Saturday, March 02, 2013

The US Treasury's Ability to Borrow is Already Threatened

This is in response to a comment that stated that there would be no change in congressional behavior until our ability to borrow was threatened.  That's true, but at the same time missing a very significant point.

Our ability to borrow is already threatened. You just don't notice it if you only pay attention to interest rates on US Treasuries. In years passed, the interest rates on treasuries was a signal about the willingness of investors to loan money to the US Federal government. When investors perceived greater risk of default, they demanded a higher interest rate.

The current US Treasury market is a different beast though, and until you see what is going on in it the interest rates will be a false signal.

The Federal Reserve has stated that they will enforce a ZIRP (Zero Interest Rate Policy) on the short end of the curve -- through 2015. For an investor, that means the interest rate risk on Treasuries with a maturation of 3 years or less is essentially nill. Well, the risk is confined to the investor's confidence in the Federal Reserve's ability to enforce ZIRP for that time frame. Since the Fed has demonstrated a willingness to be the buyer of first, last, and only resort for short-dated Treasuries, that risk is understood to be effectively non-existent. See the video linked below to observe the Fed's ability to come in and just flat own the marginal (and then some) portion of the short end of the Treasury curve.

A quick aside on "interest rate risk." This is the risk that you would buy a Treasury yielding X% today, and at some point before it matures, the market interest rate for that duration of Treasury would be X+Y%. This isn't a concern about repayment, it is a concern that you will be holding a Treasury that isn't very marketable (since buyers could go purchase a better paying Treasury than the one you are trying to sell).

The net result of ZIRP on the short-end of the Treasury market is that investors see, rightly, that any Treasury with a duration less than the ZIRP time frame is just as liquid and secure as cash. In fact, it is just a little bit better than cash, as measured by the tiny little bit of interest it pays.

So that's the short-end of the Treasury market. There is zero signal in these interest rates about investor's confidence in the US Federal government. Instead, the signal in these interest rates is entirely about the Federal Reserve bank's (a privately owned, Federally chartered, at-arms-length-if-at-all Federally managed bank) ability to control the short end of the yield curve. They demonstrated their ability to crush this end of the curve, and the bond market investors believe them.

What about the long end? What signals are the interest rates on the 10 year and 30 year Treasuries sending? To make sense of this, again, we have to look at what is going on in the market.

And, what is going on in the market is basically scary as hell. The Federal Reserve bank has become the dominant buyer of all net new long-dated US Treasuries. Prices are set at the margin, and the Federal Reserve's long-dated Treasury holdings have become anything but marginal in the past year or so. The movie linked at the bottom shows how the Federal Reserve first effectively wiped out the short-end of the curve (turning the 3yr and shorter into cash-equivalents), and now how it has moved into the long-end of the curve to drive those rates down. The Federal Reserve is spending $45 billion per month to control the long end of the curve.

But, it's worse than that. Bond investors need yield. They need yield because they are insurance funds and the core of large retirement programs (pensions, and Social Security). They need returns that are stable over long periods of time, otherwise their ability to meet their obligations becomes much, much more difficult. One place that these investors sought yield was in the Mortgage Backed Security (MBS) market. The Federal Reserve has been crushing interest rates in that market too, soaking up an enormous swath of net new issuance -- to the tune of $40 billion each month.

So, here is the question that is worth pondering. What would long-term interest rates be if the Federal Reserve were not currently spending $85 billion each month to keep them contained?

When you think about that, remember that bond investors are looking for stable yield, and that the risk associated with all bonds can be translated into interest rates (by just lumping the cost of a companion Credit Default Swap (CDS) insurance contract into the cost of riskier borrowers).

To help consider the impact of that $85 billion in proper perspective: the US Federal government is currently borrowing about $100 billion per month.

And that is why I moved my family out of the city and to rural Idaho almost 2 years ago. The US Federal government is only able to cheaply fund about 15% of its deficit. There is, effectively, no functioning long-dated debt market in the US (and most of the world for that matter). All of this sequester fighting is over $86 billion from now through the end of September. Can you even imagine the disaster that cutting nearly that much each month would mean?

That last sentence might make you want to retort something like, "but investors, real investors, will buy Treasuries when interest rates rise." And you would be right. But, to think that would make things OK is to ignore the giant "roll risk" facing the US Federal Government.

What is "roll risk?" Roll risk is the risk a borrower faces when they take out a loan but are unable to repay when the loan comes due. If that happens, the borrower will then need to go borrow new money in order to pay off the old loan. This is called rolling the note. Roll risk is the risk that you will have to roll a note in a market with a higher interest rate than the original loan you are repaying. When that happens, you go deeper in debt in order to pay off the old debt. It's a bit like paying off your low-interest-rate car loan by using your higher-interest-rate credit card.

The US Federal government is facing this risk in spades. Which makes sense, interest rates have been pushed down by the Federal Reserve for at least the past decade, and aggressively so for the past half-decade. At the same time, the total US Federal debt has ballooned. Unless tax revenue suddenly spikes like mad and revenues exceed expenditures, the US Treasury dept. is going to be stuck rolling notes as these US Treasury bonds come due. On a fiscal year basis (Oct 1 - Sept 30), the US Treasury has gotten deeper in debt every single year for the past 30 years or so. On a net basis, they have NEVER not "rolled the note".

So, if interest rates do rise enough that real investors are buying the bulk of US Treasury issuance so that interest rates again have an actual signal in them (other than the signal being that the Federal Reserve is going to keep rates low), the US Federal government gets crushed by roll risk as they repay super-low interest rate US Treasury securities by selling much-higher interest rate securities.

How big of a deal is that roll risk. Well, if the interest rates go back to their long term ranges, then the US Treasury is looking at about $900 billion per YEAR in interest expenses. That's a brutal increase from the $359 billion of last year. An extra $45 billion each month.

This is why nations tend to collapse when their debt goes over 100% of their GDP. They get stuck. They can't afford for interest rates to increase. And, the portions of their economy that have to operate with something approaching long-dated financial planning simply can't due to the inability to save money without incurring real loss. When the central bank kicks and pushes and goads the citizens into spend it now, don't save it unless you want to lose it thinking, the long-term economic viability of a nation just sort of evaporates.

At this point in time, I'm not sure that our situation is recoverable. If it is, it's going to hurt like hell. If it isn't, it's going to hurt like even more hell. If I were you, I would be looking into how my family and my loved ones are going to get through this. Either that, or finding an actual coherent explanation for how the wheels are going to avoid coming off the bus. I've been looking for that explanation for 5 years now and haven't found it.


Wednesday, May 25, 2011

Lazy, stupid, or lying?

This is in response to Dr. Krugman's May 24, 2011 blog entry: Debt Arithmetic: Wonkish

"Still, Serious People tell us that investors will turn on us unless we slash the deficit immediately — and they know this because, well, um..."

Apparently, these "Serious People" think that investors won't want to buy US Treasury debt at anything like the current, very low, interest rates. Rather, these "Serious People" seem to think that investors will demand much higher interest payments to be willing to loan money to the US Treasury. I think that is the core of Dr. Krugman's argument.

Let's look at that.

Right now interest rates are low, very low. They have been low for a couple of years now. At face value, that sure seems to indicate that investors are willing to loan to the US Treasury for very little nominal return. Case closed.

Or not.

There is one massive elephant in the room that Krugman, (and the myriad of others who I've seen make this same argument), just ignore. Who are these "investors" that are willing to loan the US Treasury over $1.4 trillion a year for the past 3 years at such low rates?

And this is where it gets interesting, (by "interesting" I mean, "bad").

Last year, the Federal Reserve was the buyer of 60 to 70% of the net US Treasury issuance. In January, they bought ~ 80%. In February their purchase of $94 billion in US Treasury debt exceeded the net debt increase of $85 billion. Via QE2, the Federal Reserve is purchasing $100 billion in US Treasury debt each month. This is at a time when the net US Treasury borrowings are ~ $133 billion a month.

Fully 3/4 of the money the US Treasury is borrowing each month is coming from a single investor.

That investor has no opportunity costs associated with their purchases -- their purchase of US Treasuries does not come at the expense of being able to buy some other asset. The money for these purchases is brand new, created by the Federal Reserve for just this purpose.

Currently, the Federal Reserve intends to let QE2 end in June (as originally planned). Who steps in to fill the gap when they do?

What other investor or group of investors has $100 billion to loan to the US Treasury in July, and August, and September....

"Serious People" are wondering why these investors will suddenly step forward in July to buy US Treasuries at these ultra low rates. After all, if there really was $100 billion in additional demand for US Treasury debt at ultra low rates, why would the Federal Reserve have to "print" up $100 billion in fresh new dollars each month just to buy US Treasury debt?

When you actually look at the really interesting question regarding US Treasuries, what you discover is that the US Treasury market is a whole lot like the mortgage market. Would mortgage rates increase if Fannie and Freddie simply stopped buying mortgages? Even those that aren't "Serious People" recognize that the housing market would more or less collapse overnight if lenders were stuck keeping the mortgages they made or sell them to an investor that can't absorb billions of losses each quarter indefinitely. In fact, it was this exact argument that led to Fannie and Freddie being taken into conservatorship.

There is one thing I would really like to know though: does Dr. Krugman ignore this massive support/intervention in the US Treasury market because he is:

  • too lazy to see who is buying US Treasuries,
  • too stupid to realize that having the Federal Reserve buy 75% of the net issuance matters,
  • or simply lying.

I can't tell. What I do know is that the lazy, stupid, or lying questions keep coming up when I read the stuff he writes.

Friday, May 13, 2011

Corporate tax musings

This is a response to the following:

Corporate person-hood and its relationship to taxation...
The deal isn't that of course money is taxed multiple times, it's that the same bit of revenue is taxed multiple times for the same people. First, it is taxed proportionally across t...he pool of owners via corporate taxes, and then whatever portion is distributed to the owners via dividends is taxed again.

The gist of the person-hood is that corporations have some of the rights of natural persons because they are freely entered into associations of natural persons, and as such limiting what the association is allowed to do is limiting what the people are allowed to do. That such limits must not violate the members' rights has long been upheld for precisely that reasoning. Mikehudack apparently looks at these same facts but misses the point of them. Corporations are NOT people, they are associations of people.

Use of the tax code to achieve policy ends...
There are two things to consider here. The first ties directly back to the realization that corporations are associations of natural persons. The idea that the government has an enormous interest in what corporations do with their money is predicated on the assumption that the corporation has lots of money. If corporations had very little money "in the bank" you would not see this. Think about the volume of discussion regarding the savings of S corps (charitable organizations) that you've seen. Effectively, this argument boils down to either envy or justice. The envy is that its essentially the same as the desire to level punitive taxes on the rich. In the US, the poor generally don't favor punitive taxes on the wealthy. I suspect that's largely from the sense that envy is just wrong. Anyway, there's also the notion of justice going on. Not taxing corporations provides the owners of the corporation a means of increasing their wealth without being taxed on the increase (until such time as they are actually receive the increase and it is available to them). That makes being a member of a corporation a bit like owning an IRA.

Secondly, using the tax code for ANYTHING other than raising revenue is inevitable tyranny. Period. In the past, I've written about the use of the tax code as a means to "level the playing field". I think what I've written about that is worth reading. It addresses the inherent dishonesty of this approach:

The fourth argument is actually a pretty good one. The owners of a corporation derive a benefit to their association from the infrastructure in the city, county, state, nation that they are operating in. Deferment of taxes on the corporation until profits are distributed to the owners allows the owners' association to use the infrastructure for "free" (sort of, they still pay for it via its embedded costs in their vendor's prices and the cost of labor which includes taxes for that infrastructure). So, while they indirectly pay for the use of this infrastructure, I'm much more in favor of direct and obvious payment than indirect hidden ones (a notion that is quite consistent with the above link).

The fifth argument is essentially no different than the second one, tax corporations because they have the money. On the surface, that seems pretty obvious. Let its proponents talk just a few more sentences and the deeper reason comes out: tax corporations because they are rich. Envy. I want what you have and you don't deserve it anyway. Years ago, back when I thought I was going to become a lawyer, a co-worker joked that I needed the law degree to "defend corporate polluters." So, in that vein... Exxon Mobile. "Big oil" always, always comes up as the poster child for we need to tax corporations more. Lets look at that.

Exxon Mobile has a market cap of $397 billion today. Revenue is running about $364 billion. And that's as far as every single "tax the corporations" argument looks. Ever. Given that profitability information is ON THE SAME page, it's very difficult to not conclude that the proponents of this argument are not stupid or envious (both is always an option). So, what is Exxon Mobil's profit margin? 9.56%. That's pretty crappy. Seriously. The value of this organization is roughly $400 billion, and it's only able to make 9.5% profit for the owners? Let's look at some other companies so that we can look at this data in some actual perspective. Apple: 22% profit margin on a ~ $300 billion organization. Adobe: 22% on a ~ $17 billion organization. ADP: 12% on ~ $25 billion. Verizon: 3% on ~ $152 billion. Boeing: 5% on ~ $62 billion. Chipotle: 9.7% on ~ $8 billion. Johnson & Johnson: 19.8% on ~ $171 billion.

Since 1980 the average profit margin for the S&P 500 has been 8.4%. "Big oil" has averaged about 9.5% over that same period. But think about the HUGE volume of cash the owners of these companies have had to pool in order to pull that off -- especially relative to those companies that have had much higher profit margins on smaller pools of capital.

If the advocates for corporate taxes actually talked about the corporations that had high profit margins, it would be much easier to believe that their concern was motivated by other than envy -- because I can absolutely see the justice argument and would be willing to make it. However, that's not what we see because that isn't the argument they make. The problem with that is that the very people that would make good allies (those that are willing to look at data and make the JUSTICE argument) don't want them as allies. What rational person joins with a partner that seems to clearly be operating out of envy? What rational person wants an ally that is either drastically ignorant or blatantly dishonest in their use of data? Not me. No thanks.

If you want to win the corporate taxes argument, talk about corporate profit margins. Essentially, be honest, and don't be ignorant.

Links for profit margin data:

Tuesday, March 01, 2011

The value of a metaphor.

A bar hires a police officer as a bouncer. He cards people as they come in, breaks up the occasional fight, and tosses people out when they need tossing out. At the end of the night, when the bar closes, he writes the owner tickets for serving minors.

Seem just a little bit ridiculous?

I read that this weekend as a metaphor for punishing the businesses that hire illegal immigrants.

I've always thought that businesses who knowingly hire illegal immigrants should suffer penalties. I still think that. But, I'm now a bit less certain about how stiff those penalties should be and just how deep a business' responsibility should be to determine they are not hiring somebody guilty of one crime vs. another when the business and its owners pay taxes that are SUPPOSED to cover enforcement of the border.

The value of a good metaphor I suppose -- makes me question things that I used to be so certain of.

As for the metaphor, it seems that Common_Cents22 was the source of it. I can't find an earlier instance -- at least not without looking hard.

High Priced CEOs... why?

A rather funny comment got me to thinking about something:

"A unionized public employee, a member of the Tea Party, and a CEO are sitting at a table. In the middle of the table there is a plate with a dozen cookies on it. The CEO reaches across and takes 11 cookies, then looks at the Tea-Bagger and says, "Look out for that union guy, he wants a piece of your cookie.”
There is a funny lesson in this -- be the CEO!

But, there is more to it than that. It raises the question of why CEOs are paid so much more than the ordinary employee. That's a good question to ask, and I haven't yet read an analysis that was much deeper than "because they are" or "because they're crooked."

That isn't to say that such analysis hasn't been done, just that I haven't seen it.

So, here's my take on the compensation gap -- and how it is misunderstood.

Too often the CEOs of very large businesses are mostly caretakers. They are paid lots of money, not because they will result in a rapid increase in the profits for the owners of the business, but because as CEO they could really screw things up royally. That's what the owners of most businesses are trying to buy when they spend "way too much money" on the senior management team. Sure, they'd like to get a CEO in that will cause the company to be worth 10-20% more within a year or two. But, they also recognize that it is much easier for a big business to loose 10-20% of its value by making bad decisions than it is to grow that much. Just maintaining past income and profit levels at most big businesses requires doing the right things and doing them rather well across the board over and over across tens of thousands or millions of transactions.

If we look at the outrageous CEO compensation from that light -- as a form of insurance taken out by the owners of the company -- then it doesn't look quite so insane. It's only when we try to make an apples and oranges comparison between the CEO's compensation and the compensation of an employee who can screw up royally for weeks at a time without tanking the company do things look crazy.

All that said, I don't like big companies. Especially companies big enough that the insurance factor of the CEO or other senior management is a "big deal." I much prefer those businesses where the CEO and other senior management is either doing real work a portion of the time, or has done real work recently enough that they know how to tell the difference between an employee who is getting stuff done and one that is just looking busy.

Further, I think that if we could eliminate corporate welfare, we'd see the small and medium sized enterprises absolutely eat the lunch of most of the big businesses. There aren't all that many enterprises that can only be efficient and effective at massive scales.

"Wisconsin lie exposed" is bunk

I haven't done too much reading about the situation in Wisconsin. But, a few Facebook posts pointed to an article by Mr. David Clay Johnston that merits response if only because of the juxtaposition of the title and the actual reporting that Mr. Johnston does in the article.

The Wisconsin Lie Exposed – Taxpayers Actually Contribute Nothing To Public Employee Pensions

The article by Mr. Johnston only really makes sense in the context of defined contribution plans. In the context of defined contribution plans, saying that employees need to "contribute more" to their pension doesn't make any more sense than Gov. Walker saying that I need to "contribute more" to my 401(k) or my IRA.

However, Wisconsin is a bit more complicated than that. The pension that a pensioner receives is the HIGHER of either a defined benefit pension of 1.6% of final average salary for each year of service, or the results of the pensioners defined contributions. See page 3 from:

If the employees total contributions (including compensation deferred via contributing it to this program) are less than the defined benefit, the taxpayers of Wisconsin eat the difference. The odds are very good that the defined benefit payout level is way better than the pension managers can pull off (for a variety of reasons that are just crooked as all hell, but I'm going to ignore them for now as they're not really the point.)

I'm actually sort of annoyed that Mr. Johnston didn't bother doing some of the research that he rails against reporters not doing. Either that, or he just tacitly assumes that the State of Wisconsin Investment Board (the source of the above PDF) which manages Wisconsin's pension fund doesn't know how pensions are structured in Wisconsin.

If the current employee contributions are larger than needed to meet the defined benefit amount, then there is no legitimate reason to increase the required contribution. But, as I mentioned earlier, that seems really unlikely.

As an aside...

The level of just lousy reporting and investigation by those who should be able to do better sucks. Mr. Johnston has won a Pulitzer Prize for crying out loud! It took maybe 20 minutes of Googling and reading to find out how Wisconsin's pensions are structured. This shouldn't be a monumental hurdle that actual reporters can't clear.

A free press is key in keeping any form of representative government from devolving into tyranny. But, it isn't enough to just have the press be free. It is equally important that the press actually print the facts. Frankly, that is probably even MORE important -- if the press is not free but still prints the actual facts, then the citizens will be able to make informed decisions. But, if the free press doesn't bother with getting the facts and truth out, the key ingredient for making informed decisions doesn't exist and the citizens have a MUCH harder time making properly informed decisions.

It is the need for the the press to be able to print the facts and the truth when they are politically unpopular that is at the heart of the demand that the press be free. Sadly, like so much else in the U.S. we have preserved much of the form and lost sight of the function.

Tuesday, February 15, 2011

2012 Budget Proposal - a Broken Process

On my drive home today I listened to some Senators speaking about President Obama’s proposed 2012 budget. Their speeches reminded me of just how broken our government is.

First, to Federal politicians who think it is important for the Federal government to “live within its means,” put up or shut up. And if you’re not a member of the House of Representatives, shut up. The President doesn’t make the budget; the House of Representatives does with the appropriations bills that are required to originate there. It is the House’s job to pass the necessary spending legislation that funds the Federal government’s operations. Period. Senators and the President are irrelevant until the House has decided what spending authorization bills it is willing to pass.

Further, if a balanced budget is important, then make it happen today. To propose a budget that shrinks or “eliminates the deficit” sometime down the road is disingenuous at best. The spending authorization bills for this year are for this year! This year’s spending authorization bills don’t constrain or affect the spending 3 or 5 or 10 or 20 years from now at all. Such claims have been so much blather every single time they have been made by Republicans and Democrats alike.

If the Republicans who currently control the House of Representatives are unwilling to pass spending authorization bills that are in-line with reasonable expectations of tax revenue, that is their prerogative. But please, please, stop lying to us about how important a “balanced budget” or “deficit reduction” or “living within our means” are. I don’t care if you pass such authorizations knowing that the Senate will refuse to pass matching legislation or that the President will veto the bill. Not one dime can be spent without the House’s authorization. The party that controls the House of Representatives can make this happen; all it takes is the courage to insist that no other spending will be authorized. Everybody else is along for the ride.

Likewise, the President can insist on a balanced budget this year, right now. Or, he can insist on a deficit of not more than some defined limit. All it takes is vetoing any spending authorization that exceeds revenues. If the House and Senate insist on spending more than that, let them override your veto.

As for the various arguments over proposed cuts in the proposed budgets… Just stop. Just stop unless and you have figured out what the goal is.

Is the goal a deficit of $1,000 billion, $1,500 billion, $300 billion, or no deficit? Is the goal to spend the maximum amount of money on every desirable program with no regard to revenue? To some extent, the actual goal doesn’t matter. What matters is that there is a goal and that at least a handful of people share that same goal, and that it is simple enough that it can be clearly articulated so that it can be used to inform spending decisions. Without at least some defined goal, every argument for cutting or increasing the allocation for any department or program is inevitably juvenile bickering.

If the deficit is reduced by cutting spending then it is a foregone conclusion that every single cut will be made to a program or agency that was sufficiently worthwhile to have garnered support in the past. When the Federal government has to borrow over 40 cents of every dollar it spends, any meaningful spending cuts will not be easy. Similarly, if the goal is to increase tax revenue to fill the gap, the additional $560 dollars per month that will need to be collected from every adult that isn’t in prison looks mighty steep.

One very important fact has been glossed over in the budget discussion ­­at all but a few online sites: of the $130+ billion the Federal government is borrowing each month, only a paltry 14% is coming from actual investors. Each month, the Federal Reserve is printing over $100 billion dollars to buy Treasury debt in order to keep the interest rates on it from skyrocketing. We have already passed the point where “the market” is willing to buy our debt at interest rates low enough that we can afford to keep borrowing.

Even if we were to completely eliminate the Departments of Defense, Energy, Education, Transportation, Agriculture, of Energy, Housing and Urban Development and NASA, we would still be unable to borrow this money from “the market” at today’s interest rates without the Federal Reserve printing the money for most of it. That is how serious the current budgetary situation is. And it is our fault, yours and mine, for electing three decades of morons who appear to be unequal to the challenge before them.

Saturday, December 04, 2010

How to level the playing field

In a conversation on reddit today, I read a comment that I think most of the people in the US and the "western world" would agree with.
Part of the point of taxation is to keep the playing field level.
That idea is a deadly mix of popular and completely and totally wrong. :)

The only legitimate purpose of taxation is to raise funds for the goods and services the state purchases.

That raises a very obvious question:
How do you level the playing field without using the tax code?
That is a really good question.

It also raises a few other questions, only one of which I'm going to address:
  • Is it the state's job to level the playing field?
  • Just how level should the playing field be? What level of wealth disparity will the state allow.
I'm going to assume, for the sake of discussion, that the answer to the first question is "Yes." Likewise, let's assume that some metric for permitted wealth disparity exists. It doesn't really matter what this number is when we look at the question of "How to level the playing field?"

How to level the playing field?

Quite simply, some wealth needs to be taken from each person that is "too wealthy" (probably in proportion to how "too wealthy" they happen to be) and given to each person that is "too poor" (also probably in proportion to how "too poor" they are). If we do this, then the playing field will be, by definition, made level to within our permitted wealth disparity.

(Please note: I am ignoring a number of other dimensions of "too wealthy" and "too poor", things like genetic predisposition to diseases, good looks, height, pre-existing medical conditions, etc. can all constitute some notion of "wealth" that a one person can have "too much" of relative to others' "too little"; for the sake of argument, I'm suggesting that these dimensions can be distilled down into some dollar figure, which doesn't seem totally unreasonable - and those that can't be distilled can't be "leveled" so they can't really be addressed anyway).

The first thing to recognize is that this is not a function of the government needing funds. The government isn't going to buy something from each of the people deemed "too poor." They're not vendors to the state, and therefore it is dishonest to acquire the funds given to the "too poor" via taxes (taxes being how the government raises funds to pay for the products and services it purchases).

Here is an honest way to achieve a leveling of the playing field. My emphasis is on the method being an honest reflection of the intent instead of intentionally obfuscatory so as to hide either the intent or the method from the ordinary citizen.
  • Each year, the net worth of each person in the US will be calculated on a mark-to-market basis.
  • Software will assign each "too wealthy" person a number of "too poor" persons that they are to transfer funds to and the amount of each transfer.
  • The state will insure that each transfer payment is received by each "too poor" person within the appointed time, say 1 month after the annual audit.
  • Any "too wealthy" person who does not transfer funds within the time allotted, will be have the amount of their proscribed transfers taken by the state and transferred to the proscribed "too poor" party(ies). In addition, a fine of 3x the amount untransferred will be levied against said "too wealthy" person, one-third of which will go to the "too poor" party(ies) that were denied their transfer, and the remaining two-thirds will be used to offset the administrative costs of this transfer system.
That achieves the goal of leveling the playing field, and it does so honestly.

It is honest about the intent: that some people are "too wealthy" while others are "too poor."
It is honest about the means: the "too wealthy" person is deriving precisely zero direct benefit from the transfer of their funds, and the "too poor" person has done precisely zero to deserve the receipt of said funds.

I believe that such a system would face monumental opposition, even though it is a fundamentally honest way to tackle the problem of "an unlevel playing field," and some of the strongest opposition would come from many of those who would directly benefit. And the opposition would make a very, very valid point:
such a system is clearly and obviously unfair.
I think that it is only through indirection and obfuscation that a system designed to take from those who have "too much" in order to give to those who have "too little" can garner sufficient public support to remain the law in a democracy.

The end result is a system that inefficiently does that which the public would be unwilling for the state to do if it was done in a clear and honest manner. That sounds like the worst of both worlds to me.

Tuesday, November 02, 2010

"Create jobs" idiocy

If I see another politician claiming that they'll "create jobs" I'll probably cry. How did the electorate become so mentally decrepit that such a line doesn't get tossed back in their face every single time they utter it? *sigh* Businesses create jobs. Small businesses do a better job of it than large. Individuals start small businesses. Individuals with capital. Capital comes from savings.

You want to destroy job creation, then destroy savings. Here's a good recipe for doing just that, steadily drive down interest rates. Even better, inflate the cost of necessary goods (food, energy, housing) at the same time so that even the frugal have a harder time saving money.

Make a person have to be foolish in order to accumulate the 6 to 12 months worth of necessary savings in order to be able to take the risks inherent to starting a new business. After all, what sane person will scrimp and save for the prerequisite 3 to 5 years when the real return on saving their money is essentially zero to negative? In that environment, the incentives are towards spending, buying cars, houses, dinner out, bigger and better TVs, vacations on the coast, new clothes that are "in style", etc. Or, if they actually want some return on their investment, it makes them have to chase risky assets like stocks or high yield bonds.

Even better, keep inflation going while driving interest rates down. That makes the value of their savings worth even less.

In that environment, the only practical way for most entrepreneurs to have the capital to start a small business is to borrow it. Now, instead of having to earn just enough to get by on their savings, they have to earn enough to service their debt. Oh, and since they're a small business, in order to get that loan they've had to pledge whatever equity they have in their house or autos or whatever. Now, when their small business tanks (and 9 out of 10 do in the first couple of years), they lose everything instead of just losing their savings.

What semi-rational person would start a business when this is the fiscal environment? Not many. Which is sort of unfortunate since the actual unemployment rate (if you measure it the way it was measure up until around 1994) is right around 22%. We sure could use those small businesses starting up.... Unfortunately, we've spent 20 some years absolutely killing the necessary pre-conditions for small business creation and therefore job creation.

At some point, we just might see candidates that actually understand this. I lost hope years ago of the Democrats ever fielding such a candidate, unless they're in a state like Wyoming, Colorado, Montana, or Idaho. It's taken me a few decades to conclude that the Republican party doesn't really get this either.

Economically, the real difference between the two parties really does seem to boil down to who their economic corruption favors. For Republicans, this has been the ultra-large businesses. For Democrats, it has been the labor unions. Neither approach does anything but buy votes and campaign dollars from the favored constituency. Hmm... that's actually not quite true. Both approaches also align nicely to destroy the fundamental incentives for small businesses -- because handing out cash that the Federal government doesn't have to ANYBODY both drives down interest rates (as a matter of necessity otherwise the US Treasury couldn't afford the interest payments on the growing debt) and increases inflation by pumping more dollars into the economy.

So, economically, they're both worse than useless. I'm not sure which approach will kill the nation's economy faster. :(

So, off to vote. :)

Wednesday, October 27, 2010

What would be a good investment in the near term?

Right now is generally a bad time to play in the stock market. The enormous levels of Federal Reserve interference in the markets (as well as either rampant stupidity or malfeasance by most every single financial regulatory body) has resulted in a market where the performance of individual stocks has become highly correlated. On days when the "market" goes up, all stocks tend to go up, largely independent of the fundamentals of the individual companies. For most of last year, the stocks that went up the most were the ones with the worst fundamentals... go figure.

Fortunately, there have been good ways to tell if the market would go up on any particular day. The best strategy was to only buy on days when the Federal Reserve conducted Permanent Open Market Operations (POMO days). That's when the NY Fed creates new money to buy US Treasury bonds back from the Primary Dealers (who are required by law to bid at U.S. Treasury debt auctions). Each POMO day, another couple billion dollars gets dumped into the big banks and has more or less guaranteed an up day for the market. Unfortunately, people have started to notice this and front-run the Federal Reserve... So, it's not as lucrative as it was a while back.

That's what makes the market (as a whole) go up, and since stocks are now way out of whack, in terms of correlation, it makes individual stocks go up also.

There are loads of reasons NOT to buy stocks right now. About the ONLY reason to consider buying stocks right now is if you think that the Federal Reserve will be able to print somewhere north of 1.5 to 2 trillion in new dollars and hand them to the banks which turn around and recycle them into stocks (or more likely, S&P 500 futures market for greater impact).

However, in spite of all the reason that the market should go down, there is one major reason to beware betting that the market will go down anytime in the immediate future -- You're playing chicken with the most powerful central bank in the history of the world, and it is intent in debauching the world's reserve currency. If this strategy actually worked, Zimbabwe and the Wiemar Republic would be held out as examples of monetary genius -- instead of examples of how to completely and totally destroy the middle class and starve anybody on a fixed income.

Here is my take on why one SHOULD NOT be buying stocks (or bull ETFs or mutual funds at this time):

  • Horrific corporate balance sheets that US companies have -- all that "flush with cash" BS ignores the debt they had to sell to get the cash and the way that the items being depreciated aren't getting repaired or replaced.
  • The finance sector would have ceased to exist in 2008 and be replaced by entirely new banks if Congress hadn't extorted FASB to allow the financial sector to carry somewhere north of $3,000 billion in mortgage related assets at mark-to-model/unicorn/fantasy levels rather than mark-to-market levels. There is a market for EVERYTHING if you lower the price sufficiently far. Instead of banks actually having MORE than sufficient assets that can be sold (at any given time) to pay off their liabilities (which just happens to be a key tenant of the Federal Deposit Insurance Act and the only reason why such a little Deposit Insurance Fund could possibly backstop the insured deposits of US banks), the banks are almost universally under-capitalized on a mark-to-market basis. Every single large one is. Most of the smaller ones are. Almost every single Friday for the past 18+ months we get another example of this when the FDIC takes over a bank and has to incur a hit to the Deposit Insurance Fund or enter into a loss sharing agreement with the purchaser. If the banks assets could actually be sold on the market for what the bank claimed they were worth, there would be no loss.
  • Consumer sentiment surveys that for the past 2 years have shown that people's assessment of their current situation is "lousy", but they're hopeful about the future (eventually the hopium wears off and people start to notice they've had flat to negative real wage growth for a decade during which prices of the things that they really actually need (food and energy) have gone up),
  • If unemployment were counted today the way it was counted up to the early 1990s, the unemployment rate is in the 22% range. -- which is awfully close to the 25% it hit in the Great Depression.
  • 40.7 million people in the U.S. are receiving food stamps. In the Great Depression you had bread lines. Now, in the Greater Depression, you can see the same thing by going to WalMart at 11:45PM on the last day of the month (food stamps charge cards recharge at midnight on the first of the month). There's our breadlines.
  • The rampant fraud in mortgages from origination to securitization to foreclosure. This is probably going to kill no small portion of the banking sector all by itself. With lawsuits and criminal charges (every single instance of a falsely sworn affidavit is an instance of perjury -- and typically a felony that packs a handy fine) on the foreclosure front, tax claw-backs from counties and states (MERS was essentially a way to let "Wall Street" (I hate that term) transfer mortgages around without actually having to refile each time with the county and state land offices -- the same counties and states that have budget holes that make MERS self-proclaimed $2.4 billion in tax and fees savings look awfully appealing), and finally pushback suits from MBS investors who were sold securities that contained massive violations of reps and warranties (to the tune of 80+% for at least two of the MBS sets that Deutche Bank sold) that the bank's execs KNEW for a fact were violations (Citigroup's chief underwriter has testified that over 60% of the mortgages sold in 2006 were defective, a level that rose to 80% in 2007).
  • At some point, it seems inevitable that the SEC will be forced to investigate the dealings of the big banks. There's simply too much testimony already extant indicating that the fraud at mortgage origination and securitization time was well known by senior management.
  • Ditto for Sarbanes-Oxley liability for the senior execs.
  • In FY2010, the U.S. Federal government spent $3.4 trillion and the total borrowed by the U.S. Treasury increased by $1.6 trillion. Almost HALF of federal expenditures were borrowed money. That's either ALL of the social services (medicare, medicaid, and social security) or more than ALL military spending. For 2 years now, the Federal government has propped up 12% of the GDP... that can't possibly continue forever, and it hasn't "primed the pump" on an actual recovery.
  • Over half a year of consecutive retail outflows from equity mutual funds. People are either pulling their money out because they need to eat, or because they want to "take profits," or because they've lost faith in the market itself.

None of that paints a pretty picture of the immediate (or medium term) outlook for the US economy. But wait... there's more... :)

The rise of high frequency trading has created a stock market where we have volume (and not much of that to be honest) but very, very little liquidity. The flash crash on May 6 demonstrated that the actual organic bid (an investor looking to hold onto the stock they bought for at least a minute or two) was at least 10% below the market levels at the time. When the HFT engines shut down, the market mostly ceased to exist. With HFTs simply opting to not participate "on the way down," the market suffers significant loss of liquidity at a time when it is needed most. Since the May 6th flash crash, there have continued to be flash crashes in individual stocks multiple times a week.

Over and over again the market is demonstrating that the exit door is very narrow, and the doorway is very sharp. If you buy a stock with the idea that you can always sell it if the price starts to fall, you could be in for a rude shock.

All that said, I actually have some ETFs and mutual fund positions. Every single one of them is bear oriented. And every single one of them is currently below water -- that's the risk of playing chicken with the central bank.

I don't really know how the market will play out in nominal terms. In real terms however, it, like the rest of the U.S. economy faces the enormous headwind of a credit bubble collapse. And, like all credit bubbles that have collapsed before, this one too will bring about a depression since we were unwilling to have the smaller recessions necessary to clear the bad debt earlier.

The good news is that you can see it coming -- if you look in the right places. The bad news is that those responsible for helping regular folks like you and I see this coming are intent on hiding the full extent of the problem from us.

Whenever you see an article or a news program that talks about the intentional filing of falsely sworn affidavits in court as a "document problem" or a "technical problem" rather than what it is, perjury and fraud on the court, you can know for a fact that you have found yet another person who's telling you that's rain falling on your foot.

I get most of my information reading the work of people who have been writing about the mortgage fraud and securitization fraud, and SEC malfeasance and FDIC failure to enforce the Prompt Corrective Action section of the Federal Deposit Insurance Act since back in 2007. But, that means spending a lot of time reading some rather detailed articles from a handful of sites on the web, and it took probably 3 months to even begin to get a handle on the terminology involved -- which is sorta far removed from software development.

The mainstream news media probably can't afford to go into detail, but they could start calling a spade a spade. When the head of our central bank manages to miss the biggest credit event in the past 70 years, maybe it's worth wondering out loud if he's a moron (since a large number of people saw it coming and explained how and why), or he's complicit in creating the problem. Instead, we got some more, "this guy is smarter than all of you so you'd better listen to what he has to say" treatment.

Here are the aggregators and commentators that I read (beware, the first two frequently contain "salty" language and course imagery and metaphors):
Global Economic Analysis

I've tracked others off and on over the past few years, but those guys seem to consistently cover all the major points -- including several that I really lack the expertise to follow.

Naturally, nothing in this post is investment advice. I'm not allowed to give that. Most things in this post actually constitute "don't invest" advice. I think I'm allowed by law to suggest that.

Friday, March 26, 2010

New York Times article from 1910: doctor complains, medical prices are too low

I've transcribed the text of this New York Times article since it's a bit hard to read in the scanned version. This is worth a read because it helps with one of the most important questions about the price of health care: why is health care expensive?

Though it almost kills me, I have not highlighted the sections that I find the most telling. Note, that the American Medical Association formed within a handful of years of this particular article with the purpose of making the medical profession pay better by reducing the number of doctors.

Please let me know about any typos in the transcription.


Medical Profession Degraded, He Says, by the Wholesale Work Done for Societies.


Regular Practitioners Hardly Able to Make a Living Now -- Lodge Doctors Canvass for Their Election

The complaint is made by a physician of the lower east side, through the medium of one of the standard weekly medical publications, that the "lodge practice evil" is hammering medical progress and efficiency in that section of the city and depriving a large number of worthy and capable practitioners of the fruits of diligence and a protracted course of study which they feel they have a right to expect.

The complaining physician is Dr. Morris Joseph Clurman of 142 Rivington Street. In the course of an article in the Medical Record, entitled "The Lodge Practice Evil on the Lower East Side," he says: "Among the local medical community, especially of the lower east side, there has sprung up of the late years an evil so virile, so powerful, and so destructive toward medical ideals, that in time only a mythical Perseus will have to spring forth to destroy this Gorgon Medusa if concerted action on the part of the east side medical profession is not taken to check it now.

"This alarming evil is nothing more nor less than the existing state of east side lodge practice with its concomitant train of manifold degradations to the local medical fraternity. At the present time there are in existence downtown somewhere between 1,500 and 2,000 lodges, societies, and benevolent associations founded mainly by the poorer class of workingmen for a double purpose: namely, social intercourse and mutual aid or benevolence.

"An iron-bound practice or custom has arisen for4 each society to elect some physician to take care of the health of the society members -- for a consideration. What this consideration amounts to we shall see later.

"Twenty years ago, when lodge practice was in its infancy, societies would send humble delegates to some physician and ask him to accept the office of lodge doctor for a fair and reasonable consideration. In most cases the physician would think twice before entering into such an agreement, since, very naturally, routine family practice, with its direct returns for every call, seemed more remunerative than cheap contract practice. However, young and ambitions medical tyros naturally sought some means of getting patients to come to them, and this seemed an easy way to help make both ends meet, and also to obtain what seemed to be a legitimate and ethical way of advertising one's self.

"The lodge doctor found that he cam in contact at the sickbed with a large class of patients who would not have patronized him in any other way. In time, however, the lodge physician, after establishing a reputation as a busy practitioner -- and, perhaps, as a good one -- became more or less independent.

"Hand in hand with the increasing number of physicians on the east side a keen competition now arose among them to be elected as lodge physician in as many societies as possible. Many sought these positions, and it now seemed that another Eldorado had been discovered.

"But now the guilt had been reversed. It was the doctors who sought after the societies, and not vice versa, as formerly. The societies found that, inasmuch as physicians were so anxious to be their lodge doctors, they could well afford to discriminate and choose from the numerous candidates.

"What a degrading spectacle it is to see three or four medical men at one of these society elections. Each candidate comes fully prepared with printed ballots bearing his name, which he distributes among the lodge members. while the vote is going on and the ballots are being counted, these physicians sit like culprits and await the result of the election. It is difficult to say who should feel more chagrined after the count is over -- the lucky (?) winner or the defeated candidates.

"To-day there is scarecely an east side workingman who is not a member of some association which has a physician to take charge of its members. Let us see what are the average rates of remuneration for the lodge doctor. With very few exceptions the market price 'per head' is as follows: One dollar a year for each unmarried member and $3 a year for every married member, including his family. And let us not forget that the east side workingman when married does not believe in race suicide.

"For these terms he is supposed to make as many professional visits in time of sickness as he is called upon to do. very often he may be called upon forty or even fifty times during the year by one family. Time and again he is called for the most trivial of complaints, since his presence is so easily obtained. What a shame and degradation that our noble profession should become so cheapened.

"As a natural result the lodge doctor becomes careless and slipshod in his medical ways. His diagnostic ability not only remains at a dead standstill, but from 'disuse-atrophy' retrogrades so far that his advice is of no more value than that of the corner druggist.

"We are in too enlightened an age not to be able to remedy or at the least make lighter most evils, and the evil of lodge practice is one that can be solved and eradicated. To do this vigorous and strenuous action must be taken by the east side physicians."

Saturday, October 24, 2009

We don't need to pay more people to ignore the problem

This is just asinine.
WASHINGTON, Oct 23 (Reuters) - The Obama administration plans to unveil on Monday a new plan for dealing with troubled financial giants, said a senior U.S. lawmaker, who also mentioned potentially big changes for the insurance industry.
No doubt, many people will be saying "about damn time." But that's missing the actual point.

Instead of enforcing existing laws, the plan is to come up with new laws. We aren't suffering from a shortage of laws (well, except in the repeal of Glass-Steagal), we're suffering from our government not enforcing the existing laws.

There are basically two types of loans -- those that are backed by the government (FDIC insured deposits) and those that aren't.

If you make a loan to a bank (by making a deposit or buying a CD) and the bank fails, the FDIC covers any loss you would have incurred by the bank not having the ability to repay your loan. (Yeah, up the FDIC insurance limits per deposit account per institution.)

If you make ANY OTHER LOAN at all, and the borrower can't repay, you loose the amount loaned (excepting whatever you can recover from any assets pledged as collateral for the loan).

That's it.

If the government were to actually enforce the law, then your tax dollars wouldn't be going to pay the large salaries and bonuses of companies that made stupid, NON-FDIC insured loans that went bad. Instead, your government decided to use you, me, my kids, your kids, and probably our grand kids to protect the financial giants that made hundreds of billions of dollars worth of stupid loans.

Oh, and the FDIC refuses to do its job of shutting down the banks that are STILL gambling capriciously with your deposits. Instead of banks being shut down before they become massively insolvent, the FDIC is waiting until they are dramatically underwater. That's a violation of the law.

Is this just a jobs plan for more people who will ignore the problems they are required by law to address?