial law by a President who was apprenticed under Saul Alinsky and instructed by Jeremiah Wright. However, as stated above, the country has functioned under this Act that has been updated by every President from Dwight Eisenhower to George W. Bush; so supposing the worst seems like a stretch.

The Order is filled with legalese that is over my head, but is couched in such terms that an initial reading says, of course, we must ensure availability of energy and food in times of crisis. Nevertheless, questions arise. Why in peacetime? And why was it issued at this time, with Osama bin Laden dead and our winding down military efforts in Iraq and Afghanistan? Why did the President choose to issue it on a Friday afternoon, a time when politicians typically attempt to slip bad news past a press more focused on the upcoming weekend than events in the nation’s capital? In short, what, if anything, is the President hiding?

Edwin Black, a journalist and best selling author of several books including one last year on British Petroleum, believes that the reason for the EO is oil and the potential for its disruption. Given the situation in the Middle East with Israel determined (and properly so) to protect itself against a potential nuclear-armed Iran, hostilities could close the Strait of Hormuz, through which about 20% of the world’s crude oil pass.

Conservative pundit Ed Morrissey, though, says it is much-ado about nothing; perhaps he is right.

However, the most important criticism I have read comes from J. E. Dyer, a retired U.S. Naval commander who keeps a blog, the “Conservative Optimist” and who writes for The Weekly Standard. She suggested on March 19th that one should follow the “M” word, not “M” for martial law, but “M” for money. Her point is that the Obama Administration has made it clear, in its public posturing, that defense spending must be cut – funds have been cut for the RQ-4 Global Hawk UAV and the F-35; bases are being closed in Europe and military forces will be reduced by 80,000. But the EO, she notes, suggests a need to fund special projects, investments in “advanced manufacturing.”

Following the money does appear to have relevance. This Administration created a new Deputy Assistant Secretary of Defense for Manufacturing and Industrial Base Policy, a position that needs no Senate confirmation, yet one that manages the Defense Production Act Fund. That fund will invest in “advanced manufacturing technologies for the defense industry.” In 2009, the President created a Defense Production Act Committee to oversee these investments. In June of last year, the Obama Administration launched an Advanced Manufacturing Partnership, charged with identifying opportunities and dispensing funds.

The risk, obviously, is that the unstated purpose of this EO may be to further the type of crony capitalism we have seen in President Obama’s push for “green energy”, exemplified by the failure of Solyndra, a company whose CEO was one of Mr. Obama’s largest bundlers.

Concerns about the EO may be overblown. It does not appear to be a precursor of martial law. But, it is an Executive Order that focuses on the dispensing of money, even though disbursements are generally the purview of Congress. I agree with Ms. Dyer’s concluding sentence: “I don’t think the EO or its timing is meaningless, or merely routine.” It needs to be closely monitored, which is why we need a real Fourth Estate, not the sycophants that seem to populate our mainstream media.

Wednesday, March 21, 2012

“Is Fiction Relevant to the Real World?”

Sydney M. Williams

Thought of the Day
“Is Fiction Relevant to the Real World?”
March 21, 2012

Novels have long been lauded as a form of entertainment that activate the brain, provide insight into character and present a version of events that we know to be fictional, yet are based on human emotions and reactions we know to be real. While there are variations, there are a finite number of human emotions, most any of which can be found described somewhere in Shakespeare or Dickens. From the website, I came across a list of 143 emotions, ranging from tense and enraged to calm and foolish. A person, more literate than I, could surely assign a well-known fictional character to each emotion. Reading fiction, we know, improves our understanding of the people who inhabit the world in which we live.

But novels and plays may do more. Anne Murphy Paul, writing in Saturday’s New York Times, in a piece entitled “Your Brain on Fiction,” tells of some fascinating studies from the field of neuroscience. The studies she cites suggest that brain cortexes, such as olfactory, sensory and motor, respond to reading about an experience in the same manner they do when encountering that same actuality in real life. Reading about pizza, for example, stimulates one’s olfactory cortex in the same manner as walking into a pizzeria. “When subjects,” Ms. Paul writes, “read a metaphor involving texture, the sensory cortex, which is responsible for perceiving texture through touch, become active.” Additionally, studies done by two Canadian scientists demonstrated that individuals who read fiction are better able to understand people, and empathize with them more clearly than those who do not. Some of this is self-evident, as writers often refer to fictional figures as epitomizing characteristics one wishes to highlight, whether it is Hamlet, Stuart Little, Elizabeth Bennett or Oliver Twist.

In a world that has become increasingly digitized, it is comforting to know that scientists affirm that writers of fiction continue to perform duties for which computers are inadequate – helping to understand the complexities of society, and the interrelationships of its members.

Coincidentally, it is also interesting that, like Mark Twain’s premature obituary (“reports of my death are greatly exaggerated!”), the death knell for publishing has been exaggerated. Julie Bosman, writing last summer in the New York Times, noted that publishers in 2010 sold 2.57 billion books, in all formats, an increase of 4.1% over 2008, and which generated a 5.6% increase in revenues to $27.9 billion, during the same period. The growth was led by e-books, which increased from 0.6% of the trade market in 2008 to 6.4% in 2010, along with juvenile and adult fiction. One can rest assured that that rate of gain (or a faster rate) for e-books will persist.

There are people who never read anything but fiction. Nevertheless, it has always seemed to me that the addition of some history and biography helps broaden the mind. However, much of history written today has the purpose of furthering a particular political agenda. Other than indisputable facts, like dates (specifics that I understand many schools have eviscerated from textbooks), one has to be wary that what one is reading is not fiction masquerading as fact. Of course, with history and biography, it is hard to differentiate fact from fiction. Did George Washington really cut down the cherry tree, as Parson Weems in his 1800 Life of Washington, claimed? No. He used the story as a metaphor to describe his honesty. The same, unfortunately, is true of biography, especially books that extol the living, like Jodi Kantor’s The Obama’s, an ingratiating, bootlicking depiction of a couple that never were.

In contrast, with fiction there is no hidden agenda. Its purpose is to entertain, but with the added value of providing insight to a complex and ever-changing world, and to the people who inhabit it. Novelists come with political agendas, but we know upfront what they write is fiction – consider Ayn Rand on the right and John Grisham on the left.

With the exception of footnotes and tables in annual reports, government statistics and frightening items from the White House, like the recent “Executive Order – National Defense Resources Preparedness” (which I wish were fiction), most of which we read contains some element of fiction. Certainly newspapers and magazines are more shill than not. The pieces that I write, despite my assiduous search for facts, would be mistakenly categorized as non-fiction; they are expressions of opinions.

But none of this fictitious non-fiction is as important in terms of understanding the human condition, as is unadulterated fiction, especially that which is classical – stories written before the advent of movies or television, when the author relied on words alone to describe his or her characters and the emotions affecting them. Fagin is unforgettable, as is Ahab, Lady Macbeth and Undine Spragg. The reader needs no camera to recognize what the character looks like, or any prompter as to how they will behave.

Is fiction relevant to today’s world? Certainly, even in this day of IM’s, tweets, texting and Facebook; and especially so if one believes in the importance of behavior in trying to understand what moves stocks or influences dictators. All of this is worth remembering, as we come closer to the May 10th publishing date of my daughter-in-law Beatriz Williams’ first novel, Overseas, and her two memorable characters, Kate Wilson and Julian Ashford.

Tuesday, March 20, 2012

“Casinos – Reflective of Our Society?”

Sydney M. Williams

Thought of the Day
“Casinos – Reflective of Our Society?”
March 20, 2012
For one hundred and forty-two years the United States functioned with no legal casinos. The instinct to gamble, of course, has been a characteristic of man since he evolved, but it was only in 1931 that governments decided to take advantage of the inability of people to control their worst impulses. That year the state of Nevada legalized casino gaming, providing them the ability to tax gambling revenues.

At the time, the country was in the midst of the Depression; though still far from the bottom. GDP, in 1931, was 25% below where it had been in 1929, yet 36% above where it would be in 1933. States, understandably, were starved for revenues. Permitting casinos seemed like a good idea. Gambling was seen as an easy and “taxless” means of generating revenues. Little attention was paid to the social consequences, or to the fact that gambling revenues are regressive, in that their promises of riches are largely illusionary and gambling tends to attract those least able to afford to lose.

In the subsequent decades things changed, especially in the last twenty years. Michael Sokolove, in a fascinating article on Foxwoods and the casino industry in last Sunday’s magazine of the New York Times, noted that 566 commercial casinos operate today in 22 states Those casinos provided 820,000 jobs and they generated $34.6 billion in nationwide gambling revenues in 2010, and accounted for $125 billion in overall spending, or almost one percent of U.S. GDP. Since Congress passed the Indian Gaming Regulatory Act of 1988, 450 casinos, ranging from trailers to the Foxwoods facilities in Connecticut with 6.7 million square feet, are now operating in 36 states on reservation land. The Foxwoods facility is the largest in the Western Hemisphere (bigger than the Pentagon!) with 6,300 slots and 10,000 employees…and a debt of $2.3 billion that has given rise to concerns of solvency.

The story of gambling in the U.S., as Mr. Sokolove writes, involves “the gradual relaxation of moral prohibitions against gambling, a desperate search for new revenues by state governments and the proliferation of new casinos across America.”

While gambling has become socially acceptable, with forty-eight states now having some form of legalized gambling – Hawaii and Utah being the only exceptions – addiction is a problem. The National Council on Problem Gambling estimates that 85% of adults have gambled at least once in their lifetime, with 60% gambling in any one year. Their data conclude that two to three percent are considered problem gamblers, with one percent deemed to be “pathological.” Those percentages translate into four to six million people with “just problems” and two million that are “pathological!”

Casinos, with neither clocks nor windows and with colors and sounds that are mesmerizing, are conducive to putting coins into slots, hour after hour. The machines are addictive; there are few sights sadder than watching an older person sitting before a slot machine, ridding him or herself of their money, a quarter at a time. If that’s entertainment, it is beyond my understanding.

Lotteries reach way back in the history of our country. In 1612, 29,000 British Pounds were raised in England for the Virginia Company, with Pocahontas as the chief draw. She had gone to England in 1611 with her new husband John Rolfe and unfortunately died before she could return to Virginia, an early victim of the travails of gaming! George Washington sponsored a lottery in 1768 to build a road across the Blue Ridge Mountains. It was unsuccessful. Thomas Jefferson obtained permission, in 1826, to conduct a private lottery to alleviate his personal debts. He died that year, on July 4th. The lottery was held by his heirs, and failed to satisfy his creditors.

A massive bribery scandal in Louisiana in the 1870s that resulted in the outlawing of the use of the U.S. Postal Service for purposes of betting put the kibosh on state lotteries for ninety years. New Hampshire became the first state to reintroduce the lottery in 1964. Today, forty-three states have lotteries. In 2006, state lotteries sold $53.7 billion worth of tickets, equal to about 3% of the $1.77 trillion in state revenues. With a 31% net margin, lottery ticket sales are the most profitable of all gaming products. (The other side of that equation is that buyers of lottery tickets are mostly losers.) Unfortunately, the biggest buyers, again, are the ones that can least afford to lose. Legislators like lotteries and casinos, because they look upon them as a way to “get tax money for free.” There is a wide use of euphemisms, like “painless” revenues and “niche” revenues, designed to obliterate the ugly facts that lotteries promote addictive behavior and are a regressive tax on lower-income groups.

While it’s understandable that the state should tap into revenue sources that come from people’s behavior, the contrary side is that gambling has no redeeming qualities. It provides entertainment, but performs no social good. Mr. Sokolove notes that the State of Connecticut has received $6 billion from its two Indian casinos over the past two decades, yet the state is in worst financial shape than it was twenty years ago. Would we have been better off without the revenues? I don’t know, but it is hard to believe the state would be in worst shape. What are the long term social costs resulting from the casinos? Again, nobody knows. Connecticut’s casinos, like casinos in every state, embody an inherent conflict between a desire to increase revenues (regardless of purpose) and the duty to protect the public welfare .

An increasingly paternalistic government carries with it growing dependence, and a concomitant loss of independence and personal responsibility. A proliferation of casinos appeals to the “hope” gene in each of us. It helps to erase the concept that hard work and thrift are qualities necessary for success. A few years ago I read of a man (surely apocryphal, but perhaps not) whose retirement plans included three parts: Social Security, trips to the casino and instigating a few lawsuits. Regardless as to whether the story is true or not, it reflects a growing attitude among too many of us that yearn for a world in which we receive something for nothing.

Monday, March 19, 2012

“The Meaning of Bo Xilai’s Dismissal”

Sydney M. Williams

Thought of the Day
“The Meaning of Bo Xilai’s Dismissal”
March 19, 2012

The Financial Times called the purging from the Party’s Politburo of Bo Xilai, one of China’s most high profile Communist Party officials, as “the most momentous political upheaval in the Country in two decades.” And, what happens in China, the world’s second largest economy, has to concern us. The Wall Street Journal described Mr. Bo as the Party’s “most charismatic and controversial figures.” Mr. Bo, who was the Communist Party secretary of Chongqing municipality, a member of the Politburo as well as a Princeling , was an advocate of the state playing a stronger role, both in the economy and the state. He was a hard-liner who cleaned up crime, but did so, allegedly, employing methods not dissimilar to those he was arresting.

A government built on the concept of an authoritarian group of elite leaders, who must reach consensus, felt imperiled by the charisma of one man. Better to nip it in the bud, place him under house arrest (punishment has yet to be determined), than to risk him using his personal popularity to seize control of the Party. One might conclude that the dismissal of Bo Xilai from China’s Politburo suggests that the good guys are winning. I suspect the answer is more complicated.

Since the death of Mao Tse Tung in 1976, China has been essentially ruled by a twenty-five member Politburo, and more specifically by its nine-member Standing Committee. There are three other centers of power – the state government bureaucracy, which with its broad reach is administered by China’s Premier; the People’s Liberation Army, which reports to the Politburo, and the National People’s Congress, the latter generally conceded to be the weakest of the three. The head-of-state is generally chosen from the Standing Committee. According to reports over the weekend, Bo Xilai has earned the enmity of Wen Jiabao, the current Premier, and Hu Jintao, President and Communist Party chief. Mr. Hu, according to Saturday’s Journal, was the only member of the Standing Committee not to have visited Chongqing, since Mr. Bo took power in 2007.

In a Friday essay in “Seeking Truth”, the Party’s main ideological publication, Xi Jinping, China’s Vice President and heir-apparent, warned of individual leaders cultivating their own style and courting the media, so as to divide the Party and sow the seeds of a Western-style democracy. In the essay, purportedly written on March 1, Mr. Xi did not specifically mention Bo Xilai, but its warning was clear. Reports suggest that Mr. Xi is treading a narrow path, trying not to alienate either side.

There appears little question of Mr. Bo’s popularity among ordinary citizens. The FT quotes one internet message: “Good Uncle Bo Xilai, the people will always remember you and can distinguish between good and evil.” His “anti-mafia” crackdown on crime was popular; though his disrespect for the legal process and allegations of torture concerned liberals and human-rights activists. Mr. Bo was especially popular with those who prefer greater government control, both in the state and in the economy. To the extent that China’s economic growth is losing steam, Mr. Bo’s populism assumes greater importance.

The political machinations in China are difficult for us in America to understand. Individual freedom is inherent to our system, which thrives on an educated citizenry, individual initiative and a capitalist-based economy. However, we have a history, during difficult economic times, of being tempted with state run economies. During the late 1920s and early 1930s, many in the Roosevelt administration came to admire Stalin’s Soviet Union, feeling it was more responsive, in dealing with the Depression, than our democratic capitalist society. Later, during the same decade, people whose politics ranged from Ann Morrow Lindbergh’s right-wing America First movement to Democrats like Joseph Kennedy fell under the spell of Hitler’s Nazism, as militarism pulled Germany from economic chaos.

Like Ulysses and the Sirens, such temptations are best avoided. First, comparisons with China are really not material. China has one third our GDP with four times as many people. Second, it is a mercantilist economy with no substantive rule of law, and with little, if any, transparency or accountability. Third, the central government has monopolistic powers and fourth, since the economic reports they issue largely reflect state-owned industries, one should be skeptical as to their veracity.

Many political philosophers believe man has an inherent desire to be free. But first he must concern himself with food and shelter. It is only prosperity that gives people the time and opportunity to consider such measures. The lifting of the Iron Curtain in Eastern Europe provided people the chance to improve their financial well-being, and with it came political freedom. Repressive regimes almost always rely on keeping the mass of their people uneducated and in relative poverty. As incomes increase, so do desires to freely speak, assemble and to question authority. China is approaching that point – maintaining authority, yet letting their economy expand. Democracy by its very nature is inherently unstable, allowing individuals to flourish – an anathema to those like the Chinese leaders who value political control and stability.

It is a delicate balance that China’s leaders must maintain and the arrest of Mr. Bo show that fears of another Tiananmen Square are ever-present in their minds. The two seminal events in the lives of China’s new generation of leaders were the Cultural Revolution (1966-1976), when they were in their adolescence, and Tiananmen Square (1989), when they were in their early thirties. They would like to keep the ship steady. Mr. Bo’s personal popularity and subsequent arrest indicate fissures in the foundation.

Friday, March 16, 2012

“Judgment Day for Wall Street?”

Sydney M. Williams

Thought of the Day
“Judgment Day for Wall Street?”
March 16, 2012

For three and a half years Wall Street has earned the enmity of Main Street. Of course, a politically polarized Washington has made sure that this issue of mistrust stays front and center with the electorate.

Mandated government loan programs and the unfortunate repeal of Glass-Steagall certainly played a role in the near collapse of the financial system, but there is no question that management and boards of some of the nation’s largest banks bore equal, or greater, responsibility. Decisions were knowingly made that elevated risk to shareholders, counter-parties and their own capital base. A focus on the short term prevented a full vetting of the consequences. Greed became dominant. The prospect of instant riches via complex derivative-based trading strategies overwhelmed any sense of a communal moral good. In many cases, officers and directors failed in their fiduciary responsibilities. Regardless, there was no question that, in the autumn of 2008, the system had to be saved. And the largest banks were saved… by taxpayers’ money, via TARP and similar programs.

To let our financial system collapse would have been cataclysmic. As I have written on many occasions, to that end we owe a great debt of gratitude to those who were in charge at the time – especially Henry Paulson, Ben Bernanke and Timothy Geithner. Those men had to make decisions in a few hours, some of which, from the perspective of a few years were obviously wrong. But, they did what they did and the system survived. Depositors were able to access their funds and the dollar still functions (though weakly) as a medium of exchange.

But what many of the banks did with some of the TARP money was reprehensible – using taxpayer funds to pay bonuses, in too many cases, to those responsible for the destruction. What has been at fault in these firms is a culture, built on the concept of speculating with other people’s money for the purpose of lining their pockets – heads I win, tails I don’t lose. That attitude was given expression in a letter by mid-level Goldman executive Greg Smith in Wednesday’s New York Times. Nobody likes a whistleblower and we may find ulterior motives for Mr. Smith’s unusual letter of resignation, but his allegations rang true at a time when Wall Street is increasingly under the microscope.
All companies have four constituencies: Owners; Employees; Customers, and Community. In private businesses, owners and employees are often one and the same, but in most public companies they are distinct. The board of directors is responsible for hiring the chief executive and should theoretically represent shareholders; in large public companies that often means millions of small shareholders across the country, generally through their ownership of mutual funds and retirement plans. In Wall Street, public firms – the last major partnership, Goldman Sachs went public in 1999 – using shareholder funds have been far more reckless than in the days of partnerships. Not surprisingly, people are more prudent with their own money than with someone else’s. Goldman is no exception. When they went public thirteen years ago, the public owned 18% of the company; today the public owns about 70%. With diminished ownership by insiders came increased recklessness.

Among other allegations, Wall Street has been accused of looking after its own interests, at the expense of its customers. While such accusations in many cases are accurate, the truth is that even Wall Street trading firms, like Goldman Sachs, need customers, for their money, their flow, fees and as counter-parties. They know that a too-cavalier attitude toward clients eventually will return and bite them in the butt. Ultimately, it will destroy their franchise and their ability to make a profit.

However, there are those who deliberately have violated rules about segregating customer funds. The most notable recent example is the MF Global scandal, which embodies the height of arrogance and disdain for the customer. The scandal is breathtaking in its bold disregard for law and convention, not only in the fact that at least $1.6 billion of customer assets are still missing almost five months after the bankruptcy filing, but in that it appears that the perpetrators may not be brought to justice. Any violation of the Commodities Exchange Act is a crime, but appropriating funds from segregated customer accounts is supposed to be the most inviolate of rules. Yet, according to reports in the New York Times the prosecutors were having trouble putting together a criminal case. They have to find a “smoking gun” according to their reports, as detailed by Joe Nocera on Monday in the Times, and it appears such a weapon is missing. And now there is a debate as to whether to pay bonuses to those executives who stayed on at MF Global aiding in the sorting through the mess. But from what pool of money would the bonuses come? From customer funds still being held? From taxpayers? There is no clear answer. Money, as my mother always said, doesn’t grow on trees. It must be earned.

The cynic in me wonders if the Justice Department is not giving cover to the politically connected Jon Corzine. Whatever is happening, it stinks. If white collar crime, such as this, goes unpunished, the message that sends to our youth is clear – crime pays, as long as you steal enough and have friends in high places. And it certainly does not suggest a Judgment Day is imminent.

But the constituent who keeps getting the short stick, and receives little or no defense from the press or Washington, is the hapless shareholder, whether he invests directly as an individual or through mutual funds and retirement plans. While the stock prices of JP Morgan Chase and Wells Fargo are finally back near where they were in the spring of 2008, the same cannot be said for other banks, like Goldman Sachs (28% lower), Morgan Stanley (71% lower) and Citigroup (82% lower). Shareholders, who were innocent as to the machinations of management and the blind eye of directors, have suffered grievously. Raising the dividend and authorizing share-repurchases is at least a means of returning some money to these long suffering shareholders. And, contrary to what the popular press would have their viewers and readers believe, most of the stock in these banks is owned by mutual funds, representing millions of individuals on Main Streets scattered across the United States. It is in equity ownership, as Charles Merrill explained so presciently sixty-five years ago, where Wall and Main intersect.

Sadly, it does not appear to this writer, though, that Judgment Day is coming to Wall Street – at least not yet. Rather we are experiencing a devilish twist to those lines from Hosea: ‘For They Have Sown the Wind, but Taxpayers are Still Reaping the Whirlwind.’ (But since less than 50% of the people pay federal income taxes, the “Government Party” may not really care!) Lovers of freedom, in which camp I place myself, must remember that crony capitalism knows no party – it is practiced by the Left every bit as much by the Right. It is damaging to our basic liberties. We don’t need or want witch hunts, but a failure to prosecute obvious criminals, especially when they are well connected, harms us all, and ensures that corruption will be here to stay.

Thursday, March 15, 2012

“Skiing Like Sixty at Sunapee!”

Sydney M. Williams
March 15, 2012

Note from Old Lyme
“Skiing Like Sixty at Sunapee!”

“It is better to go skiing and think of God, than go to church and think of sport.”
                                                                                                           Fridtjof Nansen (1861-1930)

Sixty degrees that is, not sixty miles per hour! Generally, when the temperature gets into the 60s the last thing a New Englander thinks of is skiing. The soil softens (will mud season be early this year?), robins appear, snow drops sprout and the breeze brings a promise of renewal.

Yet, a week ago found me, three sisters – Betsy, Charlotte and Jenny – and one brother, Willard at Mt. Sunapee. By mid-day the thermometer, both at the base and the top, read 61 degrees.

The surprise was how good the skiing was. Generally, when the temperature is as warm as it was, conditions become mushy and the skiing intolerably slow. But the mountain faces north; the base was solid and the trails had been groomed impeccably. Of course, snow has the benefit of being white, so reflects rather than absorbs the sun, warming the skier, and not so much the slope. A lack of crowds, combined with the conditions, made for perfect cruising. It was not particularly challenging, but for one of my age and this late in the season it was great fun whistling down the slopes.

Mt. Sunapee is owned by the State of New Hampshire, but managed by Tim and Diane Mueller, owners of Okemo Mountain Resort in Vermont. In 1948, the Society for Protection of New Hampshire Forests turned over to the State of New Hampshire 1,185 acres, which included both peaks of what is now Mount Sunapee. On December 26 of that year the new ski area opened, managed by the state, with a 3,300 foot chair serving three trails. Over the years, new trails were cut and new lifts installed. Fifty years after its inaugural, management of the facility was turned over to the Muellers’, whose success has been notable.

The first time I skied at Sunapee was either fifty-nine or sixty years ago. On weekends, because of the crowds, we bought books of tickets – twenty runs for $4.50. On weekdays – my father was an artist and so often took us out of school – he would buy a full day ticket for the same price. Children paid less. Money was a scarce commodity in our home. So we always packed our lunch, but might get treated to a hot chocolate; and we learned to slither under bathroom doors, because toilets cost a nickel!

The single chair of those days carried us to the top of the two steepest trails – Flying Goose and Lynx, both of which are unrecognizable today. In the 1950s both trails were narrow, steep and filled with turns. Ironically, despite the narrow, twisting trails, skis, which were longer in those days, did not have the turning radius they do today, with trails much wider and more conducive to sweeping turns. My brother Frank and I, in our early teens, once made twenty-two trips down Lynx, turning only when the trail did, and then cutting in line, so to quickly get back to the lift for the next hair-raising run. On another occasion, I recall a race on Flying Goose. The trail had to be climbed, whether out of sadism or because our coach thought it would give us a feel for the terrain, I never knew...but I suspected the former! At that time, downhill races had two gates – at the start line and at the finish – what you did in between was your business. Noting that some of my competitors were marking trees, so to cut corners, made me realize that my racing days were coming to an end.

Memories, both sweet and sour, always come flooding back at Sunapee: My father meeting former army comrades who wore the insignia of the 10th Mountain Division; Skiing when it was so cold, that horsehair blankets, available for the ten minute chair ride, were welcome; My sister Mary, a year before she succumbed to cancer, getting “air” on Hansen Chase.

Of the original nine siblings, eight are living. We live different lives, ranging from a dressage rider, riding instructors, a ski instructor, an artist, a retired professional fund raiser, to a bookseller and a couple of stockbrokers. Yet we have a common heritage: We were raised by the same parents, in the same house and we carry the same genes. Coming together at Sunapee allows for a special couple of days, when each of us exits our individual orbit and re-enters a bygone era. Because of the age difference, some memories of events do not overlap. But we know we are of the same flesh; the camaraderie is fun, as is the skiing. And this year, sixty degrees on slopes still fast was an added bonus.

Wednesday, March 14, 2012

“Equity Markets – Implications of Declining Volumes and Volatility”

Sydney M. Williams

Thought of the Day
“Equity Markets – Implications of Declining Volumes and Volatility”
March 14, 2012

Stocks have begun the year with one of the best performances in years. The S&P 500 is up 11.0%. Two factors have characterized this move. One has been a precipitous decline in volume (with the exception of yesterday, when most of the largest U.S. banks passed the latest round of “stress tests!”) and the second factor has been reduced volatility as measured by the VIX and as measured by days up or down more than 1.5 percent.

Monday’s volume in the NYSE, at 643.2 million shares was approximately 45% below the average for all of last year, while Composite volume, at 3.074 billion shares was about a third lower. Volume yesterday staged a major reversal, with NYSE volume at 906.1 million shares and Composite at 4.376 billion shares. The VIX closed at 15.64 on Monday, and 14.80 on Tuesday, the lowest level since April of last year. Thus far this year, on only three days has the daily volatility of the Dow Jones exceeded 1.5% – on the first trading day of the year, with that index up 179.82 points, last Wednesday, when the index retreated 203.66 points and yesterday when the DJIA rose 1.7 percent.

While declines in volumes have obvious, and negative, implications for brokers, it is unclear that such declines are injurious to investors. A declining VIX is almost always associated with improving markets. Birinyi Associates, in a piece out yesterday on volatility, confirms that finding.

Volume on both the New York Stock Exchange and Composite volume peaked with the credit crisis in October 2008 and have since been declining. In both cases volume is about 70% below what it was during that tumultuous period. Volume on the NYSE persists at about 25% of that on the Composite.

Explanations for declining volume are difficult to ascertain with any accuracy, but I suspect they encompass a few factors: Anecdotally, the attitude toward stocks appears, at best, lackadaisical; the Volcker rule has caused banks to eliminate, or shrink, their proprietary desks. Despite a market that has rallied 108% from its low in March 2009, equity mutual funds continue to get withdrawals; and the equity exposure of hedge funds seems abnormally low, as they await Armageddon – the consequences of a Federal Reserve printing its way toward safety. High frequency traders appear to be less active, slinking away, as a friend puts it, from the rocks under which they operate, as they watch the gradual approaching of SEC investigators.

It has been suggested that the decline in the VIX manifests a growing complacency. As the S&P 500 rallied 22% from its September 2011 lows, the VIX declined from 43 to its current level of 14.00. And, certainly if something came along to spook the market (and there are plenty of things that could), we would certainly see the VIX rebound. But, when one looks at a twenty-year chart of the VIX, it has spent more years at 20 or below than above. On December 19, 2006, I wrote a piece which began: “Complacency has settled over the financial markets like a soft coating of December snow.” At that time, the S&P 500 was 1425.55, up 80% over the previous three and a half years; the VIX was selling at 11.56 and had essentially been under 20 since October 2003. The high-yield market was on a tear and housing had already peaked. Now the VIX has been under twenty for two months. Equities, as mentioned, have rallied 22% over the past five and a half months and housing is showing signs, if not of recovery, of at least bottoming. Given the lack of equity exposure at hedge funds and the continued outflows from equity mutual funds, it doesn’t strike me that there is excess complacency in equity land. That doesn’t mean the market may not correct. It has never been known to behave as expected, but there is no bubble in equities.

Where there is complacency is in parts of the corporate market and in U.S. Treasuries. Yesterday Coca Cola sold a billion dollars of three-year notes with a 0.75% coupon, thirty-five basis points over Treasuries. With the Ten-Year yielding 2.1% and with the CPI over the last twelve months showing a gain of 2.9%, owners of Treasuries will, at some point, be in for a rude awakening. Could that disruption be felt by equity investors? Of course. But, in general, the balance sheets of non-financial corporations are in pretty good shape, and consumers, while recently increasing spending, are better off than they were a few years ago.

Over the past twenty years, a chart of the VIX shows five peaks: October 1997, during the Asian crisis; August 1998, when Russia defaulted; October 2002, when equity markets were bottoming following the internet-tech bubble, October 2008, at the height of the credit crisis (and when the VIX reached its all-time high of 89.53); and last October when the European crisis was at its height. But for most of the past twenty years the VIX has traded between 15 and 25. We are now below the low end, so it is certainly worth monitoring.

While declining volume certainly reflects factors unrelated to the relative valuation of stocks, one can reasonably assume that a market that rises on low volume is a market that has been missed by a number of participants – not, typical of a market that is extended. On the other hand, I do worry about the bubble that has developed in the Treasury market. When that bubble deflates, it will likely be sudden and will create unforeseen consequences. Investors are best off focusing on the valuation and prospects of the individual securities they are considering.

Tuesday, March 13, 2012

“From Little Acorns, Giant Oak Trees Grow”

Sydney M. Williams
Thought of the Day
“From Little Acorns, Giant Oak Trees Grow”
March 13, 2012

As a nation, we have lost part of our soul when legislatures feel the necessity to codify behavior into law. It is the little things that individually may seem unimportant, but when viewed collectively determine the kind of society we are.

What brings this to mind was a vote by the New Hampshire House last Wednesday to kill a bill that would have required students to stand for the Pledge of Allegiance. Students, in my opinion, should stand for the Pledge, not because they are required to do so by law, but out of respect for the nation and those who serve it. Standing should be natural, instinctive and non-controversial. We have reached a sad point if morality, decency and respect must be legislated.

My generation – the ‘50s – rose up in the 1960s against the (outwardly) puritanical lives of our parents and grandparents. The advent of the “pill” in 1960 provided women the opportunity to enjoy sex without the fear of pregnancy. That same year Harvard psychologist, Timothy Leary, began to experiment with Sandoz’s new drug, LSD, which he characterized as “magic mushrooms.” The year before, Ken Kesey published his novel, One Flew Over the Cuckoo’s Nest, arguing that society is a prison and the only ones free are the insane. Two years later, in 1962, the rock group, the Rolling Stones were formed, and in 1964 the Beatles arrived to tremendous fanfare in the United States and an appearance on the Ed Sullivan Show. A year later, they were given OBEs by Queen Elizabeth. Hip became “cool”, and so did disrespect toward authority. Vietnam brought out the antimilitarist in us. What had been a fringe cultural became mainstream, and American society was changed forever.

It was truly an Age of Aquarius; of self-expression. Narcissism dislodged humility. The Commandment, Honor thy Father and Mother was replaced by bearded young men and long haired young women dressed in hand painted hippie dresses carrying signs reading Hey! Hey! LBJ, How many kids did you kill today? We gained freedom of expression, but with a focus on “me”; we lost a sense of communal respect and decency. And, in rebellion, we rediscovered conformity. Hippies of that generation were, as Edith Wharton described Undine Spragg in The Custom of the Country, “fiercely independent, yet passionately imitative.”

I have no interest in returning to the 1950s. Civil rights and women’s rights were laudatory goals whose achievements were hastened by the disruptions of the 1960s. But I deplore what we have become – a society without a moral compass, in which respect for others has become secondary to self-aggrandizement.

Of course, the most blatant recent display of uncivilized behavior has been the “Occupy” movement, and the support that such miscreant behavior receives from the political left. As columnist Mark Steyn wrote in November, the “Occupy Oakland” movement “rampaged through the city, shutting down the nation’s fifth-busiest port, forcing stores to close, terrorizing residents…destroying ATMs…” The reaction of the Oakland city council the next day? – They considered a resolution to express support for “Occupy Oakland!”

James Q. Wilson famous “broken window” theory holds that, in cities, when broken windows were immediately repaired the incidence of crime went down. His studies showed that when property was destroyed and restitution was not forthcoming, crime went up. If no one says something is wrong, how do our youth learn?

Social scientist Charles Murray, in an interview in the weekend edition of the Financial Times, responding to a question about the economic relapse of America’s middle class, said “the culprit is entirely cultural – the loss of the Tocquevillian virtues of industriousness, marriage, honesty and religiosity on which the republic was built.” Roger Ailes, chairman of the Fox Television Stations Group, said at a lunch yesterday that America risks becoming a nation of two parties – a government party and a freedom party, with dependency and comfort being hallmarks of the former, and a desire to be free and a willingness to accept responsibility, indicative of the latter.

A lack of respect permeates our culture. We see it in a lack of manners – standing for the elderly on busses and subways, opening doors, the use of “after you”, “please”, “I’m sorry” or “thank you” – words and phrases that risk becoming extinct. We note this lack of respect in the way people dress. Young male students go to school wearing pants that sag, exposing unattractive butts. Girls dress so alluringly that they activate male hormones that need depressing, not activating. Nice restaurants are frequented by men wearing ripped jeans and shirts that would be more appropriate in a log-rolling contest, with women in halters looking as though they’re headed to the beach for a clambake. Visitors to the White House wear torn sweat shirts and jeans. TV shows like CBS’s “Good Christian Bitches” (the last word has now been changed to “Belles”) is not only demeaning to women and Christians, it is hypocritical in that one cannot imagine the middle word being “Muslim.” I have nothing against a show like MTV’s Jersey Shore, other than it reflects poorly on our culture. But if that is what viewers want, so be it. We are what we watch.

Radio show hosts have reached new depths, though with a double standard disappointingly ever present. When Rush Limbaugh called Sandra Fluke a slut, the outrage was palpable. Even the President called her to see if she was OK. And those two “illiberal” liberals, Jane Fonda and Gloria Steinem, called for the FCC to suspend the licenses of those radio stations that carry the Rush Limbaugh show. So much for free speech! However, when liberal radio host Ed Schultz called Laura Ingraham a slut last spring, Barbara Walters laughed it off, and no call was made by the President to find our how Ms. Ingraham felt, and neither Ms. Steinem nor Ms. Fonda felt compelled to go to the FCC to register a complaint. Both men were wrong and both apologized. Both should remember that our inherent right of free of speech carries with it a responsibility to be non-inflammatory. The right of free speech does not permit someone to cry “Fire!” in a crowded theater. Decency and thoughtfulness should precede rash calls to judgment. Being respectful, even in disagreement, sends a powerful message.

None of these issues, alone, puts our civilization at risk, but collectively they suggest a slide into darkness. Writing about manners and morality may invoke specters of Victorian England with gloved men in top hats carrying canes, escorting their daintily-shod, petticoat-clad ladies. But nothing could be farther from the truth. Democracy depends on honesty, openness and communication; and a big part of communication is listening. And listening involves respect for the other person.

Disrespect among youth is not what troubles me. Part of growing up involves testing convention. Manifestations range from earrings and dyed hair to language whose purpose is to shock, not inform. It is the lack of manners, common decency and respect we see everyday in the workplace, at home and in politics that is a concern. And, if there is no model or standard of behavior for the young to imitate or aspire to, why should we expect anything else?


Seemingly small things in the political world also create significant consequences. When Defense Secretary Leon Panetta, in testimony before the Senate Armed Services Committee last Thursday regarding the possibility of military involvement in Syria, asserted: “…our goal would be to seek international permission. And we would come to the Congress and inform you and determine how best to approach this, whether or not we would want to get permission from Congress.” Had it not been for Senator Jeff Sessions, Mr. Panetta’s remarks might have gone unnoted and uncriticized. Despite the apparent Constitutional breach in Mr. Panetta’s comments, Mr. Sessions’ retort went largely unreported by mainstream media. Our democracy is fragile. It is based on the simple, but elusive concept of freedom. It depends upon a watchful and skeptical press, not the cronyism and mouthpieces we largely have today that simply serve one party or the other, but mostly one party.

We are all fortunate to be in America, not matter how or when we arrived. Assuring America’s free future should be the goal of all of us; achieving that end in the most civilized manner improves all of our lives. The “Golden Rule” of doing unto others what we would have them do unto us should not be codified into law, but it is a reasonable dictate under which to live. There should be no need of a law requiring us to stand during the Pledge of Allegiance. It should be the natural reaction of everyone who respects this nation.

Monday, March 12, 2012

“The Jobs Numbers, What’s Really Going On?”

Sydney M. Williams
Thought of the Day
“The Jobs Numbers, What’s Really Going On?”
March 13, 2012

Saturday’s headlines had different takes on the same story: the New York Times, “Economy Shows Solid Job Gains for a 3rd Month;” FT Weekend, “Obama boosted by strong jobs growth;” the Wall Street Journal, “Jobs Recovery Gains Momentum;” and IBD, “227 New Jobs Last Month; Payrolls Still 5.3 Mil Off High.”

There is no question it is good news when the economy adds job, and for the third month the economy did. The question, however, remains: Why has it taken almost three years for this to happen? The only headline that was not disingenuous was the one in IBD. Not only did they provide the actual number of new jobs, but more importantly they put it into perspective, pointing out that there are still 5.3 million fewer people working than there were four years ago. The story in the FT quoted the President speaking Friday at a new Crosspointe, Virginia Rolls Royce facility (Virginia, it should be noted, is a right-to-work state!): “But here’s the good news: Over the past two years our businesses have added over 4 million new jobs.” There was no mention that approximately an equal number of jobs disappeared and that natural growth in population added 2.4 million people to the work force during the same period. Not surprisingly, there was no mention that payrolls have been below the last peak for forty-nine months, the longest stretch since the Great depression, or that 5.4 million people (42.6% of the unemployed) have been unemployed for more than six months. Neither the President nor the FT nor the New York Times mentioned that GDP growth has not topped 4% in six years – the longest stretch ever. And, of course, the President did not mention the $4.7 trillion that has been added to federal debt since he took office.

(Keep in mind, for purposes of comparison, unemployment in 1982-1983 remained above 10% for ten months – September 1982 through June 1983, according to data from the Bureau of Labor Statistics, BLS. A year later, unemployment had fallen to 7.2 percent and GDP was growing in excess of 7 percent. In the recent recession, unemployment topped 10% only in one month, October 2009.)

Mr. Obama’s profligate spending has produced very few, if any, net new jobs since he became President. Since the trough in employment in October 2009, 1.9 million net new jobs have been added. But, as mentioned above, natural growth in the population adds about 100,000 to the workforce each month, indicating that since September of 2009 the workforce expanded by 2.9 million people, a million more than jobs created since the 2009 trough. Mr. Obama’s stimulus spending may have prevented the economy losing more jobs, but that is debatable and no one knows. I strongly suspect that its effects have been effete. What Mr. Obama has done, though, is add a lot of debt.

In three years, Mr. Obama has added about the same amount of debt as did his predecessor in eight years. Mr. Bush took on debt for a War on Terror in a bid to eliminate the threat of radical Islamic terrorism, which had manifested itself in an unprecedented attack on our nation on 9/11. We can argue as to whether Mr. Bush should have sought approval from Congress to fight the War on Terror. (I believe he should have.) But, his purposes were clear. Mr. Obama took on debt in the midst of recession and in the waning months of a financial crisis, as an attempt to radically transform the face and culture of the United States – to tilt the country further toward a form of European Socialism, a means of increasing the dependency of people on the benevolent hand of government. His purposes are also clear. We should not forget the infamous words of White House advisor Rahm Emanuel: “crises are terrible things to waste.”

Whether or not you agree with my version of Mr. Obama’s motive, there is no denying that total federal debt now exceeds 100% of GDP for the first time since World War II. Economic growth is the only way out. The question is: Which part of the economy is most dynamic – the public or the private sector? Do markets work? Are we better off letting government bureaucrats determine investments?

Too much debt limits government’s options. It is unable to spend on large projects, such as the 1960s space program. It would be unable to respond to a credit crisis, like that experienced in the fall of 2008. Washington may try to rectify the situation by increasing taxes to usurious levels. But, 10% of the people already pay 70% of all federal income taxes. And almost 50% of the population pays no federal income taxes. Perhaps Mr. Obama would prefer to see the top 10% be responsible for 90% of all taxes, and allow 75% of the population to receive the services of federal government for free? How much government does he want? What does he believe is fair?

At this level, debt is an impediment, not a stimulant. And, if we were forced to pay market rates, which we will at some point, the burden of debt will become far greater. While interest rates are being held down artificially by an accommodative Federal Reserve, there is an instinctive understanding, among many consumers and markets, that the road we are on is laden with potholes. At some point the Fed’s balance sheet will become indigestible. Incipient inflation has already been noted in food and energy prices. The BLS put the CPI at 2.9% for all of 2011. The same group (the BLS) noted that wages only increased 1.9% in 2011 – an ultimately untenable situation that will only be made worse when interest rates inevitably move higher. Certainly, rising gasoline prices, this early in the year, are not a positive omen.

When government invests, the motive is never profit; yet it is only profit that allows for continued self-sustained growth. CBS News, in a January 13th piece by Sharyl Attkisson, wrote: “CBS News counted 12 clean energy companies that are having trouble after collectively being approved for more than $6.5 billion in federal assistance.” She went on to write that five had filed for bankruptcy, and the rest are struggling. Bureaucrats in Washington, as academically smart as they may be, are no substitute for the market place.

So, while it is good to read that employment is improving, that fact says more about the resiliency of the American economy than it does about the policies of the President. The President has burdened the private sector with regulation, ranging from healthcare (the full effects of which won’t be felt until 2013-2014), and environment, to the financial. The negative effect has been most noticeably felt by minorities and the poor. Their cost-of-living has increased and their wages (when they are working) are not keeping pace. While the overall unemployment rate remained unchanged in February at 8.3 percent, it rose for Hispanics to 10.7 percent and for African Americans to14.1 percent.

Too many Americans are unemployed and underemployed. Unfortunately they will continue to struggle until government loosens the reins and allows markets to compete more freely in the global economy. Two-hundred and twenty-seven thousand new jobs was nice to see, but given the additions to the work force, at that rate it will take another five years to return to peak employment. Personally, the President has no financial worries, but millions of Americans do.

Tuesday, March 6, 2012

“When is Default not a Default?”

Sydney M. Williams

Thought of the Day
“When is Default not a Default?”
March 6, 2012

In 2009, juggler David Sack kept three balls in the air for twelve hours, five minutes, setting a world record. The European Central Bank (ECB) is trying to achieve a similar feat by keeping profligate states from disorderly default via a process of restructuring debt without calling it default. Greek debt holders, for example, have been asked to accept a deal that equates to a 73% loss. Greek Finance Minister Evangelos Venizelos told private creditors to take the offer, “Because it was the best deal they would get.” They have until Thursday to decide.

Mr. Venizelos, who is running for Prime Minister on the Socialist ticket, assured his European Partners that Greece would stick to its pledges of austerity. “Signatures are signatures,” he said, “Commitments are commitments.” But apparently commitments and signatures do not apply to credit default swap (CDS) contracts. Despite bond holders losing three quarters of the value of their assets, the International Swaps and Derivatives Association (ISDA) has determined that a restructuring Credit Event has not occurred – an enormous benefit to the banks that wrote these contracts, and harmful to those (mostly hedge funds) who had purchased the contracts. And it raises questions: Do credit default swaps on sovereign debt have any value? What role does contract law play in the CDS market?

One of the shortcomings of the Dodd-Frank bill was that it did not clarify the role of credit default swaps. A credit default is a form of insurance for bondholders, protection against an issuer defaulting or in the instance of a credit event that is harmful to the bond holder. That is a valuable capability, allowing issuers to, conceivably, pay lower interest rates, and for investors to better able manage their risk and return. The market is huge. The gross notional value of the CDS market in early 2012 has been estimated at $32 trillion, down from 2007, but up from 2010.

However, a singular (and negative) characteristic of a CDS is that the seller can sell protection that exceeds the value of the underlying bond. That is equivalent to you and all your friends buying insurance on my home in Connecticut. It is no longer insurance; it is a speculative bet and it means that there are several people (you, of course, being the exception) who would have an interest in my house burning to the ground. Dodd-Frank could and should have addressed this, but it did not.

Besides the obvious difficulty Greece will have in conforming to the austerity measures required in the “restructuring”, the whole mess stinks. Bloomberg this morning updated a story that first came to light two years ago about the role played by Goldman Sachs in using derivatives to mask the debt and deficit numbers of Greece in 1999, so that the country would meet the requirements of the Maastricht Treaty, allowing them to join the European Union.

It remains hard for me to believe that a continued avoidance of reality will serve the people of Greece, the European Union, or investors well. Those who object to a default and the re-introduction of the Drachma persistently use the term “disorderly” to scare investors and Greek voters. One cannot help wondering if the European Central Bank, which has an estimated €177 billion exposure to Greek debt against a capital base that is about half that level, has been a factor in urging acceptance of this deal, which penalizes bondholders without providing them the relief a credit default swap would offer, and which subjects the country to years of austerity.

Who is being helped?

“Smarts versus Wisdom at the Fed”

March 6, 2012

Thought of the Day
“Smarts versus Wisdom at the Fed”
March 6, 2012

Nobody will argue that Federal Reserve Chairman Ben Bernanke is not a very smart man. Before the age of thirty-two he had graduated Summa Cum Laude from Harvard, had earned a PhD in economics from M.I.T. and had become a full professor at Stanford. However, (and hoping I am wrong) I question his wisdom. It was debt that got us in trouble in 2008 – years of expanding debt, especially consumer debt and government entitlement programs. So, now buckets of “hair-of-the-dog” are the answer?

Certainly, liquidity was necessary in the fall of 2008, for what could have been a solvency crisis. The efforts of the Federal Reserve and the Treasury prevented what would (or could) have been a total collapse of the financial system. And for that, we owe a debt of gratitude to Mr. Bernanke, Treasury Secretary Henry Paulson and Tim Geithner, then head of the New York Federal reserve.

But once the ship was righted, which credit markets indicated happened pretty quickly – by the end of December, 2008 – was it still necessary to print money at the rate they did? Was it really necessary to borrow, and then spend, $850 billion for a stimulus plan? Did we have to pass what will turn out to be the biggest and most unaffordable entitlement program ever – the Affordable Care Act? The Fed’s balance sheet, for the week ending February 22 was $2.935 trillion, versus $877 billion in December 2007. Last year, the Fed bought 40% of the U.S. Treasury’s issuance. (China was a net seller of U.S. Treasuries in 2011.) We all know that the Fed has been artificially depressing interest rates. The concern that everyone has is: How high will rates go when the Fed begins the process of normalizing its balance sheet? A normal yield curve environment would have Ten-Year rates three or four hundred basis points higher than Fed Funds, suggesting that interest costs would be approximately $400 to $600 billion higher than the estimate for 2012 of $225 billion – a meaningful change to a $3.8 trillion budget, especially when receipts are only expected to be $2.6 trillion!

Obviously, no one knows when rates will rise. A year ago, Bill Gross of PIMCO, the dean of bond fund managers, made a famously bad bet in selling Treasuries – obviously, too early. Nevertheless, we know that at some point the thirty-year bull market in bonds will come to an end. Warren Buffett recently wrote in his annual report that “…bonds should come with a warning label.” David Stockman, the former White House budget director under President Reagan, and who resigned in protest over deficit spending (and went on to make a fortune investing in debt-inspired leveraged buy-outs), in a recent interview with Associated Press suggested that Fed Funds ought to be 3% or 4%, instead of the current quarter of one percent.

The problem of too-low interest rates is not the sole purview of the U.S. The combined balance sheets of the U.S., England the ECB and Japan now total $8.76 trillion, suggesting that a back-up in interest rates, when it happens, will prove a headwind to global growth. As well, China has been easing its reserve requirements to stimulate more bank lending.

The Fed is making the bet that they will be smart enough to know when to start gradually reducing their balance sheet, without negatively impacting growth that is likely to still be anemic. As Hamlet might say: “‘Tis a consummation, devoutly to be wished.” We are already 33 months into a very mediocre expansion, with the average post-war expansion lasting 59 months. Additional pressure on economic growth comes from demographic trends. Robert Arnott, chairman and founder of Research Affiliates LLC, points out in a Wall Street Journal interview on Monday: “This very year, for the first time in U.S. history, the population of senior citizens rises faster than the working-age population.” Does anyone believe that economic growth will accelerate in the next couple of years?

Policy initiatives should be encouraging investment, not consumption. Yet, the Fed and the Administration are doing the opposite. Artificially low rates encourage speculation and consumption, not investment in plant and equipment, which are based on their expectations (not governments) for economic growth. And plans to treat dividend income the same as earned income will discourage investment; and it certainly hurts seniors, as they receive more than half of all dividend income. They are the group that already has been most affected by low interest rates on savings. In the meantime, the longer the Fed persists with abnormally low interest rates, the more difficult will be the process of detoxification. The Fed has placed itself – and by proxy, us the taxpayers – in a difficult position.

The good news is that non-financial corporations entered the downturn with good balance sheets and they now hold almost $2 trillion in cash. Consumers have been addressing their debt. The fourth quarter report on household debt and credit from the Federal Reserve Bank of New York showed that total household debt continued to fall in the fourth quarter, down $126 billion to $11.53 trillion. Household mortgage debt and home equity lines of credit are now, respectively, 11% and 11.7% below their peaks. However, consumers are not out of the woods. The Case-Shiller Index suggests that national housing prices, which as of December 2011 were down 34%, have not yet bottomed.

But federal debt continues to increase at alarming rates. Other than Representative Paul Ryan, no one in Congress, and certainly not the President, has seriously addressed the problem of entitlement spending. Given the propensity of Congress to spend, it is little wonder that fiscal conservatives do not trust Congress to use increased taxes to voluntarily pay down debt. If they did, they would have no problem paying higher rates. Even today, the top 10% of income earners pay 70% of federal taxes. Spending must be curtailed and entitlements must be subject to means’ tests. A federal government that provides net support to more than half its citizens becomes a government very difficult to dislodge.

No one can foresee how we will extricate ourselves from the trap that has been set, the web that has been woven, but we all better hope that our leaders are endowed with more wisdom than they have shown so far, to go along with their academic degrees.


I will be out the balance of the week, skiing in New Hampshire with a number of my siblings, an annual ritual at a place, Mt. Sunapee, where I first skied almost sixty years ago.