Gillette and Mothers of sons… Inventing economics… How did we get here?

Gillette and Mothers of sons

My new razor

In a new TV commercial, Gillette promotes the idea that we as a society have an obligation to fight “toxic masculinity.”  Like its forebear “testosterone poisoning,” this outrageous sexist term is accepted in everyday conversation as though the behaviors of a few bad men are the result of simply being born male.  

A generation of boys and young men are suffering by virtue of what is now defined as “social constructivism.” The theory goes that there is no difference between men and women other than that imposed by society.  So, we should discourage behavior that is stereotypically male to ensure women are treated equally.  As a result, boys are growing up in a culture that is questioning what’s wrong with them and casually derides them. 

Popular culture has followed suit.  Slang terms like “mansplaining” and “man flu” are in common use.  Popular TV shows once elevated Dads like Robert Young’s character on “Father Knows Best” and now deride them in shows like The Simpsons and Everybody Loves Raymond. 

For the last couple of generations, many fathers have raised their daughters to fearlessly be the best they can be.  An acquaintance of mine raised three girls all of whom were All-American lacrosse players in college and have gone on to success in business.  It’s time for mothers of sons to take the same approach. My mother raised three sons to have the courage of our convictions, to value achievement based upon merit and make moral judgments based upon fairness.  We were never ashamed of being male. 

What are you teaching your  sons? 

Inventing economics

Have you heard of Modern Monetary Theory (MMT)?  Probably not.

It’s a theoretical model based on absolutely no experience being used by the “progressive” left to justify unlimited deficit spending.  Using Quantitative Easing (QE), the practice of central banks monetizing debt to inflate asset prices, MMT would be used as the basis to simply let deficits grow.  No doubt, MMT would be used to justify Medicare for All (M4A), free college tuition and God knows what else.  What’s interesting is that QE has created much of the income inequality about which the left complains.  Low interest rates make assets like real estate and other investments more affordable. No doubt the progressive response will be to take money from those who have earned it and give it to those who haven’t. 

Politically, MMT would enable politicians pass these massive programs without dealing with the nagging question, “how will we pay for it?”  Eventually, MMT calls for taxes to be raised when inflation gets out of control. By taking money out of the economy, inflation and growth would slow.  Well, at least they understand supply side theory even if they pay it no mind. 

I wonder how the public will react when they are told their taxes are being raised to fight inflation.

How did we get here? 

If you can carve out 20 minutes in your day (It’s tough, I know) to read a short story, I recommend “How This All Happened” by Morgan Housel.  It’s a very easy and fun read, an overview of Post-WWII history of American society and our economy.  

Each of us would take something different from it.  What I found it remarkable is how much the growth of debt was a factor in our economic growth.  From 1945 to 1965, US household debt grew from $49.4B to $331.2B.  That’s a modest sum by today’s standards but it’s 1.5 times faster than the growth in debt during 2000’s debt bubble. 

The momentum continues, of course.  As I wrote in “The Next Bubble to Burst Will Be…” global debt is now more than 300% of global GDP.  A truism about debt is that the more you have the less you get from it.  At manageable levels, it can enable economic growth, the acquisition of assets or high-return investments.  However, the larger the debt burden, the lower the return from each additional dollar of debt.  A clear manifestation of this phenomenon was the build up of excessive government deficits during the George W. Bush administration.  Each dollar of GDP growth was matched by a dollar of government debt. No multiplier effect at all.  Now that government debt exceeds 100% of GDP, each additional dollar of debt will subtract from GDP growth.  

What started as sound fiscal practice has become an addiction.

WHO WILL LEAD? 

The next bubble to burst will be…

Recessions occur when demand gets ahead of our ability to pay for stuff.  Of late (the last 20 years or so), the triggering event for a recession has been the bursting of an asset bubble.  First, it was the Dot Com bubble (or is it .com?).  Then it was the real estate bubble.  The paper gains of assets like stocks and real estate create in us a “wealth effect.”  We feel wealthier than we are and comfortable taking on debt to pay for all that stuff.  When we wake up (or when the bubble bursts), we stop spending so much and the economy contracts.

Cruising channels the other night, I stopped on Bloomberg long enough to hear a Swedish economist who specializes in Asia report that global debt now totals 320% of global GDP, ¾ of it corporate.  (Ya gotta love it: A Swedish Asia expert on American media!  Ain’t globalization grand?)  In other words, corporations and governments have been taking advantage of low rates and central banks’ Quantitative Easing to expand spending and investment that drives GDP growth.  Of course, sooner or later, someone has to start paying back all that debt. It seems that big corporations and banks can keep kicking the can down the road.  However, there are other concerns.  

Long term, the challenge of living up to the obligations that governments have made to citizens will be untenable.  Absent reform of Medicare and Social Security, we may be unable to pay those benefits without taking on debt too heavy for the US economy to support.  The alternatives are to expand the money supply (which QE did to little effect because there was little M2 acceleration) leading to extraordinary inflation, to raise taxes to a degree that will reverse economic growth, or to fail to live up to our obligations.  This extends to states and municipalities (and, indeed, corporations) that can’t pay pensions to which they have committed.  (It should be noted that the unpaid obligations of public pension funds, Social Security, Medicare et al. are not on the books.  In other words, the sum of those obligations is not included in the $320T of global debt.)

So, what does it look like when the bubble bursts?

Some think that the triggering event will be a collapse in the High-Yield Bond market.  (We used to call them Junk Bonds, a more appropriate title.)

To me, it seems more likely that developing countries may suffer a collapse. When countries without a reserve currency enter into international contracts (or development loans), they are generally required to make repayments in a reserve currency, typically US dollars.  As the US dollar strengthens (due to rising interest rates or international strife), it becomes more expensive and, eventually, impossible for those nations and their corporate citizens to repay their debts.  This process could be accelerated by a new tariff regime.  Such an event in one country could trigger a series leading to massive defaults.  This happened in isolated instances in the 90’s. When the Mexican currency collapsed, for example, President Clinton structured a debt package that enabled them to work their way out of trouble.  

Now, of course, the problem exists on a massive scale.  Governments, including the US, are carrying the weight of debt over 100% of GDP (and adding $1+ Trillion per year to it).  Corporations, globally, are carrying more than twice that burden in percentage terms and we don’t account pensions as liabilities.  They are typically described as “unfunded liabilities.”

For several years, the gurus at ITR Economics have been forecasting another Great Depression beginning around 2030.  (They’ve even gone so far as to outline how Millennialsshould prepare for it.) Its causes will be different than its 20^th Century counterpart.  It will be caused, in ITR’s view, by the failure of the US government to reform its largest entitlement programs – Social Security and Medicare. 

This scenario is becoming more believable as time goes on.  We have recently been treated to the spectacle of a hypocritical Republican Congress -- which quite correctly criticized President Obama’s huge deficits – pass a tax bill and a budget that creates $1 Trillion annual deficits for the foreseeable future. 

Maybe it’s time to start hoarding gold. 

WHO WILL LEAD?

Hey, Congress! You Are Asking the Wrong Question!

The brinksmanship in Washington has a lot of people upset (including me).  But the reasons differ depending upon where you sit and what relationships you have with the federal government.  Indeed, not everyone is upset.  A client told me he was in the middle of an IRS audit when the government shut down.  He wasn’t upset when the auditors vanished. 

A conservative friend of mine is upset with the direction of the Republican Party.  He quoted Napoleon over lunch.  In his view, Obamacare will collapse of its own weight and Republicans would be wise to let it.  “Never interrupt your enemy while he's making a mistake. That's bad manners,” quipped Napoleon.

However, Wall Street Journal economics editor David Wessel extols the virtues of Obamacare in an Op-Ed piece called “Obamacare – A Game Changer in the Making?” 

The Economist tries to elevate the debate a bit, pointing out “when you are brawling on the edge of a cliff the big question is not ‘Who is right?’ but ‘What the hell are you doing on the edge of a cliff?’ ” 

Meanwhile, Joshua Green asserts that “Republicans Are No Longer the Party of Business” in Bloomberg Businessweek.  Green starts with an anecdote about a Tennessee businessman whose company makes furniture.  He says, “It’s as if House Republicans are playing suicide bomber with the U.S. economy.”  People who make furniture are affected by a slow down in government-funded mortgages. 

None of them are asking the right question. 

Why is the government in the mortgage business?  For that matter, why are they in any business?

One could challenge a lot of things our government does.  The government is the largest landowner in the nation.  By some estimates it owns approximately $128 Trillion of real estate and mineral rights. 

Sell 10% of it and our debt problem vanishes.  Sell another 10% and no one pays taxes for the next three years.

The federal government also distributes between $10 Billion and $30 Billion in farm subsidies each year.  Originally intended to provide support to poor farmers who might again suffer the trials of the Great Depression and the Dustbowl, it now provides support to absentee landowners who are millionaires many times over.  The bottom 80% of recipients gets an average of $587 per year. 

Try to eliminate the subsidies and you’ll run into a buzz saw of mostly Republican congressmen who fight to protect the economic interests who send them back to Washington every two years.

Changing this paradigm doesn’t help to resolve the current budget and debt ceiling crisis.  However, it does go to the core of some foundational principles.

Americans take a lot for granted.  We expect the water from our faucets to be potable, the electric power grid to be reliable and the transportation systems to be safe.  We expect our military to be strong, our economy to be prosperous and our institutions to protect us from ourselves.

We have the luxury of those expectations because of the last 150 years of prosperity.  Yet, we have lost track of what got us here. 

The principles of economic freedom – predictable policy, rule of law, strong incentives, reliance on markets, limited role of government – are no longer on the minds of those who govern.  So, corporate interests have adapted.  In a world where lobbying for favorable tax and regulatory treatment can have a dramatic effect on your bottom line, big businesses benefit by focusing on Washington.  Interrupt that activity and the muddle that is the media somehow draws the conclusion that “Republicans Are No Longer the Party of Business”.

In the lingua franca of today’s political environment, the term economic freedom sounds conservative and Republican.  However, since WW II, the violators have come from both parties.  Starting in the 1960s, Presidents Kennedy, Johnson, Nixon, Ford and Carter approved a succession of laws, regulations and restrictions that violated the core values of the economic system that underpins our economic strength.  Perhaps no violation was more egregious than Nixon’s imposition of wage and price controls in 1971. 

An America that transforms itself from a free market juggernaut to a government that funds its favored interests will not maintain its economic leadership.  Instead, we will continue to be mired in the current slog of low economic growth rates and expansionist monetary policy. 

A reversal of that course will tread on the entrenched interests of big corporations who have benefited from the results of their influence on electoral outcomes.  Yet, that is what’s necessary to restore economic growth, the strength of the middle class and continued American hegemony.  The only question is…

WHO WILL LEAD?