"Debt"

 

I do not claim expertise about U.S. Treasuries, nor about any fixed income securities. And I am not an economist; so there are those that may argue with some of my assertions and conclusions. Nevertheless, I worry as to what the unprecedented period of exceptionally low interest rates we experienced, beginning in the wake of the 2008 credit crisis and then re-adopted during the Pandemic, may have done to our attitudes toward debt.

 

By the way, if you get a chance Google Daniel Hannan and his March 24, 2009 speech to the European Parliament, the speech from which the rubric heading this essay comes. In the speech he eviscerates the British Prime minister Gordon Brown, as only an English Parliamentarian is able.

 

Sydney M. Williams

www.swtotd.blogspot.com

 

Thought of the Day

“Debt”

May 3, 2024

 

“You cannot spend your way out of recession or borrow your way out of debt.”

                                                                                                                                Daniel Hannan (1971-)

                                                                                                                                British Member of European Parliament

                                                                                                                                Speech, March 24, 2009

 

Many problems we face make the front pages, and deservedly so: seven and a half million illegals through our southern border over the past three years; A Messianic belief that man alone is responsible for climate change; pro-Palestine and anti-Semites protesting on college campuses for misogynistic Hamas; rising crime; an aggressive China and revisionist Russia; a domestic education system that focuses on identity politics rather than fundamentals of learning; a belief that equal outcomes should replace equality of opportunities; and that energy inflation can be cured by controlling prices and limiting supplies. With that, debt and deficits are relegated to the back pages.

 

………………………………………………………………

 

Yet too much debt moves the hands of the doomsday clock closer to midnight. However, when entered into judiciously, debt can be a good thing. Mortgages, auto loans, and the purchase of appliances on time have allowed consumers to live lifestyles unavailable to their forebearers. Student loans, when not overwhelming, lead to improved earnings. We should, however, live within our means. As for the state – a nation must be able to keep secure its people and its principles. As well, it must be able to fund infrastructure projects and other necessary expenses. Because the state has the ability to print its currency, living with a balanced budget, while preferable, is not necessary.

 

However, when too much leverage is employed – examples being NYSE margin requirements of 10% in the 1920s and reduced/no-down-payments on housing in the 2000s – debt leads to a collapse in pricing and a loss in values. When incomes fail to keep pace with debt accumulation, risks of bankruptcies rise, as happened in 2023 when bankruptcies reached a 13-year high. And when a nation’s spending causes it to raise taxes to a level that inhibits, or limits, economic growth, everyone suffers. 

 

Over the past several years, we have become addicted to low interest rates, which encourage borrowing and discourage savings. After years of near-zero Fed Fund rates, following the 2008 credit crisis and despite 23 subsequent quarters of positive GDP growth, the Fed only began to raise rates in the 4^th quarter of 2015. With the advent of Covid in the first quarter of 2020, the Fed again lowered the rate to near zero, which is where it remained for two years, until the second quarter of 2022, despite strong GDP growth in 2021. When inflation became a problem the Fed raised its benchmark rate. Now, despite inflation still running ahead of the Fed’s target, many are urging the Federal Reserve to lower rates before year end. And perhaps they will. Politically it is tempting, especially in an election year. However, consequences of years of exceptionally low interest rates include government bloat, an increase in debt, a rise in asset prices, and inflation – an unsustainable burden on our children and grandchildren, a burden they will have to bear. 

 

Between 2003 and 2022 total household debt almost doubled, rising from $8.3 trillion to $16.4 trillion, while median household income rose 13%, from $65,860 to $74,580. These numbers are disturbing, but it is what happened at the national level that is of more concern. In 2000 federal debt was $5.63 trillion, a little more than half of that year’s GDP of $10.3 trillion. Twenty-three years later, federal debt stood at $32.99 trillion, while GDP in 2023 was $27.4 trillion – the first time since World War II that federal debt exceeded GDP. Interest expense on that debt in 2023 was $659 billion, or about two percent. Should interest rates remain at current levels (4.6% on the 10-year and 5.00% on the 2-year) interest expense will more than double over the next three to four years. Of course with continued deficit spending total debt will increase, further raising interest costs. Since both political parties have contributed to deficits and debt, the outlook is daunting. Neither party offers solutions.

 

In contrast, consider the immediate post-War years: In 1945 the U.S. generated $250 billion in GDP, with national debt of $258 billion. Fifteen years later, GDP had more than doubled to $543.3 billion, while debt had increased less than 50% to $382.6 billion. According to Trading Economics, GDP growth averaged four percent in the 1950s. Since the start of the new century, GDP growth has averaged about two percent. 

 

So, what are the risks? For one: In an August 7, 2011 interview on Meet the Press, Alan Greenspan said the issue was not one of credit rating: “The United States can pay any debt it has because we can always print money to do that. So there is zero probability of default.” The risk, rather, is Milton Friedman’s “hidden tax”– continuing inflation. A second risk is higher taxes to pay for swollen government, an impediment to economic growth as high taxes limit returns on investment. A third risk is increased regulation, which hinders innovation. Adding to fiscal and economic problems has been a dearth of births. Economic growth is dependent on innovative products and services, productivity gains driven by technology, an increase in purchasing power of a nation’s consumers…and growth in the nation’s population.

 

The latter is a concern and a risk. In 2023, in the U.S., there were 3.6 million births and 3.46 million deaths – a year in which America’s birthrate hit a new low, with a total fertility rate (an estimate of the number of children a woman is expected to give birth to over her lifetime) of 1.62. A total fertility rate (TFR) of 2.1 is needed to keep population steady, absent immigrants. As China has discovered, a low TFR is difficult to reverse. So our future population growth will be dependent on immigration, suggesting to this observer that what is needed is a two-to-three fold increase in legal immigration, along with a closing of our southern border. Illegal immigration, over the past three years, has amounted to over two million per year. While some of these people will become productive residents, most incur costs. Legal immigrants, according to the National Immigration Forum, number about a million per year. Most of these people, many of whom have waited years to become citizens, add almost immediately to our nation’s economic growth.

 

Solutions to problems do not usually announce themselves in advance, so perhaps there is a way out of the quagmire in which we find ourselves. Nevertheless, smooth sailing does not seem to be in our immediate future. Federal debt (forget unfunded liabilities for Social Security, Medicare and Medicaid) exceeds GDP, with deficits continuing to expand, and with interest rates having returned to, historically, more normal levels. The Administration is adamant about writing more rules, increasing regulations and placing further restrictions on fossil-fuel energy production and distribution, all of which will increase costs to consumers. To pay for their expansion of government, they talk of raising taxes which will disincentivize investment and savings. Added to this unhappy picture are the demographic challenges we, and most of the West, face. It is hard to be Panglossian about the world we will leave for our children and grandchildren.

"Maverick: A Biography of Thomas Sowell," by Jason Riley

 As much a biography, this book by Jason Riley is a treatise on intellectual thought over the past six decades, for it his mind that truly distinguishes Thomas Sowell. Sowell is an exemplar of the value of empiricism when formulating ideas that become good policy, of which, sadly, there is too little today. 

Sydney M. Williams

 

Burrowing into Books

“Maverick: A Biography of Thomas Sowell,” Jason L. Riley

October 10, 2021

 

“The kind of idealized unity, projected by political leaders and

intellectuals, has seldom existed among any racial and minority

anywhere. Nor has the economic progress of racial or ethnic groups

been much correlated with their closeness to, or remoteness from, such unity.”

                                                                                                                                                                                                                                                                                                        Thomas Sowell (1930-)

                                                                                                                 As quoted by Jason Riley in Maverick

 

Thomas Sowell was born into rural poverty in North Carolina in 1930. His father died before he was born and his mother a few years later, giving birth to a younger brother. With an aunt, he moved to Harlem. Two years after being admitted to New York’s Stuyvesant High School he dropped out. At eighteen he joined the Marines. After his service he acquired his GED and entered Howard University. Following freshman year, he transferred to Harvard. He earned a masters at Columbia and a PhD in economics at the University of Chicago. After giving up teaching at age fifty, he has spent the last forty-one years at the Hoover Institute. He has written at least thirty books on subjects ranging from economics, race, education, to politics and intellectual thought. It has been his intense research and life-long pursuit of facts, which usually produce conclusions that do not conform to what is expected of a black American male. 

 

The author, Jason Riley, was born in Buffalo, New York in 1971. He graduated from State University of New York in Buffalo in 1993. After stints at Buffalo News and USA Today, he joined The Wall Street Journal in 1994. In 2005, he joined the editorial board and since 2016 has had a weekly op-ed column. He is also a senior fellow at the Manhattan Institute.  With this biography, he has authored four books, including Please Stop Helping Us: How Liberals Make It Harder for Blacks to Succeed (2014), a book Thomas Sowell applauded.

 

In this, Riley spends little time on Sowell’s personal history, relying on his autobiography, A Personal Odyssey, published in 2000 (and written up by me in August 2020.) “The goal,” Jason Riley wrote in his introduction, “…is to place what he and others consider his (Sowell’s) most important observations into context, and then trace the intellectual traditions from which those insights derive and the orthodoxy they often challenge.” While Thomas Sowell is an economist – his PhD thesis was an analysis of Say’s Law – his interests extend far beyond economics. While studying under Milton Friedman and George Stigler at the University of Chicago, he remained a Marxist, but that changed in 1960 when he became an intern at the U.S. Department of Labor, studying Puerto Rico’s unemployment in the sugar industry. A study of the data convinced him that the cause for unemployment was due to a mandated minimum wage. 

 

The book, which is 248 readable pages, is divided into nine chapters, with titles like “Higher Education, Lower Expectations,” Sowell’s Knowledge,” “Civil Rights and Wrongs,” and “Culture Matters.” Sowell is an intellectual and empiricist. Riley quotes from the preface to Sowell’s book Race and Culture: “…what is most needed is an understanding of existing realities, the history from which the present evolved, and the enduring principles constraining our options for the future.” It is the reliance on empiricism, rationalism and skepticism that has always distinguished Thomas Sowell, whether he is writing on economics, race, education or culture. For example, in an essay written in 2000, “Success Concealing Failure,” when U.S. universities bragged that Americans win more Nobel prizes than any other nation, Sowell pointed out an unpleasant truth: “While Americans won the lion’s share of Nobel Prizes in 1999, not one of these winners was actually born in the United States.”

 

Riley points out Sowell’s belief that well-intentioned people (“useful idiots,” as Lenin described them) strive to help blacks and other minorities. Yet the results, as both Sowell and Riley have noted, are often the opposite of what was intended. Sowell says it is unclear whether Civil Rights leaders’ and politicians’ intentions are unintended, as both groups have built careers on the concept that blacks can only succeed with the help of programs like Affirmative Action – a policy Sowell finds insulting to the millions of individual blacks who succeeded without assistance. If it were true, how does one explain the success of Dunbar High School in Washington, D.C., a black-only high school, where black students out-scored white students in segregated schools in the 1950s? School success is a function of ability and effort on part of the student and insistence on learning on part of the teacher. Can a gifted black youngster in the nation’s capital today receive as good a high school education as one could sixty-five years ago? 

 

Sowell is concerned about current trends toward wokeism. In an essay, “Lessons not Learned” published twenty years ago, he wrote, “…we and our children are being trained to be sheep and to respond automatically to words that strike an emotional chord…The very tactics of those totalitarian movements – intimidation, demonization and disregard of all rules in favor of politically defined results – have become hallmarks of political correctness today.” And political correctness has become more ubiquitous over the past two decades. 

 

While this is not a biography in the traditional sense, Jason Riley enters the mind of a man about whom Steven Pinker once wrote, “…is one of the most brilliant thinkers in the world today.” Like most black conservatives, Sowell is denigrated by much of mainstream media and progressive politicians because the conclusions he reaches do not accord with those who feel that all blacks should speak with one voice. Riley’s contribution is to better understand this man, and that it is the individual – not the gender, tribe or race – that is important. We are not born equal. We do not have equal abilities or aspirations, but our Constitution provides for equal rights and equal protection under the law. We must strive for inclusion, diversity of ideas and equal opportunities; but equal outcomes are dreams of the naïve, which deceitfully serve only those who seek power. Ironically, and perhaps counter-intuitively, Sowell has greater confidence in the innate ability of blacks than do many of those who claim to help them. “Sowell wants to make his readers smarter, not tell them what to do,” Riley writes.

 

Maverick is an important book. It illuminates a brilliant thinker; it explains why current, perhaps well-intentioned, but racially discriminatory policies, like critical race theory, hurt those they are supposed to help, and it describes a man who rose to prominence, despite enormous odds, based on his abilities and his willingness to follow where his knowledge and research led, regardless of what public opinion might say. 

"Inflation"

                                                                   Sydney M. Williams 

Thought of the Day

“Inflation”

July 31, 2021

 

“The most important thing to remember is that inflation is not an act of God, that inflation is not

a catastrophe of the elements or a disease that comes like the plague. Inflation is a policy.”

                                                                                                        Ludwig von Mises (1881-1973)

                                                                                                        From a lecture, 1958

                                                                                                        Selected Writings of Ludwig von Mises, Chapter 9

 

Are we or are we not, in the early stages of an inflation surge? The question is important because the answer has consequences that affect us all – from the daily cost of bread and energy to investment and retirement accounts.

 

The President and the Federal Reserve claim inflation is not a problem. On July 19, Mr. Biden spoke at the White House: “Our experts believe and the data shows that most of the price increases we’ve seen are – were – expected and expected to be temporary.” In February, in testimony to Congress, Fed Chairman Jerome Powell said that the growth in money supply, specifically M2, “doesn’t really have important implications.” Upticks in inflation are “anomalous and transitory.” Nevertheless, one wonders. In a July 21 Wall Street Journal op-ed, John Greenwood, chief economist of Invesco and Steve Hanke, professor of applied economics at Johns Hopkins, wrote: “Since March 2020, M2 has been growing at an average annualized rate of 23.9% - the fastest rate since World War II.” The Fed’s target rate for inflation is two percent; however, for April, the CPI was 4.2%; for May, 5% and for June, 5.4%. The PCE (Personal Consumption Expenditures) price index – the index the Fed uses as their primary source for inflation – rose 6.4% in the second quarter versus 3.8% in the first quarter. If inflation is nothing to worry about, try telling that to families living on a median wage or to retirees on fixed incomes. Energy prices were up over 40% between December 31 and June 30, while food commodity prices were up close to 20 percent.

 

Since the start of the recession in February 2020 (which lasted only two months according to the National Bureau of Economic Research!), the Federal Reserve has retained a policy of near-zero interest rates and $120 billion in monthly bond purchases. When the Fed purchases Treasury’s they add to the money supply. Federal debt now amounts to 119% of GDP. The last time federal debt exceeded GDP was in 1946, in the aftermath of World War II, when it stood at 106% of GDP. The federal deficit for fiscal 2021 is expected to be $3 trillion, much of which will be financed by the Federal Reserve. As the Wall Street Journal noted in their lead editorial on July 29: “You don’t have to be a cynic to wonder if the Fed privately now wants more inflation to ease that rising debt burden.” Paying back borrowed dollars with cheaper ones is a policy decision. Five percent inflation means that $100.00 invested in a Thirty-Year Treasury would be worth $23.00 at maturity, while the interest payments (currently 1.93%) would amount to less than $60.00 (before reinvestment) of a depreciating currency – attractive to the borrower but not for the investor. In 1919 John Maynard Keynes, in an essay entitled “The Economic Consequences of the Peace,” wrote: “By a continuing process of inflation, Governments can confiscate, secretly and unobserved, an important part of the wealth of their citizens.” Inflation is a tax that falls most heavily on retirees and the low income.

 

Fifty years ago (August 15, 1971), President Nixon ended the Bretton Woods Agreement, which called for the U.S. to redeem dollars presented by foreign governments at 1/35^th of an ounce of gold. Ending the agreement made it easier for the U.S. Government to finance social programs, without raising the necessary taxes, but making inflation more likely. The Dollar, thus, became a fiat currency, meaning it was backed by the credit worthiness of the issuing government, not a physical commodity, like gold or silver. Fiat currencies lose value during times of economic and political uncertainty. Their numbers can be increased, ad hoc, at the will of the government 

 

In a 1963 talk in India, Milton Friedman observed: “Inflation is always and everywhere a monetary phenomenon, in that it can be produced only by a more rapid increase in the quantity of money than in output.” His hypothesis is expressed in the equation MV = Py, where M is the supply of money, V is its velocity (the rate at which money is exchanged), P is the price level (using either PCE or CPI) and y is real gross domestic product (GDP). Thus, when V and y are constant, an increase in M means an increase in P. On the other hand, increased GDP growth may warrant an increase in the money supply, as well as its velocity. If price stability is the desired outcome, the Fed must carefully monitor the relationship between the supply of money, its velocity and GDP.

 

But are they, and will they? Over the past several years, the Fed has become politicized and less independent. Today, a former Fed Chairperson, Janet Yellen, serves as U.S. Secretary of the Treasury. Since the end of the last recession in 2009, the Fed, pressured by the Obama and Trump White Houses, kept interest rates at historically low levels. In the past two years, since the onset of the pandemic, the growth in money supply has been high, driven by increased government spending, much of which has been funded by the Federal Reserve’s bond purchases. However, velocity of M2 fell by 21% during 2020, reflecting declines in consumer and business spending caused by COVID. So, inflation was not a concern in 2020. However, with the economy picking up speed, the velocity of money has accelerated, and the money supply continues to expand, creating inflationary pressures. Will that trend continue?

 

The Federal Government’s proposed spending plans, especially the $3.5 trillion budget plan, will require the issuance of new bonds, along with new taxes that act as a retardant on GDP growth. While GDP is now above pre-pandemic levels, economic growth in second quarter was below expectations, perhaps a warning sign. Higher debt loads have a natural tendency to increase interest rates, something Washington does not want, so there will be pressure for the Fed to continue bond purchases. Using Friedman’s formula, can GDP growth equal the increase in money supply and velocity, without an increase in price (inflation)? The truth is we don’t know, or, at least, I don’t. But I worry.

 

Debt to GDP is at record levels for a peace time economy. Budget deficits are the highest since World War II. The fiscal 2021 federal budget outlays will represent about 29% of GDP, five percentage points higher than a year ago. Will higher government spending boost GDP growth, or will it impede the private economy? Near the conclusion of his lecture quoted in the rubric, Ludwig von Mises said, “One of the privileges of a rich man is that he can afford to be foolish much longer than a poor one.” The Federal Reserve has a challenge. It must navigate between the Charybdis of inflation and the Scylla of excessive federal spending and debt. Can they do that without debauching the currency? Let us hope so. In his 1919 speech quoted above, Keynes began: “Lenin is said to have declared the best way to destroy the capitalist system is to debauch the currency.” Is that what we are doing?

 

I am not predicting a return to the 1970s inflation or something worse. But I worry. As a country, we are that rich man to whom von Mises referred. Let us pray we will not be more foolish than we have been.

"A Personal Odyssey," by Thomas Sowell

Sydney M. Williams

30 Bokum Road – Apartment 314

Essex, CT 06426

www.swtotd.blogspot.com

 

Burrowing into Books

“A Personal Odyssey”

August 13, 2020

 

“Although marching to your own drummer has its downsides, both personally

 and professionally, it also made me no stranger to controversy.”

                                                                                                            Thomas Sowell (1930-)

                                                                                                            A Personal Odyssey, 2000

 

This memoir was written twenty years ago, so some will have read it. I had not. Sowell is a man I have long admired for his independent thinking on many issues. Trained as an economist, he writes as well on education and race, and of how politics, protests and policy prescriptions influenced his thinking.

 

Like Odysseus’ return from Troy, we follow him from birth and young boyhood in rural North Carolina, through his school years in Harlem, and his leaving home at age seventeen. We follow him into the Marine Corps, and we learn of his years in college and graduate school, of marriage and children. We read of his years of teaching, writing and thinking, and, finally to his Ithaca, Stanford’s Hoover Institution, where he researches and writes – a passage through trials to triumph.

 

He was born in 1930. His father died before he arrived and his mother, who could not afford to feed and care for him, had to give him up to his father’s Aunt Molly. The poverty in which he lived was bleak. His first home: “Like most of the houses in the area, ours had no such frills as electricity, central heating, or hot running water…The toilet was a little shed on the back porch.” At age nine, his family moved to New York City, to a shared apartment in Harlem. In 1944, his intelligence got him admitted to Stuyvesant High School where he first spent time with white children. But he quit before graduation. He worked and went into the Marine Corps: “Never in my life did race mean less than during those two months at Parris Island. The Drill Instructors saw their job as making everybody miserable, and they did so without regard to race, color, creed or national origin.”

 

Honorably discharged, he passed exams allowing him to enter Howard University, but soon realized that there “was no way for my mind to develop in the stultifying atmosphere there.” He transferred to Harvard, from which he graduated Magna Cum Laude.  From there it was on to Columbia where, under Arthur Burns, he wrote his master’s thesis on Marx’s business cycle theory. He received a PhD from the University of Chicago, with Milton Friedman as his advisor. His thesis was on Say’s Law, which says that production is the source of demand. In one of Friedman’s courses he was assigned Friedrich Hayek’s essay, “The Use of Knowledge in Society,” which “showed the role of a market economy in utilizing the fragmented knowledge scattered among vast numbers of people.”

 

As a black man, civil rights were important. Everyone, he knew, should be equal before the law. “But,” he wrote, “to expect civil rights to solve our economic and social problems was barking up the wrong tree...” He saw quality education as providing the best route out of poverty but did not see that as the plan of civil rights activists. “In education, the agenda was racial integration in general, including busing. Discussions of first-rate all-black schools were a distraction from that agenda.” Busing, in the 1970s, had become a symbolic action. “My research on affirmative action likewise convinced me that it was counterproductive for its avowed purpose, except for a relatively few affluent individuals.” In last Monday’s Wall Street Journal, Barton Swaim wrote, “Thomas Sowell and others have shown that choice and competition would benefit black children far more than doubling or tripling funds for public schools, but white liberals and black civil-rights leaders studiously ignore it.”

 

What struck this reader is his common sense and his wish for other blacks to have the advantages he had. He credits his success to genetics and to the environment in which he has lived. A mathematics gene was common in the family, as were other characteristics: “Some remarkable similarities in personality traits also showed up as between me and my siblings, even though we were raised in separate households hundreds of miles apart.” Environment was important. He left the south “before I would have fallen irretrievably far behind in inferior schools,” and then passed through public schools in New York, “at a time when they were better than they had been for the European immigrant children of a generation earlier and far better than they would be for black children of a later era.”

 

His story is personal; we meet his son John, a brilliant child but a late talker, a condition that prompted his writing Late-Talking Children, one of the more than thirty books he has written. Summing up his life thus far, he added: “With all that I went through, it now seems in retrospect almost as if someone had decided there should be a man with all the outward indications of disadvantage, who nevertheless had the key inner advantages needed to advance.”

 

Sowell is an icon of conservatives, but he is not political. He notes how he developed a “…lifelong immunity to Potomac fever.” Asked to join the Reagan Administration, he demurred. His last membership in a political party was as a Democrat; he became an Independent in 1972. He does not have, he wrote, “…the political skills or temperament to accomplish anything that would justify the aggravation that going to Washington would involve.” He is an intellectual, with an interest in truth based on facts, not policies based on politics of identity. While his common sense would be refreshing in Washington, his wisdom is available to all who can read. This book is a good place to start.

"Eleven Years After the Credit Crisis: Debt, Interest Rates and Inflation"

Sydney M. Williams

30 Bokum Road – Apartment 314

Essex, CT 06426

swtotd.blogspot.com

Thought of the Day

“Eleven Years After the Credit Crisis: Debt, Interest Rates and Inflation”

July 31, 2019

“At the end of the day, it is not a normal condition to have interest rates at zero.”

                                                                                                            Lloyd Blankfein

                                                                                                            Former Chairman, Goldman Sachs

The TED spread – the difference between Three-month U.S. Treasuries and Three-month LIBOR and an indicator of perceived credit risk in the general economy – declined from 314 basis points to 131 basis points during the fourth quarter of 2008, after reaching a high of over 458 basis points on October 6. (Historically, the yield spread had been closer to 50 basis points). The S&P 500 bottomed on March 9, 2009 at 676.53. The Second Quarter of 2009 marked the end of the 2007-2009 recession. The rate on Fed Funds, which began 2008 at 4.25%, ended the year at 0.25%. Despite having spent almost half a century on Wall Street, I am an observer not an expert on credit markets, so what follows are opinions that should be taken with the proverbial grain of salt. It is my contention, however, that monetary policy over the past decade has been driven by political wants not economic needs. 

In my opinion, the incoming Obama Administration, in 2009, used the credit-driven recession to justify a political agenda of increasing the role of government and “…fundamentally transforming the United States of America,” as Mr. Obama put it five days before the 2008 election. Apart from demonizing Republicans, the first thing the new Administration did was to call the seven-quarter recession a “Great Recession,” reminding people of FDR and the Great Depression. Certainly, the bankruptcy of Lehman on September 15, 2008, and the ensuing credit crisis, made for a frightening few weeks, but the scare was over by the end of the year. While Treasury Secretary Henry Paulson, Federal Reserve Chairman Ben Bernanke, and President of the New York Federal Reserve Bank Timothy Geithner have been criticized by some for their handling of the crisis, it is my belief they saved the system. Monday morning quarter-backing may argue that there were some things they did they should not have done and other things they did not do they should have done, but the bottom line is that, while Lehman want bankrupt and other banks were forced to sell out, by the end of December the crisis was largely resolved, as could be seen in the decline of the TED spread mentioned above and in the fact that high-yield bonds had begun to rally a month before year end.

For six and a half years, while the economy expanded from $14.2 trillion in 2009 to $18.2 trillion in 2015, the Federal Reserve left the Fed Funds Rate at 0.25%. It was only in the fourth quarter of 2015 that the Federal Reserve finally lifted the rate to 0.50%. The rate remained at that level until December 2016 when it was increased to 0.75%, just before the Trump Administration took office. During 2017, the rate rose, in three increments, to 1.50%. In 2018, the rate rose in four increments to 2.50% where it remains today – higher than it was but still low by any historical measure. However, once again, political pressure is being put on the Fed, this time by President Trump – and silently acquiesced to by members of Congress – to lower rates, a mistake, in my opinion. It is expected that this afternoon the Fed will reduce rates by twenty-five basis points. 

Low rates trouble me for three reasons: first. they incentivize borrowing, discourage savings and hurt the retired. Second, they mask the cost of the debt our government has accumulated, which makes more difficult economic expansion. Third, low rates and cheap money make more likely a return to inflationary forces.

Non-financial corporate debt has increased to about 45% of GDP, or about $9 trillion, roughly where it was prior to the last two recessions. The $13.7 trillion in household debt is at record levels, driven by growth in student loans, but, as a percent of GDP, household debt is below where it was in 2008. The U.S. personal savings rate, at 6.2% of disposable personal income, has been flat for the past ten years, despite rising incomes in a recovering economy.

The size of government debt has increased political pressure to keep rates low. In 2000, the U.S. economy generated $10.3 trillion in GDP on total local, state and federal borrowings of $7.2 trillion. By 2018, the U.S. economy had doubled to $21 trillion, while debt more than tripled to $25 trillion. Interest expense is a rising cost. Should interest rates return to their average post-War levels, interest expense for the federal government would approximate 20% of the budget, or close to $1 trillion of a $4.7 trillion budget. This was a problem foreseen by our Founders. In his pamphlet, “Poor Richard’s Almanac,” Benjamin Franklin wrote: “Think what you do when you run in debt; you give to another power over your liberty.” An unsustainable debt load, made easier by lower interest rates, makes more likely systemic risk to the economy.

Inflation can be seen as a Janus, depending on whether one is a borrower or lender, a progressive or a conservative. There are those who are concerned with the “Japanification” of the economy, where deflation becomes entrenched in a vicious, downward cycle. Japan, however, is different than the U.S. in many respects, but particularly in terms of demographics. Its total fertility rate (TFR) is 1.46 and has been below the replacement rate of 2.1 for several years, while the U.S. has a TFR of 1.8 and only recently went below replacement rate. We have an abundance of raw materials. They have little. They have an homogeneous culture, while we are diverse. 

Milton Friedman, in his 1963 text Inflation: Causes and Consequences, wrote: “Inflation is always and everywhere a monetary phenomenon, in the sense that it is and can be produced only by a more rapid increase in the quantity of money than in output.” Today, money is cheap in all Western and developed nations, as interest rates inform us. For decades, many economists have claimed inflation is a function of slack or tautness in spare capacity in the economy, including labor. But, as well, positive forms of deflation are affected by productivity gains associated with disruptive technologies and by the importation of cheap consumer goods from abroad. But, now big technology companies have been coming under government scrutiny and tariffs are making more difficult the import of lower-cost goods. 

Low rates are a world-wide phenomenon, especially in Europe and Japan. The key short-term interest rate in Japan is -0.01 percent. In Europe, benchmark interest rates are set by the governing council of the European Central Bank (ECB) and are set at zero, while they are -0.75% in Switzerland. Mario Draghi, out-going president of the ECB is concerned about the EUs economy; last week he said this is a “whatever it takesmoment,” suggesting he is considering negative rates and possibly some form of renewed quantitative easing – to, hopefully, stimulate growth while cheapening the value of the Euro. Low rates are good for borrowers but bad for savers. Some inflation is wanted by governments, as it eases the repayment of debt. However, the lender suffers as he receives depreciated dollars. Two percent inflation reduces by half the value of a dollar every generation. Very low and negative interest rates are the last resort of politicians who failed to implement fiscal policies, probably because the latter would require a reduction in regulations and tax cuts to stimulate private demand, something inimical to progressives who favor big government. 

Populations in all western countries and Japan are aging and declining, with fewer in the work-force and more in retirement, a trend that is accelerating. The lack of an intelligent immigration policy only aggravates the situation. In an environment with a shrinking labor force, greater needs of retirees and minimal investment returns, politicians have promised more than they can deliver, particularly in funding the social welfare state. No one wants to see people starve, the ill unable to receive medical care, or the aged unable to live well, but there is also a need to keep the economic engine going. Without economic growth, our civilization will collapse. Politicians see low interest rates and inflation as a way out of their predicament. But, is not this a temporary reprieve?Is it not future generations who will bear the cost? Consider the advice George Washington offered in his 1796 Farewell Address. He was speaking of the dependency of the new country’s strength and security on public credit and on how we should use it sparingly:“…avoiding likewise the accumulation of debt, not only by shunning occasions of expense but by vigorous exertions to discharge the debts…not ungenerously throwing upon posterity the burthen, which we ourselves ought to bear.” A voice of reason in a politically-heated time.The 2008 credit crisis was an existential threat that had to be responded to with unconventional means. Today, in more conventional times, in relying on central bankers rather than legislators, we are creating self-inflicted wounds.

"Morality and Evolution"

Sydney M. Williams

30 Bokum Road – Apartment 314

Essex, CT 06426

swtotd.blogspot.com

Thought of the Day

“Morality and Evolution”

December 17, 2018

“Science is the search for truth, that is the effort to understand the world:

It involves the rejection of bias, of dogma, of revelation, but not the rejection of morality.”

                                                                                                        Linus Pauling (1901-1994)

American chemist, educator, peace activist

Recently, a granddaughter, a senior in high school, was asked to write an essay on morality and evolution. It was a subject that caught my imagination. Was not Jesus, who lived two thousand years ago, the most moral person ever? Can one argue we are more ethical today? Do our grandchildren have better manners than did our grandparents as children? How did a world that produced the Enlightenment, two hundred years later create a Hitler and a Stalin? Would anyone suggest that Donald Trump, Barack Obama, George W. Bush and Bill Clinton are more respectful of others, have higher ethical standards and are less narcissistic than George Washington, John Adams, Thomas Jefferson and James Madison? It is hard not to conclude we have witnessed a reverse form of evolution, at least when it comes to morality

Evolution is a natural condition. Civilizations evolve, mostly for the better. Consider the buildings we live in, the food we eat, the clothes we wear, the cars we drive. Technology has changed the way we communicate, how we shop and the care we provide the sick. We have sent men into space. We grow more crops on less acreage. Evolutionary forces have reduced poverty and extended life expectancy. Even laws and prisons have become less draconian. Government has evolved – from authoritarianism to democracy. According to the website www.ourworldindata.org/democracy, 13 million people lived in democracies in 1830, while 3.92 billion did in 2012. Additionally, racial segregation has been addressed and government care is provided the elderly and impoverished. There has been a downside. War has become more horrific. A small number of social media companies influence how we think; privacy issues have been raised, and the prospect of cyber-war fare has increased. Still, technology-driven evolutionary forces have given us much, including time. But have they made us more gracious and considerate? Has compassionate government made us more respectful, thoughtful and thankful?

Different people will offer different answers, but one possibility is what William McGurn recently called “The Crisis of Good Intentions,” reminding this reader of Milton Friedman: “One of the great mistakes is to judge policies and programs by their intentions rather than results.” In his Wall Street Journalop-ed, Mr. McGurn noted that there are those who claim that capitalism is facing an existential crisis. He cited Alexandria Ocasio-Cortez (“wild-west capitalism”), Thomas Pikety (“patrimonial capitalism”) and the Archbishop of Canterbury (the gig economy is “the reincarnation of an ancient evil”). These are people who see capitalism as pernicious and government as the genesis for equality and social good. Yet California, the most socialistic of U.S. states, has the greatest income inequality of any state. It has the highest poverty rate, as measured by the Supplemental Poverty Measure, which allows for differences in cost-of-living; yet, with 12% of the nation’s population, it is home to 24% of the nation’s billionaires. In his op-ed, William McGurn quoted Chapman University’s Joel Kotkin and Marshall Toplansky: “California is creating a feudalized society, characterized by the ultra-rich, a diminishing middle class and a large, rising segment that is in or near poverty.” Does that not present a moral imperative?

Europe and California have become fiefdoms of hypocritical elites who brook no quarter with those with whom they disagree. Consider the climate change debate. To believers, man is principally responsible for the earth’s changing climate, reminding one of mythical King Canute’s conceit. Natural forces play no role. Salvation depends on obeisance to rules laid out by non-elected bureaucrats. If the end is worthy, so the well-intentioned proclaim, cost is immaterial. Yet carbon taxes – like those on lotteries, sports betting and marijuana sales – are regressive. Arrogance follows, as elites are segregated from average Americans. 

Politicians have found success in the obverse of John Kennedy’s famous dictum: promise what government can provide; disregard what voters can do. Yet all promises come at a cost – not only in dollars, but in ethical standards. The dollar cost is an inconvenient fact, studiously avoided. Diminution in morality is simply ignored. Promising more has become habitual, with voters rising to the bait. Government’s offer of low-interest student loans led to a rise in tuitions. A focus on regulation slows the pace of economic growth and perpetuates a permanent administrative state. Today, like Orpheus with his gifted voice, politicians charm the electorate, promising an Earth where oceans will recede, tuition-free college and birth to death care. The result is increased dependency and reduced self-reliance, habits that lead to sloth and irresponsibility. Morality stems from civility, decency, self-esteem and respect for others. It finds its foundation in the dignity of work, not the dishonor of idleness. It evolved from the Golden Rule of doing unto others what one would have done unto them – a rule once taught by parents to children and teachers to students. And it characterizes America’s middle class, which tribalism threatens to destroy.    

America’s middle class – a varied, un-compartmentalizable, but shrinking segment of the population – is unified by a value system based on a Christian-Judeo ethic, archaic in today’s global, multi-cultural world. These Americans are unique, in that they represent a cross-section of the world’s population – West and East Europeans, Asians, Africans and Latins. They believe in the rule of law, in the precept that hard work is fundamental to success, that strength comes from what we share, not how we differ. They are more likely to have nuclear families, to be church-goers and to be involved in their communities. Identity politics are useful to politicians, for they segment the electorate into identifiable groups. But the result is division, not unity, which, in turn, leads to personal greed – getting what one wants is more important than getting along.

           
Albert Schweitzer once allegedly wrote, “The first step in the evolution of ethics is a sense of solidarity with other humans.” It is an obvious truth, as morality is only necessary within a societal structure. The reason we were taught to be polite, to open doors, listen to others and to be respectful is that such behavior is imperative to civil relations. We understand the role smart phones and video games have had on social interaction. But this change in social behavior pre-dates the advent of the internet and social media. Church attendance has been falling throughout the post-War years. Out-of-wedlock births have risen. In his 2001 book, “Bowling Alone,” Harvard Professor Robert Putnam described the collapse of community organizations. There has been a concomitant decline in volunteerism, despite a rise in the over-65 crowd. The pending bankruptcy of the Boy Scouts of America, with its oath, “On my honor, I will do my duty to God and my country,” is not only a consequence of alleged sexual misconduct, but declining membership. What twelve-year-old boy today would recite that oath, so dated and out-of-sync in a world where honor is passé andwhere “God” and “country” are denigrated? We ask: are today’s PC police better than yesterday’s parents, ministers and teachers?

None of this fully explains why morality has failed to evolve, but perhaps provides clues. My granddaughter, who recently found out she will be attending Bucknell University next fall, was as perplexed as I, as to why ethical standards have retreated. Nevertheless, we both believe culture plays a role, and that the pursuit of happiness means traveling a road paved with a moral sense.