The Aftermath: the future is now

We left on a two-month vacation the day after Presidents Day – February 18.  At the time, there were only 25 cases of Coronavirus reported in the U.S.  Like most of you, we were caught flatfooted by the pandemic and its astounding spread.  A graphic in the online New York Times tells the tale.  China’s delay in recognizing the disease and its effects led to millions of people leaving Hubei province, many carrying the virus, over two months.  Nine hundred per month were destined for New York now the epicenter of the crisis in the U.S. 

As I write this, the Senate has approved a $2 trillion stimulus package to keep the economy on track during the Coronavirus crisis.  In a post last week, I suggested now is not the time to worry about fiscal deficits.  Let’s focus on keeping people healthy first.  But the virus and our response to it will have some long-lasting effects – some good, some bad, some ugly. 

The Good

The future is now!  Trends predicted to take shape over the next decade or two have taken root overnight.  We are telecommuting and teleconferencing at work.  Similarly, universities have moved coursework online, shedding expensive infrastructure and adopting a model I predicted in 2015.  Will there be a snap back to the old model, or will there be a shift to a new way of working and learning? 

Traffic is lighter just about everywhere.  Demand for fuel has dropped dramatically (I paid $1.99/gallon the other day).  That means reduced emissions and stress on our infrastructure.  Will work at home become a lasting effect of the crisis?  

No one will be denied healthcare because of a lack of insurance during this crisis.  Bernie Sanders points to the need to nationalize healthcare like, you know, Italy… um, maybe not a good idea.  And, Republicans are unlikely let go of their objections to any solution.  It is perhaps Joe Biden’s incremental approach to reforming Obamacare that might lead to the best outcome.  Will that lead to universal coverage?

Crisis response has necessitated that government regulations pretending to protect us have been set aside to, well, protect us.  FDA has eased up on guidelines for testing drugs and manufacturing ventilators, and companies are repurposing without the obstacle of licensing rules.  Will the crisis cause us to question the need for all those regulations? 

 

New York Governor Andrew Cuomo

Governors are stepping up to respond according to the needs of their individual states. Wyoming doesn’t need what New York needs. So, there is a renewed focus on the effectiveness of regional and local response.  States have powers not afforded to the federal government according to Constitutional experts.  Only states have police power to enforce quarantines or compel vaccinations, for example.  Will governors finally press the point and take back authority they have abdicated to Washington? 

The Bad

In the last twenty years, we have consistently been failed by our institutions of government. The 9/11 attacks revealed a weakness in national intelligence, particularly the CIA.  Hurricane Katrina placed the failures of FEMA at center stage.  The Great Recession was caused primarily by banking regulators not doing their jobs.  And, now there’s COVID-19 which has revealed the soft underbelly of our ability to protect our citizens from a pandemic.  Meanwhile, congressional politicians can’t seem to set aside their dysfunctional behavior for the sake of the nation.  

The era of free trade, that was nailed into place by China’s entry into the World Trade Organization, has restructured supply chains so that we no longer have the manufacturing capacity to make critical supplies.  Meanwhile, China is providing Europe with masks, gloves and other medical supplies.  It sounds like an echo of the Marshall Plan. It’s another way in which we have abdicated our role in global leadership. 

The Ugly

This ain’t the 1950’s, a time when the nation was led by a war hero whose minimalist approach to governance resulted in the paydown of war debt while maintaining a balanced federal budget, the construction of the interstate highway system and the inception of NASA.  No, Democrats, we aren’t going to raise marginal tax rates to 90%.  And, no, Republicans, we aren’t going to shrink government to balance the budget.  Bipartisanship in the 21^st Century means more government spending and debt not less.  That’s how the coronavirus stimulus went from $1 trillion to $2 trillion in the course of a week.  

A former business partner suggested a scenario I deem likely.  Likely because of the way in which the nation’s institutions responded to the financial crisis a decade ago.  The first round of QE or Quantitative Easing by the U.S. Federal Reserve Bank in 2009 was viewed as a positive step toward getting investors to invest and get the economy moving again.  In this process, the Fed purchased U.S. Treasury bonds and mortgage-backed securities to keep interest rates low and encourage the acquisition of assets.  Low interest rates help those who can invest in stocks and real estate but they penalize savers and retirees.  

Back to my former partner’s prediction:  the Fed will not only purchase the additional U.S. Treasury debt but also will write it off, he says.  In other words, since the Fed can create as much money as it wishes, they can also reduce the government’s debt with the stroke of a pen.  

Two years ago, the election of Rep. Anastasia Ocasio-Cortez made a big splash in the national news.  Among her more controversial suggestions was that the nation’s economy could be managed by Modern Monetary Theory (MMT) – the creation of money out of thin air.  There was a minor uproar in business and economic circles.  Now, under the cover of a pandemic, MMT may become the government’s tool of choice to feed our addiction to debt.  

Conservatives warn this approach will result  in hyperinflation, citing Post-WWI Germany as the relevant example.  Liberals, led by Nobel economist Paul Krugman, have pointed out that we’ve been pursuing MMT for the last ten years and inflation is low.  They’re both looking in the wrong place.  Hyperinflation hasn’t occurred in consumer prices.  It has occurred in asset prices – stocks, bonds and real estate – enriching those with the capital to invest at the expense of everyone else.  

Once the crisis has passed, we’ll applaud those who have crafted and voted for the $2 trillion package and reelect them in the Fall.  And, there will be no one to stop this juggernaut. 

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?

FOR SALE: 640 Million Acres

Remember that guy Cliven Bundy?  A few years ago he made headlines by protesting grazing fees on federally owned land in Nevada.  He hasn’t paid them for over 20 years.  The Bureau of Land Management, armed with a court order, showed up to evict his cattle.  He stood in front of the gates, armed with his personal firearms, accompanied by armed supporters, and challenged the Feds to a gunfight.  And, he won the day.  The government backed down.

The standoff over federal grazing fees

He was a conservative hero for a few days until his racist remarks had his political advocates distancing themselves from him.

But, here’s the thing.  He shouldn’t have been a conservative hero.  He should have been a liberal hero.

But, I am getting ahead of myself.

My last post (Let’s understand just what socialism means to us) excoriated democratic socialist Bernie Sanders and, by extension, his supporters and those who advocate his beliefs.  One reader called it a rant.  After rereading it, I had to admit he was right and apologized.  Another accused me of contributing to the demise of civil discourse.  Another mea culpa!

Notably, no one refuted the core of my argument – that capitalism is superior to socialism or even democratic socialism. 

Then I got an email from a friend on the left coast.  It included a link to a New York Times op-ed piece titled “Socialism, American Style”.  The article promotes the idea that state government ownership of real property serves the interests of conservative politicians.  How?  Charging fees for its use raises revenue and enables state governments to reduce taxes.  The authors provide examples of socialist enterprises in conservatively governed states including Alaska, Texas, Nebraska, Wyoming and Tennessee.

Like most punditry masquerading as analysis, the column gets the facts right but ignores alternatives that don’t fit the author’s bias.  What alternatives, you ask.

When commenting on fiscal matters, conservatives are fond of making analogies to household budgets or running a business. 

How’s this for an analogy?

If a business doesn’t generate enough revenue to cover its expenses – the equivalent to governments running a budget deficit – they often sell assets to raise cash.  The federal government owns over 640 Million acres of land or 28% of the area of the United States. 

So, here’s my challenge to conservatives and to conservative politicians, if any are listening:

            SELL THE LAND!

If you believe that private enterprise is the surest path to American prosperity, sell the land.  Private owners will convert it to its highest and best use.  It will generate more personal income for its investors.  They will reinvest it; they will spend it; and, it will boost economic growth.  If you believe in supply side economics, you should expect to generate more tax revenue without raising tax rates if the property is converted to a more economically productive purpose. 

The Federal land is estimated to be worth about $128Trillion.  The practice is most prevalent in the 11 adjacent states that constitute the American west, where the federal government owns 47% of the land. 

Sure, some of it houses military bases and government buildings.  But, most of it – including 85% of the land in Cliven Bundy’s home state – is wilderness.  We could pay off the federal debt with proceeds from the sale of only 15% of it.

Much of it is grazing land of the type that old Cliven, the conservative hero, was using to feed his cattle.  What would happen to that land if it were sold to a private owner?  No one can be sure.  Maybe the new owners would build condos or a health spa and resort.  Maybe they would grow genetically modified corn and feed the world’s hungry with cheaply grown food.

But, if that were to happen, Cliven would be out of business.  What would he do?  Lead a march on Washington?  After all, his government benefits will have been cut.  Aren’t we concerned about social outcomes?

The Wildlife News made this point succinctly, referring to him as “a freeloading, welfare rancher who has an inflated sense of entitlement.”

Like I said, Cliven should be liberal hero.

WHO WILL LEAD?